In 1781, in his Notes on the State of Virginia, Thomas Jefferson stated that the “cultivators of the earth are the most virtuous and independent citizens.” A few years later, in a letter to James Madison, he argued that farmers and small landowners were vital to the security and economic viability of the United States. Despite the many changes that American agriculture has undergone, it remains as important to the national economy today as it did in the eighteenth century. Beginning with Jeffersonian ideals of small yeomen farmers, to modern agribusiness, agricultural production has been a major factor in the economic stability of the US. Vital to this agricultural growth has been the development of agricultural lending practices that have made land available to cash strapped farmers. Beginning at the turn of the 20^th century, the federal government has understood the value of making money available to agricultural concerns. Developing in tandem with the economic and industrial growth of the United States, lending practices and policies have helped propel agriculture in the United States and have preserved and protected this vital economic interest throughout the years.

The early Republic’s economy was primarily agrarian. The United States had few major industrial businesses and relied heavily on farming and agricultural development. At the same time, however, the early United States had few centralized banking institutions capable of dispensing credit. The Bank of the United States was short-lived and failed to provide significant credit to American farmers. The lack of farm credit, however, was not a significant problem in the eighteenth and early nineteenth century due to the structure of American agriculture. Large-scale Southern agriculture, the backbone of the US economy, was largely self-financed by wealthy plantation owners. Smaller Northern farms were much less commercialized and thus had little need for large-scale access to credit. The strength of American agriculture quickly made the United States a major economic power. Southern agricultural products, for example, drove Northern manufacturing and industry and the international export of American agricultural products generated millions of dollars in revenue.  The sectional tensions of the 1850s and the Civil War helped to disrupt this traditional system and radically changed the structure of American agriculture. In 1862, Congress, emboldened by the secession of Southern states, passed the Homestead Act, opening up Western land to farmers and settlers. American citizens who had reached the age of majority could file claims for 160 acres of Western public land. After living on that land for five years and paying a small fee, up to ten dollars in the early years of the Act, they received title to the land. The Homestead Act, combined with increased Western land speculation, opened up the Great Plains and the Western United States to agricultural development and settlement and allowed for the future development and commercialization of American agriculture.[1]

Following the Civil War, agricultural prices dropped. In addition, Gilded Age economic politics sought to control inflation and limit the cash supply in the United States. A strict gold standard helped keep currency out of supply. These economic policies tended to hit farmers hardest and, in the 1880s and 90s, various agricultural and rural political movements campaigned to expand credit to American farmers. Starting with the Grange movement and the Farmers Alliance, these groups eventually coalesced into the Populist Party. One the principle demands of the Populists was the creation of a subtreasury system, which was designed to help farmers get access to credit and to help increase the monetary supply. The subtreasury system would allow farmers to turn over major crops, such as wheat or cotton, to the federal government in exchange for loans up to 80% of the value of the crop. If the value of the crop rose above the value of the loan, the crops could be sold to settle the debt. If it did not, the crops would be forfeited to the government.[2] Although the Populists never became a viable third party, their agricultural policies would resonate nationally.

Despite the political failure of the Populist Party, farmer’s concerns regarding credit were eventually adopted by the Democratic and Republican Parties. In the early 1900s, President Theodore Roosevelt created a commission to determine and address the major concerns of American farmers. Unsurprisingly, credit reform remained their principle political desire. In the election of 1912, all three major parties, the Democrats, Republicans, and the Progressive Party, endorsed platforms pledging to create an agricultural credit system. In 1913, Democratic President Woodrow Wilson sent a committee to Europe to study and report on the various agricultural credit systems implemented by the European Great Powers. In 1916, after two years of congressional debates, Congress passed the Farm Loan Act. The act authorized the creation of 12 federal land banks as well as a system of private land banks. The federal government provided the initial capital for the cooperative land banks and regulated and controlled the interest rates of agricultural loans.[3] These land banks experienced sporadic growth in their early years. The late 1910s and early 1920s saw little growth in these credit institutions. Agricultural prices had risen in the mid 1900s and grew dramatically during World War 1. Higher farm prices eased the need for credit in many American farms. This agricultural boom was short-lived, however, and towards the end of the 1920s, farm prices fell and the US economy lurched into a serious depression.[4]

In response to the postwar recession and the Great Depression, President Franklin Roosevelt, elected in 1932, took swift action to stabilize the agricultural sector. In addition to federal legislation regulating agricultural prices, Roosevelt provided additional loans to farmers through the Commodity Credit Corporation, created in 1933. The CCC was the realization of the subtreasury system advocated by the Farmers’ Alliance and the Populists in the late 1800s. The CCC allowed farmers to receive loans based on the prices for their particular crops. If the crop prices rose higher than the loan rate, farmers could sell their products, pay off their loan, and keep any profits. If it dropped below the loan rate than their crops were forfeit and the debt cancelled.[5] In addition to the CCC, the federal government reformed the farm credit system through the passage of the 1933 Farm Mortgage Act and the Farm Credit Act. These acts unified federal agricultural credit organizations into the Farm Credit Administration. In addition, the Farm Mortgage Act expanded the activities of the federal land banks and increased the money available to farmers through emergency credit. The Farm Credit Act created production credit associations which made short and intermediate-term loans to farmers. It also created twelve district banks to support and extend credit to the cooperative associates. These Farm Credit Banks, along with the CCC, became the principal federal lenders to farmers and agricultural businesses.[6] In 1937, the Roosevelt administration created the Farm Security Administration, which provided loans to farmers who needed assistance in meeting daily expenses in order to remain on their land. The FSA worked with famers, helping to assess the viability of their farms, developing soil conservation practices, while fashioning plans for farm operations and expenditures. In return for this large-scale government planning, farmers who otherwise could not receive loans from other financial institutions were able to stay on their land.[7]

The beginning of World War 2 saw a significant increase in agricultural prices as domestic and international demand grew during the war years. Unlike the end of World War 1, agricultural prices remained high following the end of the war due to continued demand caused by the end of rationing in belligerent nations and the increased foreign aid sent to Europe and Asia. The postwar years in fact saw the increasing commercialization of farms throughout the United States. Increased prices allowed farmers to further mechanize their farms, and the increasing reliance on mechanical improvements and technological and chemical advancements completed the heretofore gradual commercialization of US agriculture. In 1930, for example, there were nearly 7 million farms in the United States. By 1970, there were only 3 million. Adapting to the changing nature of agriculture, the federal government took gradual steps to alter its existing agricultural lending apparatus. In 1972, Congress passed the Consolidated Farm and Rural Development Act, also known as the Con Act, which expanded the lending powers of the Department of Agriculture, empowering the agency to make direct ownership, operating, and emergency disaster loans to farmers. In addition, it allowed for rural development loans and grants.[8]

The rural boom, which had lasted throughout the postwar years, abruptly ended in the 1980s. As inflation rose and farm prices dropped, the United States faced a serious agricultural depression. In response to the financial crisis, the government passed the Agricultural Credit Act of 1987. This act authorized a $4 billion package to aid fiscally vulnerable institutions of the Farm Credit System. It also served to restructure delinquent loans, created an insurance mechanism to protect FCS loans, and, most importantly, set up a secondary market for agricultural real estate loans through the creation of the Federal Agricultural Mortgage Corporation, better known as Farmer Mac.[9] Designed to help the struggling Farm Credit System, Farmer Mac established a secondary agricultural real estate market and increased long-term credit with stable interest rates to farmers and ranchers. In order to meet its goals, Farmer Mac purchases agricultural loans from lenders, replenishing their funds and allowing them to make further loans to agricultural borrowers.  In order to fund their purchases, Farmer Mac sells debts and securities on the capital market, guaranteeing a flow of money from Wall Street investors to rural farmers.[10] Since its creation in 1987, Farmer Mac’s authority has been modified four times. In 1990, Congress created the Farmer Mac II program, at the request of the USDA, which provides the support of the secondary market to USDA guaranteed loans and allows lenders to sell portions of guaranteed USDA loans to Farmer Mac. In 1991, Farmer Mac was amended and subjected to moderate capital regulation by the federal government, in 1996 its purchasing processes were streamlined, and in 2008 Farmer Mac was allowed to purchase loans made to finance electrification and telecommunication improvements in rural areas.[11] The modifications made in the 1990s transformed Farmer Mac into a widely profitable institution. Since 1995, Farmer Mac has increased its capital from $12 million to over $100 million in 2001.[12]

Thanks in part to thoughtful government actions and regulations, Farmer Mac, unlike similar government-sponsored enterprises like Fannie Mae and Freddie Mac, remains fiscally sound and has weathered the current economic crisis. While government actions to manage and regulate agriculture lending may have lagged over the years in comparison to other forms of banking and credit developments, the government has frequently taken decisive action to protect and support agriculture in the United States. The development of farm lending systems and institutions has helped the agricultural sector develop into the economically powerful system that exists today.