Iowa, it will be remembered, is entirely an agricultural State, and may be said to be, in fact, one great big farm. Statistics show that about nintey-six per cent, of the industrial activity of the State arises from farm products, consisting of canneries, meat packing plants, grain mills, etc. The actual wealth that has accrued in Iowa has heretofore come largely from increases in the value of farm lands and not from profits derived from the production of crops. This fact had a tendency to encourage speculation in land to an enormous extent. In many instances there were first and second mortgages on farm property, followed by unsecured notes, nearly all of which found their way into the banks. These obligations arose from inflated values of the farm property. In some cases the price was as high as $600 per acre.
It was estimated that the State and national banks in Iowa held paper of farmers amounting in the aggregate to about $10,000,000, given by them for the purchase of highly speculative stocks, which had little, if any, intrinsic value. The promoters of "sky blue" corporations sold this stock to farmers, taking their notes in payment therefor, which they discounted with the banks, accepting certificates of deposit for the proceeds. They then sold the certificates to brokers in Chicago and elsewhere and when the certificates matured the banks naturally were called upon to pay them. In the meantime the corporations for whose shares of stock the notes were given had probably gone into the hands of receivers and the farmers refused or contested payment.
These conditions prevailed to such an enormous extent that in a very large number of instances the loans to borrowers were of such proportions as to greatly exceed the legal limit of the loaning banks, and there was considerable swapping of paper between the banks for the purpose of circumventing the limitations of law. This occurred to such an extent and in such magnitude that it was not unusual to find banks with a capital of $25,000 swapping paper with other banks of about the same size in amounts ranging up to $100,000 and in some cases in greater amounts. In a number of instances banks sold this paper to city correspondent banks under guarantees of their officers and directors, which transactions, in fact, were nothing but rediscounts.
Conditions of this kind existed in many banks which were difficult for the examiners to discover and more difficult to correct.
Apparently no curb was placed upon the borrowing banks by the Federal Reserve Bank of that district and the deplorable and critical situation which existed in Iowa was, in a great measure, due to the unreasonably large lines of credit extended to the member banks by the Federal Reserve Bank of Chicago, ap-parntly without regard as to whether the funds loaned were to be used in legitimate business transactions or for speculative purposes or hazardous ventures.
In a number of cases the lines extended to these banks were largely in excess of justifiable and prudent limits.
In addition to the amount of eligible paper discounted for Iowa banks by the Federal Reserve Bank the volume of ineligible paper held by that bank as collateral to the eligible paper ran to very large totals. The proper exercise of even ordinary judgment by the Federal Reserve Bank at Chicago in extending credit to the member banks in Iowa undoubtedly would have prevented the situation in that State from becoming so acute.
The enormous deflation in commodity values would have caused a most unsatisfactory condition under the most favorable circumstances, but the critical situation that developed could have been avoided, or, at least, greatly ameliorated, if the Federal Reserve Bank at Chicago had not permitted the Iowa banks to become so desperately extended.
After about four years of this extreme liberality, the Federal Reserve Bank suddenly reversed its policy, and about January
1, 1921, commenced to advise the banks that they could have no more credit, but must arrange to liquidate their indebtedness. An active and vigorous campaign was then inaugurated through the Federal Reserve examiners to coerce the banks into liquidating their obligations to the Federal Reserve Bank.
Due to the shrinkage in the value of farm products the tenants were unable to pay the landlords the cash rents contracted for on the basis of high values. Consequently nearly all business in that State was at a standstill. Practically nothing was being moved to the markets. A considerable portion of the previous year's corn crop remained to be moved, but this could not be done until the roads were in a better condition. Most of the hogs were not ready for market. It was no time for liquidation at the then market prices.
For the Federal Reserve Bank to insist that any great proportion of the borrowings of the banks be liquidated at that time was a thing impossible to be accomplished. The result of such a policy on the part of the Federal Reserve Bank was obvious.
Numerous complaints from different banks and from other sources were made to the Comptroller of the Currency of the attitude of the Federal Reserve Bank and the Federal Reserve examiners, which were brought to the attention of the Federal Reserve Board by the Comptroller. The Governor of the bank and some of its officers were summoned to Washington for a conference over the situation, with the result that a change of policy was immediately put into effect and the injudicious and destructive methods that had been pursued were abandoned, and more constructive measures adopted in the nature of assisting the banks that were deserving of assistance. The Comptroller of the Currency transferred a number of his most experienced examiners into the State to study the situation and aid the banks in every possible and proper way and encourage them to remain open by having them understand that they were there to help them out of their difficulties and not to force them into liquidation. This constructive policy was also pursued by the Federal Reserve Bank after the conference in Washington, and thus what threatened to develop from a bad to a very serious banking situation was greatly alleviated.