Creditworthy: The Federal Farm Loan Act and a Century of Support for American Farmers

Depression farm foreclosure web

Whenever farming is the business at hand, I’m reminded of when I was in Las Vegas some years back. I was there to address the annual Farm Bureau meeting. And on my way into the hall, a fellow, one of the regular visitors in Las Vegas, asked me what was a bunch of farmers doing in a place like Las Vegas? And I couldn’t resist. I said, “Buster, they’re in a business that makes a Las Vegas crap table look like a guaranteed annual income.” – President Ronald Reagan speaking at the signing of the Agricultural Credit Act of 1987


Reagan’s words neatly describe the unpredictable world of farming, a vital American industry whose fortunes are affected daily by vagaries ranging from the weather to global economic conditions and access to credit.

The legislation the nation’s 40th president was signing into law could trace its lineage directly back to a bill passed in 1916 that originated the Farm Credit System (FCS) American agriculture relies on 100 years later. The Federal Farm Loan Act is the foundation upon which the FCS was built. Continually revised and updated, the FCS is the largest single provider of credit to American farmers today, holding more than 40 percent of farm business debt, according to the Farm Credit Administration.

The system owes its existence and longevity to the idea that American farmers are worthy of credit. Though uneven in application and efficiency in certain periods of history, the public/private credit plans that Congress initiated with the Federal Farm Loan Act have been decidedly positive for farmers over time, offering a reliable alternative to commercial sources of financing.

Before the passage of the Federal Farm Loan Act, commercial lenders were the only option for farmers in need of capital. Not consistently responsive to farmers and rural communities, they were often considered …

… Fair Weather Friends

As the 20th century got underway, farming was becoming a capital-intensive business. Advancements in farm science and technology brought with them the promise of greatly enhanced agricultural production. But they also carried a steep price tag. American farmers looking to expand from small-scale, near subsistence farming to larger, more land-intensive operations needed money.

Credit for agricultural purposes, however, was in very short supply. Farmers were facing a credit-crunch, a situation known to the nation’s leaders. Proposals for a system of banks that would provide farm credit had been studied under the Theodore Roosevelt, William Howard Taft, and Woodrow Wilson administrations. These stemmed from a series of commissions sent to Europe to study the cooperatives of several countries, France and Germany among them, that served the credit needs of farmers.

Nevertheless, when the Federal Reserve System was created in 1913, most in government still believed private lending could accommodate the credit needs of farmers.

“At the time, Congress believed that commercial banks through the Federal Reserve System would provide credit for agriculture and farming,” said Richard Katz, senior counsel in the Office of General Counsel at the Farm Credit Administration (FCA).

But even in rural areas, bankers were more comfortable making loans to Main Street businesses, Katz added.

“For commercial bankers, extending loans with the uncertainty of a return on agriculture – hoping the weather wouldn’t be bad, or that crop yields would be high – was a gamble. So farmers didn’t really benefit credit-wise from the Federal Reserve System,” Katz said.

Wilson Signs the Federal Farm Loan Act web

President Woodrow Wilson signs the Federal Farm Loan Act on July 17, 2016. The act originated the Farm Credit System on which American agriculture relies today.

Acting on the suggestions of the aforementioned commissions, Sen. Henry F. Hollis, D-N.H., and Congressman Robert J. Bulkley, D-Ohio, presented a bill to create a public/private system for extending credit to farmers. The Hollis-Bulkley Act of 1914 didn’t pass in Congress due to opposition from President Wilson. But two years later, a revived version focused on the extension of long-term mortgage credit was enacted as the Federal Farm Loan Act.

The act created a two-pronged system of credit with the establishment of Federal Land Banks (FLBs) in 12 districts across the country, along with hundreds of National Farm Loan Associations (NFLAs) to serve as agents for the FLBs. The NFLAs, in which farmers were encouraged to buy stock (groups of 10 or more mortgage-holding farmers who together owned 5 percent or more of an FLB), were the conduit for financing, making loans directly to farmers.

“The act set up a board [Federal Farm Loan Board] that was a bureau in the Department of the Treasury. The act required the supervisory board to establish 12 districts, modeled after the Federal Reserve, and [to] choose where the FLB was to be in those districts,” Katz said.

When the Federal Reserve System was created in 1913, most in government still believed private lending could accommodate the credit needs of farmers.

Provided with $9 million in capital from the U.S. government, the federally owned FLB/NFLA structure was complemented by a private, investor-owned Joint Stock Land Bank System. Joint Stock Land Banks could, like the FLBs, issue tax-exempt bonds to raise capital for making loans to farmers.

“It was like a rival system,” Katz said. “They got the government charter but not government capital. They had to come up with their own.”

The first land banks were up and running by early summer of 1917, just after America entered World War I. The need to feed American troops and the starving European populace led to a boom for American agriculture that lasted until the war’s end in 1918. There was definite interest in the new credit system, but there were problems with the implementation of the act.

“It was an active system and there was demand, but there wasn’t a good division of territory for setting up markets,” Katz said.

In statistical terms, the Federal Land Bank system served a relatively small proportion of the total farm mortgage market. According to “Federal Lending and Loan Insurance,” a 1958 publication from the National Bureau of Economic Research, the peak lending year under the original structure of the act was 1922, when FLB loans amounted to $224 million – not quite 9 percent of all farm mortgage loans for the year.

“I think it was viewed as being generally successful, and it kept going, but there was a need for short-term credit,” said Katz.

With no means of providing short-term credit, the 1916 act couldn’t offer the financing farmers needed to maintain and run their farms – to buy such things as livestock, seeds, fertilizers, and pesticides, and to purchase new farm machinery as mechanization spread in the 1920s.

The solution was the Agricultural Credits Act of 1923, the first of a series of legislative measures that would build on the Farm Loan Act. The Agricultural Credits Act created new Federal Intermediate Credit Banks (FICB) in the 12 land bank districts. FICBs served as “banks of discount” to agricultural cooperatives, commercial banks, and other institutions.

There was definite interest in the new credit system, but there were problems with the implementation of the act.

“These were also wholly owned government banks,” Katz said. “They didn’t do any direct lending to farmers. Somebody else would make the loan, and then they’d discount the loan. They were basically a source of credit for small rural community banks and production/livestock corporations and didn’t have a direct connection to farmers, so they weren’t all that successful.”

As the 1920s wore on, the swoon in agricultural markets continued, with commodity prices steadily falling. Undercapitalized Joint Stock Land Banks – institutions lacking the joint liability for debt stipulation that applied to FLBs – began to fail. With the onset of the Great Depression in 1929, Joint Stock Land Banks suffered widespread defaults on loans. FLBs were under similar pressure as the national economy and agriculture spiraled downward in the 1930s.

The Farm Credit Act of 1933

When President Franklin Delano Roosevelt took office in 1933, one of his first actions, aimed at reviving the nation’s farm economy, was an executive order that created the Farm Credit Administration and placed all existing federal agricultural credit entities under its supervision. The Farm Credit Act of 1933, enacted three months after the executive order, expanded the Farm Credit System by creating 12 Banks for Cooperatives (BCs) and production credit associations (PCAs).

The 12 FLBs and FICBs remained intact but were joined by the BCs, providing credit for farmers’ cooperatives, and a Central Bank for Cooperatives to augment the district BCs in loans that exceeded their lending capacities.

Short-term credit for farmers was facilitated by a system of PCAs, with financing from the FICBs. Long-term mortgage credit relief for farmers facing foreclosure was provided by the Emergency Farm Mortgage Act of 1933 via appropriations from the Treasury; the Emergency Farm Mortgage Act also mandated the liquidation of the Joint Stock Land Banks. Between 1932 and 1934, Congress enacted legislation that recapitalized the FLBs and that also enabled the FCA to provide emergency relief to farmers and to reorganize local farm loan associations so they served viable agricultural credit markets.

These changes brought about the forerunner to the FCS we know today, but they also took the idea of farm credit in a direction not envisaged by the 1916 act.

Farm Loan Act federal land bank web

Paul Erickson, a farmer in Yuba County, California, works on his tractor, November 1940. With the help of a federal land bank (FLB) loan, he diversified his fruit farm, but low prices of farm products led to decreased income. Before 1933, FLBs held relatively small proportions of farm mortgage debt, but by 1936, they held 30 percent of the $7.2 billion farm mortgage debt.

“Originally, there was one vision that said this would be a system for farmers owned by farmers,” Katz said. “But there was a lot of government capital put into it. Various crises like the Depression and wars led to much more government involvement.”

Before 1933, FLBs accounted for relatively small proportions of total farm mortgage debt, ranging from 3.5 percent in 1920 to 13.5 percent in 1932. By the end of 1936, however, they held more than $2.1 billion, or 30 percent of the $7.2 billion farm mortgage debt, according to the 1958 National Bureau of Economic Research report. Government involvement in the FCS went further in 1939, when the FCA was made part of the U.S. Department of Agriculture.

The measures undertaken by Roosevelt to consolidate the entities of the FCS under one agency, the FCA, and to provide widespread government relief to farmers in danger of default on their mortgages did help to stabilize the farm economy and rural communities. However, government intervention pulled FCS institutions away from the goal of becoming agricultural lending cooperatives that were owned and controlled by their farmer-borrowers.


With the Farm Credit Act of 1953, President Dwight D. Eisenhower reasserted the principle that the FCS should operate as a system for farmers owned by farmers. Direct government loan programs had been transferred from the FCA to the USDA beginning in 1946. Eisenhower’s 1953 act solidified the Farm Credit Administration as an independent agency once again – a farmer-owned cooperative lender as originally intended – and reorganized the agency’s operations.

A Federal Farm Credit Board with 13 members – one from each district and one appointed by the secretary of agriculture – was created to develop policy for the FCA. The board was designed to represent the interests of farmer-borrowers in the governance of the FCS. Devising a plan “to get government capital out” of the FCS was also a priority, according to Katz.

Statutes enacted in 1955 and 1956 directed the FCS to repay government capital and turn over ownership of the FCS to farmers, ranchers, and cooperatives.

“That took about 12 years, until 1968, when all government capital was repaid,” Katz said.

Another feature of the 1955 and 1956 acts were that they took into account the declining number of individual farmers in the United States, recognizing that many now farmed part-time while seeking other employment to bolster income. With farmers engaging in activities that weren’t strictly farm-related, the FCS was broadened to meet their needs, said Katz.

Statutes enacted in 1955 and 1956 directed the FCS to repay government capital and turn over ownership of the FCS to farmers, ranchers, and cooperatives.

“In the early years after the act passed, you could only borrow for six purposes – all farm related. In the 1950s, they started to allow financing for other needs of farmers – housing needs, college, and businesses – as long as it could help keep people farming. The FCS worked with a lot of the middle segment of the farm economy in those years. It had a loyal following, particularly on the land bank side.”

Boom and Bust

By the late 1960s, the FCS had firmly established itself with farmers. Many had roots in the FCS and liked the co-op system, but an increasing number chose to “graduate” to commercial banks.

“Eventually Farm Credit became a specialist,” Katz explained. “As people became more part-time farmers and needed money for other things, some of them ended up being better off at commercial banks. Those whose principal vocation was agriculture found that FCS better met their needs because it specializes in financing agriculture.”

It also expanded. After government capital was repaid in 1968, the Federal Farm Credit Board embarked on a review of the FCS, setting up a Commission on Agricultural Credit to recommend changes to modernize the FCS so it could meet the credit needs of farmers. The commission’s recommendations formed the basis of the Farm Credit Act of 1971. The new act gave banks and associations more flexibility in lending to farmers, raising the limits on land bank loans and authorizing the expansion of the system’s mandate to include lending to commercial fishermen and rural homeowners.

After government capital was repaid in 1968, the Federal Farm Credit Board embarked on a review of the FCS, setting up a Commission on Agricultural Credit to recommend changes to modernize the FCS so it could meet the credit needs of farmers.

Congress granted the FCS the authority to finance rural homes for non-farm rural residents and farm-related business because non-system lenders were not meeting the credit needs of these borrowers, who were not farmers, according to Katz.

“In many rural communities in the 1960s and 1970s, there was a gap in financing in the private sector, so they allowed the FCS to make single-family, moderately priced home loans in communities of 2,500 or less, not to exceed 15 percent of the total [outstanding loans of these banks or associations].”

Simultaneously, there was a boom in agriculture. Drought and low agricultural productivity in the USSR and other markets led to steep increases in U.S. farm exports. American farmers benefitted and expanded operations, acquiring more farm equipment and land. To make these investments they borrowed heavily, relying on the commercial market and the FCS.

Reagan Farm Credit Amendment Act 85 web

President Ronald Reagan signs the 1985 Farm Bill and Farm Credit Amendments Act of 1985 in the State Dining Room at the White House on Dec. 23, 1985. Sen Bob Dole, Congresswoman Virginia Smith, Agriculture Secretary John Block, Vice President George H.W. Bush, Congressman Charles Stenholm, Sen. Spark Matsunaga, and Sen. Richard Lugar are among those in attendance.

But by the early 1980s, changes in currency value, soaring interest rates, and a dramatic drop in demand for domestic agricultural exports combined with low commodity prices and sharply falling land values to create a perfect storm for American farmers.

By 1985, the FCA estimated that 200,000 to 300,000 farmers were facing financial failure. Unable to repay loans, they wrought havoc on the FCS, with system institutions reporting losses of $2.7 billion and $1.9 billion in 1985 and 1986, the largest losses in history for any U.S. financial institution.

Congress had to step in once more, first with the Farm Credit Amendments Act of 1985, which restructured the FCA to give it increased oversight, regulatory, and enforcement powers similar to those of other federal financial regulatory agencies, and established the Farm Credit System Capital Corporation to provide technical and financial assistance to financially weak FCS institutions and their borrowers.

It wasn’t enough. In early January 1988, Reagan signed into law the Agricultural Credit Act of 1987, which authorized a bailout of the FCS to the tune of up to $4 billion; of that $4 billion, only $1.261 billion was used. The act also launched the Farm Credit System Insurance Corporation (FCSIC) “to ensure timely payment of interest and principal on system-wide and consolidated bonds and other obligations issued by FCS banks,” according to the FCA website.

“This really consolidated the FCS, capitalized it, and got it back on its feet,” Katz said. “Thirty years ago there were 37 banks and probably close to 1,000 PCAs. There were hundreds of Federal Land Bank Associations [FLBAs].”

The consolidation was enabled by the 1987 act’s restructuring of the FCS, requiring that its FLBs and FICBs merge. It also encouraged the merger of the Central Bank for Cooperatives and the 12 regional banks.

“Now it’s down to four banks, 71 Agricultural Credit Associations, and two Federal Land Bank Associations. There’s a funding corporation to sell system-wide bonds on behalf of the banks – a massive reconfiguration of the FCS to become more responsive to credit needs in a different environment.”

Reliable Credit in Good Times and Bad Times

Improving economic conditions in the 1990s and through the first years after 2000 allowed the U.S. farm economy to recover from the disaster of the 1980s. The streamlined system of arm’s-length regulation instituted by the 1985 and 1987 acts allowed the FCS to function more efficiently. By 2005, all government financial assistance was repaid, with interest.

Today, the system functions alongside the commercial credit market much as it was originally envisioned, as a reliable source of agricultural credit available to farmers regardless of prevailing economic conditions.

“It gave farmers basic control of their credit,” Katz concluded.

“Farm Credit serves all kinds of farmers, from small, part-time farmers to very large entities. Because it competes with investor-owned companies, it keeps credit flowing and interest rates lower because it’s a different kind of product, and it has a mandate to serve young, beginning, and small farmers. It’s reliable, and part of its mission is to help people get into agriculture and ensure that it continues as a big component of our economy.”

Caption for top photo: Farm foreclosure sale in 1933 in the midst of the Great Depression. Measures undertaken by President Franklin D. Roosevelt, including the Farm Credit Act of 1933 and the Emergency Farm Mortgage Act of 1933, served to consolidate Farm Credit System entities under one agency and provide government relief to farmers in danger of mortgage default. Credit: Franklin D. Roosevelt Presidential Library & Museum

This article was originally published in the 2017 edition of U.S. Agriculture Outlook.

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