Chapter Five from...
by Bruce Brown
When Albert Droll died in 1975, John Hughes was named to succeed him as president of the bank. Although Hughes's youth (he was then thirty-six) surprised some, it was an astute choice on the part of the Hills board. No one could match John Hughes's mixture of legal training and farm boy savvy. There was also something about John Hughes that transcended the numbers. In the boardroom of the Hills Bank, he put up a small poster with one word on it: "Quality." In a direct and personal way, Hughes strove to make this a central tenet of the Hills Bank. "He made you feel good," recalled one associate. "He was always very positive, and had a way of coming up with concrete solutions to problems."
It was John Hughes's idea, for instance, to move the Hills Bank into the lucrative suburban and urban Iowa City market, which proved the foundation of its prosperity during the late 1970s and early 1980s. He also showed uncommonly good judgment in the people to whom he extended credit. As Robert Downer noted, "People in town went down to [the Hills Bank] to borrow money, and they turned out to be some of the most successful people in the area." In 1975, Hills Bank had assets of $36.4 million and deposits of $33.2 million. At the end of Hughes's first decade at the bank's helm, assets were $219.8 million and deposits were $199.7 million. "You have to give John credit," said Harold Schuessler, a member of the Hills Bank board and Dale Burr's close neighbor to the east. "John knew all the angles. When an opportunity presented itself, he was ready "
A prime example of John Hughes's acuity was the Hills railroad right-of-way annexation he helped engineer during the late l970s and early 1980s. Under Iowa law, a bank from one town cannot open an office in another town where there is already a bank, unless the two towns are "contiguous." Since eight miles separated Hills from Iowa City, the Hills Bank could not open a branch in the much larger neighboring community, even though more than 40 percent of its deposits came from there. "I think our banking laws as they pertain to branches make absolutely no sense," said Hughes, who confided to the Des Moines Register that he had long been looking for a way into Iowa City. The bank could have asked state banking authorities for permission to move its headquarters to Iowa City, but Hughes decided it was more important to the personality of the bank to keep the headquarters in Hills, "Where Town and Country Meet."
Then, in 1979, John Hughes was approached by childhood friends Ron and Jim Stutsman, co-owners of Stutsman's Farm Supply. Curiously, the Stutsmans came in asking about a loan for the Rock Island Railroad, which operated the spur line from Hills to Iowa City. It soon became apparent that the Stutsmans' business was itself in some financial difficulty, though. They had recently invested a good deal of money expanding their fertilizer business without getting more than an oral commitment from the Rock Island that it would maintain service to the Hills spur. Now, a few months later, the financially strapped railroad had changed its mind. "Rock Island apparently told Stutsman's that they wouldn't ship any more railroad cars unless they got a hundred-thousand-dollar interest-free loan from Stutsman's, or from somebody, that they could then repay by granting credit on the number of cars ordered," said Hills Bank officer Jim Gordon.
It looked like another small blow to another small town, but in this problem for Stutsman's Farm Supply, John Hughes saw the glimmer of something grand. He said he was not interested in loaning money to Rock Island, but he might be able to help. Hughes initiated discussions with people like Hills City Attorney Jay Honohan and Cedar Rapids and Iowa City Railroad (CRANDIC) president Otis Woods, which led to the formulation of a concrete plan. The idea was that first the City of Hills would annex the old Rock Island right-of-way. This would enable Hills to issue industrial revenue bonds to subsidize the railroad, and would also give Hills a hundred feet of contiguous boundary with Iowa City. The bonds were supposed to sweeten the deal by helping finance the purchase of the spur from the now-bankrupt Rock Island Line by CRANDIC, and possibly help restore the tracks and bridge over the Iowa River. The Hills Bank, for its part, pledged to purchase the bonds if no other buyer could be found.
The scheme was publicly championed by Larry Culver, who was both Stutsman's accountant and the mayor of Hills. In a typically small-town manner (a record of town business was sometimes "published" by taping the minutes of town meetings to the door at City Hall), the City of Hills first sought permission from the state to annex the railroad right-of-way all the way into Iowa City on the grounds that it was needed to save a local family-owned, farm-related business. Then it authorized issuance of up to $672,000 in industrial bonds to entice CRANDIC to purchase the spur from the federally appointed bankruptcy trustee for the Rock Island. Since these industrial revenue bonds were backed by the tax revenues of the town of Hills, the people of Hills were ultimately behind the whole deal, from the acquisition of the property to the railroad subsidy to the Hills Bank's commission on the bond issue.
John Hughes and the Hills Bank maintained a relatively low profile throughout the dicey and seemingly endless negotiations necessary to bring the deal to culmination. The bank was aided in this effort by the fact that the local newspaper, the Iowa City Press-Citizen, carried almost nothing on the matter. The Iowa City bureau of the Cedar Rapids Gazette ran a dozen or so pieces, but they treated the annexation issue as an embattled small-town farm business story. The public was given no clue that the railroad right-of-way annexation being promoted by Stutsman's would allow the Hills Bank into Iowa City, let alone that this might be the driving economic force behind the project. This vital connection was not revealed until after the state board had approved Hills's annexation proposal, and even then the story was broken a paper 125 miles away, the Des Moines Register.
Although Hughes characterized benefits to the bank from the annexation deal as "a side effect," it was actually quite a significant matter, as evidenced by the fact that the $672,000 the bank pledged to the purchase of the utility bonds was almost exactly the institution's legal lending limit at the time. John Hughes was willing to shoot the limit because the deal promised to make the bank money in numerous ways. In the first place, it gave him the face interest on the loan, which was secured in granite by governmental pledge. Beyond that, it buttressed other investments and loans and maintained the viability of the Hills Bank's investment in the main Hills businesses. These factors alone would probably be enough to persuade most bankers to underwrite such a bond issue, but they were actually just minor sidelights for the Hills Bank and John Hughes.
When the various portions of the deal were finally sealed, the City of Hills acquired a ward eight miles long and one hundred feet wide, Stutsman's maintained railroad service to its mill, CRANDIC got its new publicly subsidized spur line, and John Hughes had his opening into Iowa City. All parties appeared pleased, but for Hughes especially it was a masterful deal, carried out so smoothly that Iowa City did not catch on until it was too late. Soon the Hills Bank was pushing other deals which gave the bank the extra security of a mortgage on the public tax revenues of the community, rather than a mortgage on the object of the loan.
In a way, this was typical of John Hughes's loan policies. While his predecessor, Albert Droll, would extend small loans to members of old families in the area on the basis of their good name, Hughes was not interested in making unsecured loans. One Hills area farmer remembers going to John Hughes for a small nonagricultural loan around 1980. "I'd been banking at the Hills Bank for thirty years nearly," he said, "ever since I was tall enough to shove the money over the counter to the teller. And I'd done a fair amount of business with them over that time. Well, one day I went in and applied for a thousand-dollar loan. John Hughes called me in and asked me what I wanted the money for." The farmer, who came from an old and prominent family around Hills, said he was kind of worn down. He wanted to take a little Mexican vacation.
Hughes inquired, "What have you got for collateral?"
"Collateral, hell," the hog farmer later snorted. "The guy before'd let you borrow on your signature. So I said, 'I got a horse.'
"He said, 'I don't ride horses.'
"I said, 'I got a motorcycle.'
"He said, 'I don't ride motorcycles.'"
Finally, Hughes told the farmer he could have the loan if he wanted to pledge some real estate. The farmer said he could have given the bank a mortgage on any of the four houses he owned, "but I'd already decided that if I couldn't do it on personal credit, I wasn't going to do it. So I told him, 'No, thanks.'"
With agricultural loans, Hughes was similarly inclined to protect himself. Often, his cleverness and up-to-the-minute understanding of legal and financial developments made it possible for him to offer farmers attractive deals, but he never did so on what they call a "guts and hide" basis (where the loan takes guts and everybody stands to lose their hide). In fact, despite the bank's ubiquitous calendars proclaiming it "Iowa's largest rural bank,'' the Hills Bank actually held a relatively small portfolio of agricultural loans.
Hills Bank attorney Downer said that under Hughes's direction "the bank was never one to throw caution to the wind with farm borrowers. . . . John was concerned that on the long-term basis farmers were buying land at prices that wouldn't cash-flow. He was concerned about farmers with high net worth but poor profitability. He could see that farmers were buying land that, even with good [crop] prices, would never pay. He felt this simply could not continue."
It turned out that John Hughes was correct in this judgment, and so once again the Hills Bank caught the turn of the financial tide before most of the competition. Just as Albert Droll was one of the first to loosen the reins of farm credit in Johnson County during the 1950s, John Hughes was one of the first to tighten down during the l980s.
BETWEEN THEM, HUGHES and Droll represented the two sides of the farm financing coin. For nearly two hundred years, the ebb and flow of farm credit and the accompanying phenomenon of boom and bust have been so essential to the American experience that the two antipodes have almost seemed to blend together.
Charles Dickens wrote of a visit to America during the l840s: "If its individual citizens, to a man, are to be believed, it always is depressed, and always is stagnated, and always is at an alarming crisis, and never was otherwise; though as a body they are ready to make an oath on the evangelists at any hour of the day or night, that it is the most prosperous of all countries on the habitable globe."
In fact, of course, boom and bust have been quite distinct, and their repeated occurrence in American agriculture provides one of the most regular cycles in our economic history. During the nineteenth century, for instance, five major agricultural credit crises occurred at roughly twenty- year intervals. Regardless of war, the political party in office, or religious fervor, the cycle repeated, reshaping ownership of the American landscape much as repeated freezing and thawing reshapes the surface of the farmer's fields.
The first great American crash of the nineteenth century occurred in 1819, when the widespread collapse in the credit purchase of Western lands produced a major national depression. The immediate trigger of the Panic of 1819 was the collapse of the Second Bank of the United States, which had been recklessly managed, but ironically the process of economic upheaval ultimately increased bank control of Western real estate. In the wake of large numbers of state bank failures, vast areas of the West became the property of the First Bank of the United States, commonly vituperated by Western farmers as "The Monster."
Congress did away with credit sales of land altogether after the crash. Public land sales slumped badly, and economic depression gripped the country until 1822. Among the factors that contributed to the recovery of American agriculture -- which is to say the American economy in the days when farmers constituted nearly 70 percent of the nation's work force -- were the invention of a cast-iron sheathed plow, which was patented in 1819 by Jethro Wood, and the continued influx of immigrants. Good land, good farmers, and good machinery made possible tremendous increases in virtually every area of American farm production during the early decades of the nineteenth century.
Then, in 1837, it all came crashing down again. Land speculation, much of it by banks and bankers, was again the underlying cause of the panic. Among the prominent plungers was the brother of Andrew Jackson's attorney general, who was part of a syndicate that used money from the New York Life Insurance Company and several banks with which its members were associated to buy a third of a million acres in eight states and territories. President Andrew Jackson might denounce land speculation, but there was really little fundamental ideological disagreement between the two parties on this point. As Theodore Parker, the prominent Boston clergyman, noted: "The Whig inaugurates Money got; the Democrat inaugurates the Desire to get money.
The Panic of 1837 was triggered by President Jackson's order to accept only silver for purchase of federal land after August 11, 1837. Jackson's aim was to reduce Western land speculation, but the medicine proved stronger than he expected and, with his veto of the rechartering of Hamilton's National Bank, provoked a total financial collapse. In late April, one observer on Wall Street noted sourly that "the whole city [meaning New York] is going to the devil from a pecuniary point of view..." The effect of the panic was, if anything, even greater out West, especially Iowa. The first land office to process sales of the Black Hawk Purchase was not opened until June 1838, at which point there were already twenty-three thousand settlers on the Iowa prairie from Lone Tree to Burr Oak who were technically trespassers.
The squatters clung fiercely to their land, developing the so-called "claim clubs" to protest their homesteads. When a section was put on the block, claim club members would go en masse to the sale and physically prevent anyone from contesting the claim of the homesteader, or bidding above the minimum price. Johnson County, Iowa, developed what has been called "one of the most perfect" claim clubs in all Iowa, but even so the majority of squatters in the Black Hawk Purchase were fighting a losing battle. Payments on loans (which frequently carried interest rates of 30 percent and higher) were delayed and then suspended. Many farmers gave it up, and joined those moving farther west.
Bitterness over usury was responsible for the hostility the new state showed toward banks in its early years. Most of the delegates to Iowa's first constitutional convention were Jacksonian Democrats who cheered when speaker Jonathan Hall declared that "a Bank of earth is the best Bank, and the best share is the Plow share." After the repeal of the Bank of Dubuque's charter in 1845, banks were banned outright in the state for thirteen years. During this period, Iowa resorted to many expedients to transact the business of society, including hundreds of different types of notes issued by banks outside the state and six kinds of local "script of orders." Almost all of this currency circulated below par, and was subject to wild gyrations in value.
In Iowa, popular reaction against this sort of financial chaos was as great as the reaction against bankers had been in the first place. Prosperity returned again to American agriculture during the l840s, taking much the shape it had the previous two times through the cycle. Kicked off by new developments in agricultural technology (such as John Deere's 1837 one-piece plow made of saw-steel that was able to cut the virgin prairie sod), and reinforced with new immigrants (such as the Burrs), the wave rose again. By the mid-l840s, Western land speculation was again robust enough to amaze Dickens. "The more absurd the project, the more remote the object, the more madly they are pursued," he wrote. "Not the puniest brook on the shore of Lake Michigan was suffered to remain without a city at its mouth."
The next crash came exactly twenty years after its predecessor. Caused by speculation in railroads and real estate, the Panic of 1857 was violent but brief. Thousands of farmers and businesses went bankrupt, and banks throughout the country were forced to suspend specie payments for a period. The fledgling Republican Party reaped considerable political advantage from the crash, especially in Iowa, where the voters returned Republican majorities in both houses of the legislature, as well as a Republican governor and two Republican congressmen. Seizing the opportunity, the Republicans convened a new constitutional convention to rewrite the fundamental law of the state.
These newly empowered Republicans were both abolitionists and ambitious capitalists, desiring to remove the shackles from banks as well as blacks. More than a passing political fancy, the Republicans' rise to power reflected a basic political realignment occurring among farmers all over the country. The Jacksonian Democrats' alliance of Western and Southern agricultural interests against Northern commerce was giving way to more purely regional alliances of North against South. Frustrated by the South's blockage of federal programs to benefit free farmers, and agitated to the edge of violence by the experiences of John Brown and Bloody Kansas, Iowa farmers felt little sympathy for their Southern counterparts.
The South, for its part, was increasingly disinclined to apologize for its "peculiar institution." In the early years under the Constitution, Southerners generally assumed that slavery would wither with the development of the country, but new advances in agricultural technology powered a rise in human bondage. After 1793, Yale graduate Eli Whitney's cotton gin, which mechanically removed the seeds from the boll, quickly transformed cotton into a practical crop for slave agriculture. Thereafter, cotton production and the synonymous social condition of slavery dramatically turned the tide of history in the South. Between 1840 and 1860, Southern cotton production tripled, and the slave population increased from 2.4 million to 3.8 million blacks.
No lengthy study was needed to convince free Northern farmers that slave agriculture represented a tremendous threat to them. On the one hand, they knew that to compete side-by-side with slave agriculture they would have to literally work themselves like slaves. Slavery thus represented an immediate reduction ,n the economic value of their labor. Beyond that, the free farmers of the North became increasingly chilled by the political effects of slavery, and the suggestion that human bondage might be the future of all American agriculture. Certainly spokesmen for the vainglorious Southern planter aristocracy made no effort to hide their contempt for all who actually worked the land with their hands. "The laboring population of no nation on earth are entitled to liberty," declared one South Carolinian, "or capable of enjoying it."
At the outset of the Civil War, Southern agriculture was characterized by large-scale commercial farming of cotton with slave labor, while Northern agriculture was characterized by smaller, diversified free family farms. Although the commercial value of the former exceeded the latter when the guns sounded at Fort Sumter, the latter proved much more resilient during the intense test that followed. Once again, as in early England, the yeomen proved the strength of the nation, besting their Southern counterparts with rifle and plow both. Despite the absence of a million agricultural workers during the Civil War, Northern agricultural production actually increased, while Southern agriculture withered in the stranglehold of the Northern blockade.
The key to the Northern farmer's success was the most intensive mechanization yet witnessed in American agriculture. "Machinery and improved implements have been employed to a much greater extent during the years of rebellion than ever before," noted the Ohio State Board of Agriculture in 1863, adding that "without drills, corn-planters, reapers and mowers, horse-rakes, hay elevators, and threshing machines, it would have been impossible to have seeded and gathered the crops of 1863 That same year Iowa farmers harvested 63.8 million bushels of corn (for an average of 36 bushels per acre), and the Iowa State Agricultural Society declared that "corn is the principal element of our wealth."
Despite the war, the 1860s were relatively good years for free farmers in America. As a reward for farmers' support of President Abraham Lincoln and the Republicans in the 1860 election, Congress passed four major agricultural reform acts that had been blocked by the South: the Homestead Act, the Morrill Land Grant College Act, the Transcontinental Railroad Act, and the bill establishing the Department of Agriculture. The last was perhaps the most important, for even though agriculture was "admittedly the largest interest in the nation," as Lincoln put it, the farmers interests had been served only by a clerkship.
The Union government's inflation of currency through the issuance of paper money to fund the war also helped farmers by making it easier for them to pay off their debts. The reversal of Northern farmers' fortunes really began with Appomattox. Freed to return to civilian life, Civil War veterans helped precipitate a serious decline in agricultural prices. Farmers who had borrowed money to expand or acquire the new machinery now found themselves in a tightening vise. Many were in financial difficulty from 1870 on, but it was riot until 1873 that thousands of Northern farmers began to pay for the Union victory with the foreclosure of their farms.
The next crash in the cycle, the panic of 1873, was caused by wild speculation in virtually every aspect of the economy, especially railroads. Presaged by the Credit Mobilier scandal of 1872, the panic was actually triggered by tightening credit, represented most prominently by the Fourth Coinage Act. Passed by Congress and signed by President Ulysses S. Grant in February 1873, the act demonetarized silver and put the nation exclusively on a gold standard. Although little understood at the time of its adoption (a year later Grant himself wrote to a correspondent complaining of the insufficient supply of silver dollars, apparently not realizing that the demonetarization of silver meant no more silver coins), the act became the focus of American political debate during the last quarter of the nineteenth century.
Farmers spoke quaintly of "too much hog in the dollar," but beneath the colloquialism their economic intelligence was keen. The effect of the Coinage Act of 1873 was to make money dearer, with the result that commodities like hogs were worth less, and debts were more difficult to repay. Then, in January 1875, Congress passed the Specie Resumption Act, which provided for the resumption of specie payments, and significantly reduced the amount of paper money in circulation, thus bringing Civil War financing to an end. With both silver and paper currency reduced, the country was thrown into a drastic deflation. In ten years the money circulation was reduced from somewhat more than $2.1 billion to a little over a billion, or from $58 per capita to $17 per capita. Gold might remain stable, but somehow "them steers," as one observer quipped, "while they grew well, shrank in value as fast as they grew."
The farmers' initial response was to organize, giving rise to the Patrons of Husbandry, better known as the Grange. Founded by Oliver Kelley of Minnesota in 1867, the Grange lobbied hard for public control of the railroads, resulting in a wave of "Granger laws" which attempted to dictate railroad rates at the state level. By 1873, there were more than two thousand Grange chapters in Iowa alone, but the subsequent prosperity made Iowa farmers inclined to seek technological rather than political solutions to their problems. Barn architecture was then the focus of considerable thought, and so beginning in the 1880s, Iowa farmers built hundreds of eight-sided and round barns. These structures contained more storage space than rectangular barns of the same height, and were further favored for their shorter distances between feed and animals, a crucial consideration in an age when virtually all work inside the barn was still done by hand.
Iowa also boasted the most complete railroad system in the country by 1880, with 5,235 miles of track and no resident farther than twenty-five miles from a railroad station. This greatly altered the economic horizon of the Midwestern farmer, for his market was no longer thirty miles away, but three thousand miles away. Growth for export had become a significant part of the American grain farmer's business by the l870s, and it continued to grow as frenzied railroad expansion throughout the West dramatically expanded the nation's agricultural acreage. With corn and wheat rolling off the American plains in ever greater quantities, the American farmer took the world food trade by storm. Blessed with low overhead and virgin soil -- and lacking major competition -- he could effectively set the world price for his crops for a time during the latter nineteenth century.
Not all American farmers shared in the prosperity, though. Farmers in older, more established areas such as New England found that they could not compete with the low prices of produce coming off the plains any more than could foreign farmers. Often too small or too hilly to employ the latest machinery, these farms were squeezed tighter and tighter while their owners, like the farmer in William Dean Howells's The Landlord at Lion's Head, dreamed of getting out and starting over in "Californy." Thousands of these Eastern farms were abandoned during the later part of the century, as witnessed by the stone fences commonly found snaking through the middle of hundred- year-old woods in New England today.
Falling exactly twenty years after its predecessor, the Crash of 1893 bankrupted an estimated six hundred banks, fifteen thousand businesses, and one-third of the nation's railroads. Although unemployment was widespread, many more farmers were forced to leave the land and seek jobs in the towns and cities. The causes of the Crash of 1893 were familiar (with railroads again playing a particularly large part), but the effects were worse, according to railroad magnate James J. Hill, because "everything is built up" and the nation was "no longer a frontier country. Hill predicted the date of the crash within a few days of when it actually occurred. At that time, according to his son, "he had nothing in his box. As he said, 'not a pound of meal.' He had only cash. He had sold everything in the Great Northern and Northern Pacific. Perhaps he had fifty million."
Meanwhile in the American heartland, thousands of farmers had nothing but meal. Historian Vernon Louis Parrington has written how, after the crash when his father was about to lose his Kansas farm because there was no market and his crop was worthless, the family sat around the stove listening as the big full ears of corn "burned briskly, popping and crackling in the jolliest fashion. And if while we sat around such a fire watching the year's crop go up the chimney, the talk sometimes became bitter about railroads and middlemen, who will wonder? We were in a fitting mood to respond to Mary Ellen Lease and her doctrine of raising less corn and more hell."
Concluding that "plutocracy has been enthroned upon the ruins of democracy," a grass-roots movement of practical, straightforward farmers set out to reclaim America from a century of increasing corruption. The man the populists rallied around as their standard bearer was William Jennings Bryan, the "boy orator of the Platte." Bryan won the Democratic Party's presidential nomination with a ringing defense of the small farmer and the silver dollar. "We shall answer their demands for a gold standard by saying to them, "You shall not press down upon the brow of labor this crown of thorns," Bryan declared. "You shall not crucify mankind upon a cross of gold."
On the face of it, it might seem that Bryan held the high ground over his Republican opponent, William McKinley. Not only had McKinley sponsored the tariff act that helped trigger the Panic of '93, but farmers still constituted a popular majority in America in 1896. As always, however, they were deeply divided. Southern farmers still largely refused to join hands with their Northern counterparts, and Northern farmers were themselves hardly of one mind. A multitude of cultural and religious differences split them, as did conflicting political aspirations.
Bryan's campaign ultimately foundered in places like Iowa, where staunch Republican farmers like the Burrs gave "the great commoner" fewer votes than any Democrat since Hancock in 1880. Although Bryan called it "the first battle," the presidential campaign of 1896 was in fact the last battle of agrarian America. Never again would a major American political party make agrarian issues its central concern.
"Lone Tree" © Copyright 1989 Bruce Brown
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