The Seven Lean Years
“ And there shall arise after them seven years of famine ; and all the plenty shall be forgotten in the land of Egypt.” — GENESIS xli. 30.
IF the X-rays had been discovered a decade ago, and one could have turned them upon the contents of any of the leather mail bags that the East was sending to the West, he would have found therein a number of appeals for mortgages bearing a higher rate of interest than six per cent; for at that time the ratio of the supply to the demand had become such that it was appeals for, and not simply orders for, seven per cents that the Eastern investors were sending. The East wanted seven per cent mortgages, and, having money to pay for them, there could be but one result, — it got them.
Five or six years later the X-rays would have shown a striking difference in the letters that filled the west-bound mail bags. They would have shown the word “ Receiver ” prefixed to the addresses of a majority of the loan and trust companies in the Missouri valley, and that instead of cries for more, the Eastern money lenders were clamoring for their money back on what they had. There were angry demands, and pathetic appeals and pitiful tales of woe, which the various receivers were unable to satisfy or alleviate. Verily, the lot of those who were charged with the winding up of the affairs of the defunct investment companies was not a happy one. Being human, they were not insensible to the hardships of the small investors, to whom the non-receipt of their interest was a serious affair and the impairment of their principal a calamity, nor to the inconveniences of the larger investors; but being only human they were powerless to change conditions that made so many Western farms unproductive, and so many mortgages no longer a source of revenue to their holders.
All over the East, from the Potomac to the Penobscot, locked up in safe deposit vaults, and buried in trunks and bureau drawers, are innumerable Western farm mortgages and debentures of Western loan and trust companies upon which their holders have received nothing for the past five years. Now and again they are taken out and looked at with varying degrees of regret. The owner of the strong box or a drawer in a safe deposit vault no doubt often thinks he might as well drop them into the waste basket as to lock them up again with his more valuable papers ; the owner of the trunk or bureau drawer thinks of the hard-earned dollars those yellowing papers represent; of the rigid economy and pinching self-denial it took to get the little hoard together; or perhaps of the proceeds of a life insurance policy, or a small legacy, that was laid away to educate the children or provide for old age, and invested this way to get a higher rate of interest than the local savings bank would pay; and now there is left not even the memory of the pleasure of spending it, — only this poor, flimsy protection for a rainy day.
Despite the many letters of explanation that have been written, most of the owners of these papers do not even yet quite understand what has become of their money, or how the papers that represent it have come to be of so little value while the land that is pledged for security is still there, just as many acres and just as good soil, and the validity of the papers is unquestioned.
Ten or twelve years ago there were so many Western investment companies offering seven per cent mortgages, that it was becoming increasingly difficult for the older and more conservative companies to market mortgages bearing only six per cent, the average investor being unable to discern any important difference save the additional one per cent, and that the mortgages bearing the higher rate of interest were of smaller amounts. Both of these differences appeared to him greatly in favor of the seven per cent loans; they would bring in ten dollars a year more on every thousand, and would enable him to scatter his funds more, avoid the necessity of putting all of his eggs, or so many of them, into one basket, of which the small investor is ever fearful. As to any difference in security, the property pledged for the payment of the seven per cents was usually valued by the owners and appraisers at a higher figure in proportion to the amount of the loans than the land which was behind the six per cents. For example, the application accompanying a four-hundred-dollar seven per cent loan in Box Butte County, Nebraska, would show the owner’s value to be, land sixteen hundred, buildings one hundred and forty-five dollars ; and the appraisers’ value, land fifteen hundred, buildings one hundred and fifty, or a little in excess of four times the amount of the loan ; while the application with a one - thousand-dollar six per cent loan in Saunders County, in the same state, would show a valuation of about twenty-eight hundred to three thousand dollars, making it appear that the difference was in favor of the former class of loans. The names of the counties meant little to him, — one looked about as well as another on the map. He would therefore invest his thousand dollars in two small loans bearing seven per cent, rather than in one large loan bearing six, serene in the belief that the advice of the investment company to do otherwise (and such advice was often given) was actuated by regard for its own profit account.
Investment companies that had hitherto confined their operations to the territory in which nobody was making loans that bore over six per cent — east of the ninety - ninth meridian — were everywhere confronted with this state of affairs. All their Eastern agents and most of their clients were clamoring for seven per cents; some correspondents who could sell six per cents would no longer purchase of them, but transferred their business to companies that were supplying them with seven per cents also ; and clients and Eastern stockholders were continually asking, “ Why cannot you also get seven per cents ? ” In this manner, many concerns that would not otherwise have done so were virtually coerced into entering the newer and uncertain territory in the western and northern portion of Nebraska, western Kansas and northeastern Colorado, comprising what has been known as “ the great American desert ” and “ the plains,” the former pasture of the buffalo.
There had been one or two phenomenal harvests where the land was cultivated, — there was no question about the fertility of the soil in this new country, — and while it was known that there had been droughts, it was believed that with extensive cultivation of the soil the weather conditions would change and there would be greater rainfall, — that rain would follow the plough, as was apparently the case farther east. And so, not without misgivings on the part of their officers, most companies began loaning beyond the zone of certain safety, in the region of conjecture, of which only the Indian and cattleman could speak from extensive experience.
The loans made there sold readily, faster even than they could be made; sometimes there were two purchasers ready with their money for every loan that was applied for; it became a question of finding borrowers rather than purchasers of loans, and the competition between rival loan companies was no longer in connection with the selling of their loans in the East, but with the making of them in the West, — a condition that boded ill for the purchasers thereof, but which they were themselves chiefly instrumental in bringing about.
Every little town in the new territory was filled with loan agents, correspondents of the various companies, and all over these “ outside ” counties men were driving about looking for farmers and settlers who would borrow money, each one endeavoring to close a loan before the representative of a rival concern came along and cut him out by offering to lend a larger amount on the security, or making some concession in the matter of commission.
These loans ranged from about four hundred to seven or eight hundred dollars per quarter - section (one hundred and sixty acres) of land, sometimes running over these amounts, sometimes under, according to the borrower’s prudence or need of money, or the competition for the loan, and were made for a term of five years. They were mostly made on the “ stuffed ” plan at first; that is, the difference between the interest the borrower was to pay and the seven per cent per annum the purchaser of the loan was to receive was added to the sum loaned and the bond and mortgage written for that amount. In other words, the borrower received the amount of the mortgage less the difference between the total interest he was to pay and the amount the loan bore for five years. If he wished to borrow five hundred dollars at ten per cent, the usual rate, the papers were written at seven per cent, and the remaining three per cent, which for five years on five hundred dollars would amount to seventy-five dollars, would be added to the amount borrowed ; he would sign a mortgage for five hundred and seventy-five dollars and pay seven per cent semiannual interest on that.
As this method made loans of an uneven amount, it was usually figured so the borrower would apply for a five-hundred - dollar loan and receive about four hundred and thirty-five dollars, or for a six - hundred - dollar loan and receive about five hundred and twenty-two dollars. From which it will readily be seen that the immediate effect of this business on the profit account of the investment company making the loans was considerable, though of course the procurer and seller had to be compensated.
After a time the borrowers demurred at this method, which is not to be wondered at, and it was necessary to take a second mortgage for the three per cent, securing notes payable in two or three years, or concurrently with the interest coupons on the first mortgage bond.
Most of the people to whom these loans were made were without any means whatever, the expense of their journey from some more eastern state having consumed what little they may have had ; for even if the journey had been made by wagon, there were bridge tolls to be paid and provisions to be bought, and there was no possibility of their meeting interest payments save from the proceeds of what they raised on the land or any unexpended portion of the money loaned them. As they must have title to the land before a valid mortgage could be given, and this could only be obtained by proof of a residence thereon of so many years, or the payment to the government of two hundred dollars, the latter method had to be adopted to get the loan, and of course materially decreased the sum they received therefrom, and almost eliminated the chance of there being anything left when the first interest payment fell due, even in the case of the best disposed and most thrifty; for they must eat while the first crop was maturing, and perhaps a horse or two must be bought to aid in putting in the first planting.
If all went well, if there was a sufficiency of rainfall, and at the right time, if the grasshoppers kept away and no hail beat down their crops, there was no trouble. But sometimes, instead of the needed rains, there came scorching winds, as if from the ovens of Hades, that burned up the thirsty stalks ; or with the rain came hail that pounded the grain into the earth ; or the locusts came and ate every green thing. Then was there trouble and despair, interest became delinquent, and the team and plough were mortgaged to fill hungry mouths. Another good season would set matters right again, for, given moisture and no hail or " hoppers,” the land yielded abundantly ; but the lean years, the dry years, came so much more frequently than the fat ones, that farming was a losing game in many of these Western counties, and the farmers finally left their claims to the coyote and the sheriff and the cattlemen.
Some held on for a number of years ; some, in the better counties, or where they could irrigate, managed to make their claims pay and gradually wipe out the mortgages ; but these cases have been extremely rare. Many were ne’er-dowells who, having failed in everything else, of course failed at farming ; some were burdened with the curse of the wandering foot, — had never remained anywhere long, — and pulled up and were off to Oklahoma, or Oregon, or Texas, or anywhere else, at the first setback. Some came simply for the money they could raise on a loan on their claim ; for where they had title it was often possible to borrow more on the land than it could be sold for, and the discouraged or speculative could more profitably mortgage their farms and leave them to the mortgagees than sell them outright, the average borrower in this part of the country caring little for his promises to pay.
The writer has been in the office of an investment company when a mail bringing applications for loans of this sort, in bundles, from Custer and Box Butte counties in Nebraska, and Sherman County, Kansas, came in, and has seen everything else dropped and the clerks kept after office hours in order that papers might be written up to go out at the soonest possible moment, it being known that the loans could be sold without question as soon as completed and sent East. That was in 1888, and this sort of thing was going on in the office of a large majority of the investment companies throughout Nebraska, Kansas, Iowa, and Missouri, where investment companies chiefly flourished at that time, and to which companies, their loans, and field of operations, this paper refers. The mails were heavy with these loans going East, and with checks in payment for them, and appeals for more, coming West.
So many Western mortgages were pouring into the Eastern states that about 1888-89 the legislatures of many of them deemed it incumbent upon themselves to pass laws that would safeguard the purchasers. So it was decreed that no Western investment company should do business in their state unless placed under the supervision of, and annually examined by, an officer of the state, who was known by different titles in different states, such as “ Commissioner of Foreign Mortgage Corporations,” “ Inspector of Finance,” or “ Banking Commissioner.” That is to say, they could not open offices in these states or personally offer their securities there, but from their home offices in Kansas City, or Omaha, or Topeka, they might by letter solicit business anywhere. There was nothing to prevent sales by mail, as of course there could not be. The inability to do this, and the carelessness or incompetency of most of the men who came West as examiners or inspectors, made these laws of no particular value.
The writer has seen one of these examiners come into the office of an investment company, copy the daily statement of the previous day, chat a little with the senior officer who happened to be in at the time, pocket his fee of fifty or seventy-five dollars, and depart in the belief that he had examined that company and was competent to say if it could be permitted to do business in his state. Sometimes the examiners went further, and checked up the ledger with the statement book. There was one of them in the earlier days of these examinations and a second, from another state, a little later, who took time to check up the assets with the ledger, get statements from the various banks where funds were deposited, and look over the mortgages with trustees for debenture bonds. Perhaps there were others, but the writer never came in contact with them.
With due respect for these two men, and with the greatest admiration for the conscientious manner in which they discharged their duties, it must be said that even they failed to learn many things that might have interested them. For instance, there were various expedients in vogue among investment companies for reducing their coupon accounts other than by collections, it being desirable — for the companies — to have it appear that they were carrying no great amount of delinquent interest. Sometimes they would get borrowers who were two or more coupons behind to give a note for the amount of the coupons and the ten per cent from maturity thereon, which all coupons bore, and hold the coupons as collateral for the note ; a proceeding which would add to their profit account, decrease the amount of past due paper on hand, but would not materially alter the value of their assets. Or they might sell coupons in batches of a thousand dollars or more to one of their clerks, or the general manager’s coachman, who would give his note for them ; the coupons, of course, being held as collateral to the note. There were a number of ways of accomplishing the same result, and most of them could also be made to serve the purpose of getting past due paper, other than coupons, out of the assets. An examiner who had served an apprenticeship in the office of a Western investment company would probably have discovered that, while a company’s books might show that the interest upon all the loans it had made was paid to it with reasonable promptness, such was not actually the case; but a man not versed in the intricacies of the business was not likely to do so, nor to form a very accurate idea as to what companies were not doing a safe business.
For a time all went along merrily : the holders of the mortgages received their interest twice a year, generally a day or so before it was due ; the Eastern stockholders, whose names were paraded in advertising matter to show the character of the men behind the company, but who had no voice in its management and little or no knowledge of its affairs more than any outsider might have, received their semi - annual dividends (whether they were earned or not) ; the wise men from the East came and inspected, and took their fees, and reported the companies sound and safe and conservative; the companies printed on their letter heads the fact that they were under the supervision of this, that, and the other officer, which was pleasing to their clients ; the officers believed they were building up a business that would be a credit to them, and a continuous source of profit to the shareholders, and were proud of their achievements ; borrowers saw the country round about them filling up with settlers and the prairie rapidly turning into farms, railway surveys running hither and thither, and new towns springing up here and there ; and those who really meant to stay and make their homes there saw a rosy future at the end of a few years of hard work and frugal living ; what the restless, thriftless ones saw does not matter ; and maker, negotiator, and purchaser of the loans were all happy.
But in the early nineties the lean years came and began to consume the fat ones. The crops dried up, and there was no revenue from the land. If any money was saved toward paying off the mortgage it went for food; borrowers were unable to pay interest, and the companies were obliged to carry their coupons for them, which most of them did willingly for a time, always believing that the next season would be a fruitful one, — that every lean kine that came would be followed by a fat one. In course of time these coupons amounted to a considerable sum, and when the far Western loans began to mature about 1892-93 many of the companies were already carrying a pretty heavy load of past due paper, or its equivalent, and receipts for taxes paid as mortgagee ; yet as long as they could they refrained from falling back on the two-year limit in their guarantee. They stood between the holders of the mortgages and the havoc of the hungry years as long as possible, and it was not until they had exhausted their resources that the Eastern investor felt the teeth of the lean kine.
When the panic of 1893 came, most companies were about at the end of their rope ; their incomes had all but ceased, and with paper falling due upon which there was no two-year limit to their guarantee, and no funds to meet it, there was nothing to do but lie down under the burden and ask for a receiver.
Then the weight of the ill-favored years fell upon the Eastern investors, and in many cases it was a most grievous one. The writer knows of a woman who, when the interest she needed to take care of her family stopped coming, became insane and went out and hanged herself; of a clergyman who put his savings against the rainy days of old age in debentures upon which he was unable to realize anything for five years, and then scarce one year’s interest; and these are but instances of the hardships that came.
But it must be remembered that the mortgage holders were not the only sufferers from the failure of the enterprise of making farms out of the cattle ranges, though they generally seemed to think they were. Many of the mortgage makers tried hard to make farms and homes of their claims, and success or failure meant infinitely more to them than to their creditors. Even through the fat years they were working hard and living frugally because they must, — because there was interest to pay and stock and implements to buy; and the fields were planted all through the lean years, until the claim was abandoned, just the same as through the fruitful ones ; so there was work that went for nothing and the agony of seeing promising crops burn up. Sometimes they left their places to work in the towns, the men as teamsters, the women as cooks, to earn money to try it another year, only to see their crops again die of thirst.
Those who were engaged in the making of loans did not escape either ; their business was ruined, and many of them lost their homes and the savings of years and were left completely bankrupt. They have received little sympathy and many curses from both East and West. If the enterprise had succeeded, if there had been no lean-fleshed years to eat up the fat-fleshed ones, that is, if there had been rain enough, they would have been looked upon as benefactors ; by the borrowers, unto whom they had brought the needed capital; by the lenders, for whose money they had found profitable use.
But there was not rain enough, the lean years consumed the fat ones, there was failure and distress, and the land has gone back to what it was in the beginning, — grazing land; the farmers left it, and the cattlemen came back with their herds. With the farmers the farming values left it also, and most of it is worth now only its value as grazing land. So, instead of gratitude, the investment men were showered with maledictions.
Of course they were not blameless, but if they concealed facts, and made misleading statements, it was partly from inability to make the Easterners clearly comprehend exact facts and estimate them at their true value ; they believed success was possible until the last, and backed their belief with their own money.
At the time these loans were made, about 1887—90, it was believed the lands could be profitably cultivated, and this belief gave them a value that could last no longer than the belief. When it was finally admitted that they could not be tilled with profit, there were no buyers, and values fell to what stock raisers would pay. While the acres themselves have not diminished, the revenue it is possible to derive from them has, and it is the revenue that makes their value.
In some cases, where lands can be irrigated, old values will return, but even seven fat years would hardly bring them back to lands that must depend upon natural rainfall, in the light of past experience, though of course good years would count for something.
There has been much in the papers about the prosperity of Kansas and Nebraska, where a large share of these poor loans were made, and it has been difficult for the holders of the defaulted mortgages to reconcile what they are told about the land in which they are interested with what they read of the state in general. These Western states cover large areas. Nebraska is larger than all of New England, its eastern and western boundaries are farther apart than Boston and Buffalo, and while a large portion of it is apparently fit for nothing but pasturage, there is still enough to make several Eastern states that is as fine farming country as there is on the face of the globe, where there is never a total failure of crops. This is what used to be the six per cent territory ; it is five or five and a fraction per cent now, and there is no safer investment than farm mortgages therein. Here is where the prosperity is.
Roughly speaking, a line drawn from Dakota down through the counties of Knox, Antelope, Wheeler, Custer, Dawson, Phelps, and Furnas would divide the Nebraska sheep from the goats, though there would be a few goats on the sheep side and a few sheep among the goats, mostly near the fence. Eastern Nebraska is a country of productive farms, with comfortable houses and large barns and corncribs, a rolling prairie that is fair to look upon; western Nebraska is largely as flat as a well-laid floor, and one may ride over it for miles without seeing any signs of civilization save, perhaps, a herd of cattle or the wreck of a sod shanty, now but a mound that is gradually going back to earth again, for Nature quickly reclaims her own, and has largely covered up all traces of the buildings described in the applications of western Nebraska loans, which were but sod. But western Nebraska is a fine pasture : it is planted with grasses that have withstood the trampling feet of countless bison, and that even the prairie fires and long droughts could never kill ; there is no better cattle country anywhere than this, — that is, the best of it, for some of it is a waste of sandhills.
As to the future of these defaulted loans, it is improbable that anything will ever be paid by the borrowers on either the interest or principal of as many as one in twenty, for most of the borrowers have left the lands with no expectation of ever returning, and in most cases it would be difficult and of little avail to trace them. Sometimes, however, by starting foreclosure proceedings, a mortgagor may be found, or some one unto whom the mortgagor has sold his equity, who will make some sort of a settlement to clear the land; but such instances are extremely rare, and the probability of such an outcome is so slight that, practically, the holder of a mortgage on abandoned land can hope for no returns upon his investments save from the security itself, or the sale of his loan for what it will bring. To realize upon the security requires some additional outlay for the acquirement of title and to clear the land from taxes ; to realize by sale of the loan one must sacrifice tremendously, and not expect much over five or ten cents on a dollar of the principal sum, taking no account of the interest there may be accrued. For whoever will buy must acquire title (that is, equity title ; the mortgage is but a lien, and must be foreclosed to give possession), and pay off the taxes; and he can generally buy as many as he wants at that price.
If one neither sells his loan nor clears the land of taxes, in course of time his interest in the land will be wholly cut out by a foreclosed tax lien; it is therefore desirable not to let matters run too long, for in the great majority of cases it is either take the land, sell the loan, or lose everything.
It is generally advisable to consult some person or firm making a business of caring for such loans before taking any action. There are many such in the different cities and towns where the defunct investment companies had their offices; they are familiar with local laws and conditions, and will usually advise without charge as to the probable cost of foreclosure, amount of unpaid taxes, practicability of obtaining title from present holder for a nominal sum, instead of by foreclosure, and prospects for selling land when in position to do so.
Much depends on the particular piece of land, and general statements are not universally applicable. The land securing a loan may not be worth the taxes against it, or it may be possible to sell it for enough more than the lien to make good the outlay for foreclosure costs and taxes, or even more; but this is not frequently the case.
The loans behind the debenture bonds are largely of the same class as those that now cumber strong boxes and bureau drawers, and the foregoing will perhaps help holders thereof to a better understanding of the difficulties of the various trustees, and the tardiness and smallness of the first dividends thereon, as well as explain to the holders of the mortgages themselves how the loans came to be made, and how they came to lose their value, or so much of it, for which purpose this article has been written.