As most economics and finance professors are at sea with financial history and institutions, scholars from other disciplines are helping us learn.
Hoping to learn from other countries’ experiences in organizing finance for agriculture, more than 150 Americans were sent abroad in the summer of 1913 to investigate the minutiae of farm-credit systems in and around Europe.
They were sent as far north as Norway and as far south as Egypt, with Ireland and Russia marking the western and eastern boundaries of the study. They learned of microcredit-like experiments to support small-plot tenant farming in Italy. In France they were told how farm credit embodied democratic ideals. In the Netherlands and Spain, commission members found counterparts who, like the Americans were doing, had looked to other European nations for ways to improve the management of farm credit. Perhaps the most anticipated stop of this trip would be in Germany, whose system of long-term farm credit distribution had achieved world renown.
The key ideas brought home from Europe by commission members more than a century ago still shape today’s U.S. credit policy. The organizing principle of these ideas was the proposition that providing farm credit could be a low-cost and politically palatable form of economic policy through which government could help people help themselves. This paved the way for the Federal Farm Loan Act of 1916, which redesigned the U.S. system from the ground up by creating a new network of government-supported farm credit cooperatives.
This idea of federal credit for agriculture was used for other purposes as well:
The Act was arguably a watershed in the use of credit as a federal policy tool whose impact was felt far beyond the agricultural sector. Before 1916, the national government used credit allocation more sparingly, as a temporary means to support expensive internal developments such as railways. After the Act, there was a continual expansion of programs that bought, sold, issued, guaranteed, or otherwise promoted the flow of credit to specific sectors or groups. In the United States today, one third of privately issued debt is backed by the government, not only through the Fed but also through the $3.4 trillion in loans guaranteed or held through a vast network of federal credit programs (if you include implicit guarantees of financial debt, the amounts are much, much higher). As Marianna Mazzucato and L. Randall Wray have noted, these forms of credit support are a central part of how the federal government participates in the U.S. economy. This proliferation of government credit allocation seems remarkable in light of longstanding political attitudes on government involvement in the economy.
The German system trusted its bureaucrats to deliver. But there was no such system in US. Moreover, it was felt that any such fedeal program if not carefully worded would be met with deep suspicion. This led to another 12 regional Feds to disburse farm credit.
To overcome these objections, proponents of a European-inspired farm credit policy spun it as government helping people help themselves, providing credit support could through farmers’ cooperatives.
The divisive nineteenth century credit politics gave way to a vision of credit as an inoffensive means of economic development, of low cost to the state. Proponents argued that “wise legislation” to lower credit risk could unlock the value of the nation’s land, then estimated by one commentator at $40 billion. It was a huge potential payoff. Later scholars of credit programs would frequently note the same thing about the federal credit programs: compared to direct forms of welfare or other expenditures, credit support is cheap, since it can be implemented by government guarantees, tax expenditures, risk management techniques, and disbursements paid back over time, sometimes with interest.
This logic was built into the structure of the Federal Farm Loan Act of 1916. The centerpiece of the Act was a proposed local version of the German system. The Treasury was authorized to fund 12 reserve banks in order to funnel credit to a network of new farmers’ lending cooperatives. The Department of Agriculture encouraged the formation of these lending cooperatives through a massive education effort. In a nod to American independence, the German system of risk sharing — in which members of the Landschaften were liable up to the full value of their property — was watered down. If the bank itself ran into trouble, American farmers would be liable for only 10% of their loan amount, rather than for the full value of their property. Since, over time, farmers could pay into the system and repay the state, the long-term costs of the program were expected to be low. Tax-exempt bonds would encourage a flow of funds into the reserve banks at the cost of some state revenue, but this was far less expensive than, say, directly subsidizing farmers.
For all that the 12-bank structure mimicked the Federal Reserve Act, the creation of lending cooperatives meant that the FFLA was a far more complicated, experimental, and entrepreneurial design.
Till date, Americans carefully present or word these programs:
In the “Analytical Perspectives” section of the President’s budget, the chapter detailing the $3.4 trillion in loans held or guaranteed by the federal government reveals the diverse political uses of credit. Federal credit has military functions, including Defense Department loans for the purchase, stockpiling, and manufacturing of military materiel, and the Atomic Energy Commission’s use of guarantees to encourage nuclear science. Credit is also a tool of foreign policy: the United States exports food to other nations through USAID. Loans can serve as disaster relief, as both FEMA and the SBA include credit support to assist with natural disasters, and the federal government also provides loans directly to states for this purpose. Credit is also extensively used as part of energy and environmental policy, with geothermal and renewable energy, biorefineries, and synthetic fuels having all benefited from credit support. Tracing its use in housing, David Freund notes that the appeal of credit programs is that they seem like small market corrections rather than consequential state policies. And they have been used to support every major sector of the American economy.
The Analytical Perspectives of the budget wraps the complexities of these programs in the dry academic language of market corrections. “Credit and insurance markets sometimes fail to function smoothly due to market imperfections … ” The implication is that this massive mobilization of debt and risk absorption by the federal government is best thought of as a technical adjustment to market imperfections, rather than, say, the American version of a developmental state.
That language, I believe, is the moderate way of thinking about credit articulated during the progressive era, and now tailored for the neoliberal age. Like a nervous wizard, it asks us not to pay attention to the man behind the curtain, and for the most part, Americans comply. And why wouldn’t they? After all, the idea that credit support does not ask us to think hard about the social and political conditions of possibility for market success has been part of the appeal of credit support all along.
Most countries have had a government funding program to help agriculture. One can always argue whether it is efficient or inefficient. But when you are told that Indian govt has no business to be in agri credit and should do as they did in west, one should just laugh off the idea. Agriculture has been politicized worldwide and has enjoyed either direct or indirect/hidden support from govt.
It is just that we are not aware of their histories. As Ha Joon Chang says, the developed world is kicking the ladder for the developing world.