14 Back When the United States Was Primarily an Agrarian Society, the Banker, the Doctor, the Preacher, the Lawyer And, in A

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Back when the United States was primarily an agrarian society, the banker, the doctor, the preacher, the THE ROLE lawyer and, in a way, the bar owner, were the enduring pillars of each town. It was the town banker, however, who enabled the farm-centric communities to survive and thrive. According to Bob Watt, a scripophilist specializing in obsolete OF THE bank stock certiﬁcates, the agrarian town bank emerged about 30 years after the money center banks, which began on the East Coast in 1781 to serve the interests of merchants, importers, and exporters. Money center banks – and the insurance compa- TOWN BANK nies, investment banks, and national and international banks – are the “out-of-town financiers” who are very different from the town bank. The town bank is the institution that services the monetary needs of a local rural community; it is manned, IN THE owned, and financed by the community in which it is physically situated. Watt explains that its existence sur- faced in the early 1800s in response to farmers’ complaints that money center banks would not loan them money because they preferred doing AGRARIAN business with merchants. The farmers’ complaints are somewhat ironic, given the atti- tudes of most early U.S. citizens. From colonial times, farmers were placed upon a pedestal, while merchants and their commercial trade UNITED were somewhat vilified. Benjamin Franklin in a 1769 piece published in his 1907 book, Writings, cap- tures the mood. “Finally, there seem to be but three ways for a nation to acquire wealth. The first STATES is by War as the Romans did in plundering their conquered neighbors. This is Robbery. The second by Commerce which is generally Cheating. The third by Agriculture By Kathleen A. Graham the only Honest Way…”

Financial History ~ Fall 200414 www.financialhistory.org n o i t a i c o s s A s r e k n a B n a c i r e m A e h t f o y s e t r u o C Early issues of Banker Farmer, the ﬁrst publication from the American Bankers Association for agricultural bankers.

What honest people want with presidents, concurs. “By the 1870s, the systems. The town bank met our a tool of the “cheats” is obscure, town banker was financing every farm, uniquely American needs.” but what is quite apparent is that house, and crop. Furthermore, com- As time passed, ownership of bank farmers used banks extensively munity bank ownership was the gen- shares consolidated through inheri- and that their love/hate relationship eral rule; every farmer would own at tances and sales, so fewer parties now with banks, especially the “out-of- least half of one percent of bank own more town banks (although town financiers,” was present stock,” Leach said. many of them are still family owned). throughout U.S. agrarian history Watt owns old bank certificates Quentin Satterfield, senior vice presi- until just recently. that illustrate this phenomenon. dent of the nearly century-old First Three unique relationships between “Old certificates usually cost about Community National Bank in the bank and its community distin- $100 per share, which was a lot of Steelville, Missouri (population: guish the town bank from its city money back in 1860,” he said. “Of 1,600), said his bank reflects this cousin. The first is that the capital the the average 350 total shares issued, a trend. It has gone from a broader bank lends originates from the area’s typical farmer would buy two shares community ownership to about 15-20 inhabitants. This local community on a payment plan. I have certificates shareholders over the last 20 years to capital investment weds the lender to where each payment was noted until being primarily family owned when the borrower more closely than the the farmer had paid it off in full. The one of the shareholders acquired relationships between out-of-town beauty of this approach was that the enough of the stock to have a control- financiers and their customers. debtor was also the bank owner and ling position. Iowan Congressman and Chairman very motivated to pay his loan.” Local community ties — financial, Emeritus of the House Banking and He added, “What a great system: geographic, and psychological — are Financial Services Committee Jim make the farmer the investor. That another unique feature of town banks. Leach, whose father, grandfather, and worked so well and was different Congressman Leach explains, “The great-grandfather were all town bank than the English and Scottish banking banker knows the community, and the

www.financialhistory.org15 Financial History ~ Fall 2004 community knows the banker. That mutual knowledge generates the enor- mous amount of trust necessary to bring together the capital needed to make the bank function. In the 19th century, it was a much harder feat to accomplish, which is reflected in the average cap ratio being 15-25 percent versus two to six percent nowadays.” These ties benefit both community lenders and borrowers. A recent study of lending practices of large and small banks by A.N. Berger and N.H. Miller, Board of Governors of the Fed- eral Reserve System; M.A. Petersen, Northwestern University; R.G. Rajan, University of Chicago; and J.C. Stein, Harvard University concludes that town banks closer to their borrowers Jamey Grafing, senior vice president of the Farm Credit System in Minneapolis. have a competitive advantage over out-of-town financiers because of the lesser distance that “soft” information petitive, most town banks now provide friends, his family, and neighbors, in has to travel to the decision-makers. Internet access and other services that addition to it being his locally-owned Satterfield, a 43-year rural bank vet- they may not have offered if the out- bank that was losing money?” eran and a farmer who with his brother of-town financiers did not exist. There- Satterfield remembers the 1980s, raises “some (about 100) cattle because fore, borrowers get these services no too. “While the city banks charged they enjoy doing it,” calls that soft matter which bank they choose. the going high rates, most of the com- information “character.” “We know In addition, town banks offer bor- munity banks tried to keep lower lids our customers, so we can make loans to rowers more downside protection. The on the rates,” he explained. “After the young farmer because we know him last big agricultural turmoil occurred all, this is our community, so we need and his family personally. We know in the 1980s, when after a period of to charge what works for both us and that they’re good for the money lent, increasing real estate values caused by the borrower.” even though financial statements might surging inflation, rising farm product As for Grafing’s out-of-town not reflect that fact,” he explains. prices, and expanding farm mortgage employer, in response to their losses Statistics from the USDA Agriculture indebtedness, inflation dropped and they closed their local offices, quitting Economics and Land Ownership Survey interest rates rapidly rose. According Midwest lending. Their reaction was concur: today banks serve 75 percent of to Jamey Grafing, senior vice president an understandable business decision, the youngest farm operators, 72 percent with the Farm Credit System in Min- given their geographically larger client of the family farmers, and vastly more neapolis, this triggered a major col- population perspective, where the women and minority-owned farms than lapse in farmland values. same rules need to be applied to all any other source of funding. Grafing, whose office boasts a pic- within defined categories to prevent John Blanchfield, director for agri- ture of his family’s Iowa farm (which fraud and discrimination in addition to cultural and rural banking at the they have owned since the 1800s) and enhancing the same branding through- American Bankers Association (ABA), who was working for one of the out- out the organization. However, from says that it is the town banks doing of-town financiers during this period, the borrower’s perspective, the better that lending as the out-of-town recalls the different reactions. “I capital choice was the more locally financiers, although very engaged in remember my best friend, whose dad enmeshed, more flexible town banker. agribusiness, tend to finance second was a town banker, telling me how his According to Blanchfield, the 1980s tier agriculture: the processors, dad was only averaging two to three experience, coupled with new com- millers, etc., who are once removed hours of sleep nightly, as he died a puter technologies and access to better from the farmer. thousand deaths emotionally,” Graf- information, gave farmers the sophis- These close community ties also ing said. “How could he not react this tication to understand how money/ benefit the borrowers. To remain com- way, as those impacted were his banking/commerce works.

Financial History ~ Fall 200416 www.financialhistory.org t t a W b o B f o y s e t r u o C Bank stock from The First National Bank in rural Fairmont, Nebraska, issued in 1887.

Grafing agrees, noting that family etc.) and livestock. Compare that to state outside of Chicago, that as farmers are now less emotional and the year-round season available in recently as 1991 still had 177 banks more pragmatic about viewing their parts of the South, and in California. that were over 100 years old. Even livelihoods as a business instead of a These areas, with their considerable after a decade of less restrictive Illinois calling. Thus ends the centuries old variety choices (strawberries, nuts, banking laws that permit branches, love/hate relationship between farm- etc.) and full planting year, have a acquisitions, etc., more than two- ers and bankers, cured by experience higher value per acre,” Grafing thirds of those century banks in agrar- and knowledge. explains. “Couple that with their ian communities still exist. Town banking also differs from city close proximity to large populations The departure of Bank One, which banking due of the size of the commu- already present because of the size- had acquired a number of the original nity. Blanchfield explains that on both able other opportunities, and it’s not century banks during its Illinois head- U.S. coasts there are more opportunities surprising that the relationships and quarters period, temporarily leaves to finance (import/export, manufactur- the interdependency between banker, Chicago without a money center bank ing, etc.), so agriculture is only one investor, and borrower change headquartered there. However, for the investment choice among many. The rapidly.” rest of Illinois and the other Heartland coasts’ larger range of opportunity Diversification also decreases risk, states, the town banks’ focus on pro- choices also attracts larger populations, so it is not surprising to see friendlier viding continuing sustenance and which means fewer towns and more state banking laws on the coasts growth to their agrarian communities cities. Looking at the Heartland stretch- enacted earlier than in the Heart- for the next 100 years is to them the ing over vast terrains, Blanchfield said land. The combination of laws and more important story. FH he thinks the most profitable, and dwindling interdependency has sometimes the only, use of these resulted in town banks virtually gone Kathy Graham is an executive search resources is farming. from both coasts. recruiter specializing in financial posi- Grafing adds that magnifying this In fact, of the original town banks tions who over the last 20 years has factor is the Heartland’s climate. on the East Coast that Watt identified worked extensively with agribusiness “Basically, the Midwest can grow in his research, none exist today. Con- financial lending, trading, risk man- annual row crops (corn, soybeans, trast that to Illinois, a very agrarian agement and credit positions.