fencing, drainage, or irrigation; third, buildings required for the shelter of crops and stock or dwellings required in conducting the necessary operations of the farm, and such as the owner could and would buy if they were not on the farm and he could obtain them. No farmer ought to borrow money to build a fine house, or expensive furniture, or ornamentation, and no banker ought to lend it to him for those purposes. It is risky to lend to pay off floating debt, except such as has been caused by sudden calamity. The fact that a farmer desires to build a house beyond his means or that he has incurred a floating debt which he cannot pay is warning that he is unthrifty, and, therefore, unlikely to meet his engagements. He cannot expect to borrow at low rates. If in any case this is not true, the burden of proof is on the borrower. All mortgage loans are unsafe whose proceeds are not so applied to the property pledged as to increase its incomeproducing power. A loan to build a hotel would be proper and safe when a loan of the same amount to build a fine farmhouse on the same property would be improper and unsafe. Loans to a soil-robbing farmer have always in them an element of danger, because the land is constantly deteriorating. The safe limit of a mortgage loan on farm land is such that the interest charge can be paid with one-half the annual rental of at least five years, with covenants to protect the land from deterioration from soil robbing. It is to the interests of both borrower and lender that mortgage loans shall be made on very long time, but always payable at the option of the borrower, at any time, by instalments or otherwise. For loans, either mortgage or temporary, made under the restrictions here outlined, there is and always will be abundant capital available at rates of interest which farmers can pay, provided only that farmers induce the enactment of such legislation as shall make the flow of capital natural and inexpensive. For all hindrances, annoyances, or unusual difficulties in enforcing payment, or overtaxation, the borrower must pay, as well as for all risks which he creates by speculative operations. The laws of many states enacted with the approval of farmers, so drive capital away from them that they can hardly get it at any price.

The purposes for which mortgage loans are actually employed in this country are stated in the mortgage volume of the Report of the Census of 1890, pages 279, 280, and 896. The following extract will give some idea of the variety of purposes:

"People mortgage their real estate to get married, to obtain divorces, and to pay alimony; to pay their taxes, to pay rent, and to

pay the money-lender. They raise money by mortgage in order that they may travel and that they may expend it in extravagant living; they speculate with it and they re-lend it. Politicians pay their political debts by means of mortgages. The guileless are deceived into buying worthless patents. Wives pay the debts of their husbands and educate them for the ministry. Men mortgage their real estate to pay their physician, their undertaker, and their lawyers, to help their friends and relatives, to make good their defalcations, to educate their children and support their parents."

Of course money for such purposes must be well paid for, but while there are many such loans, the great majority, of course, are for proper business purposes. The census experts group some of the foregoing and many others into a class which they term "Calamity Loans." They estimate these as 5.40 per cent of the number of mortgage loans and 1.95 per cent of the amount.

192. AGRICULTURAL CREDIT INSTITUTIONS'

By R. B. VAN CORTLANDT

Our present system of borrowing on land is by mortgages running from three to five years, the entire principal coming due at one time. This is expensive, involving renewals, and dangerous from the possibility of the mortgage falling due at a time of restricted credit, so that it cannot be renewed. On the continent of Europe this business is handled by so-called land-mortgage banks, or rather associations. These associations are formed along varying lines, some with stock like the great French institution, the Crédit Foncier; some having no stock, like the German Landschaften; some being guaranteed by a state or province, as in Austria, while the principal one in Hungary combines ingeniously various features peculiar to itself. These institutions are formed along certain general fundamental lines as follows:

The mortgages granted are pledged for the security of bonds which the institution issues and sells in the general market. These bonds have no fixed maturity, but can be retired at par or some small premium at any time. When the borrower mortgages his land to the bank, he agrees to pay a certain fixed sum semiannually. This is called the "Annuity," and is composed of the annual interest plus an amount, generally one-half per cent, toward the reduction of the principal of the debt and known as "Amortization," and an additional Adapted from North American Review, CXCIX (1914), 585–88.

amount, about one-quarter per cent, toward the expenses of the bank. The borrower, therefore, at once begins to extinguish the principal of the debt, and as each year the principal decreases, the interest, of course, decreases also, and the annuity being fixed, the proportion of it applicable toward the extinction of the mortgage increases. Thus it happens that, beginning with a payment of one-half toward principal, the mortgage bearing 4 per cent to 4 per cent, which are the general rates, the entire debt is extinguished in between fifty and sixty years.

The borrower has the right at any time to pay off the mortgage, a small penalty being generally exacted; but the lending institution cannot require payment from the mortgagor, thus guarding against any higher rate of interest being exacted during the life of the loan; whereas, should interest rates fall, the borrower can anticipate the payment of the mortgage and secure the benefit of the lower rate of interest. If payment of a mortgage is anticipated, or when the semiannual payments are received by the bank, it enters the market and buys or retires a corresponding amount of its bonds, so that its outstanding bonds never exceed in the aggregate the total of the mortgages it holds against them. This has the advantage of making a constant market for the bonds, and there is no necessity of sinking funds for special mortgages, as they are under a general pledge. These banks do not compete with commercial banks.

193. AN AMORTIZATION LOAN1

An amortization loan is illustrated by the table on pp. 391, 392. At the end of the thirty years the borrower has paid, in principal and interest, $2,100. Under the ordinary plan the borrower of $1,000 at 5 per cent would have paid out $2,500, exclusive of commissions and legal expenses, which are saved under the Woodruff plan.

There are other advantages of importance also. Each semiannual payment is so small that the average farmer can borrow the amount necessary from his local bank if he is temporarily out of funds. As the amount of each payment will in no case exceed 1 per cent of the value of the land, he should always be able to meet the payments out of current proceeds of the land itself. On any interest date the farmer is allowed to make partial payments on the principal, thus shortening the duration of the loan.

Taken from circular describing plan of the Woodruff Trust Company, Joliet, Ill.

AMOUNT OF LOAN, $1,000.00. LENGTH OF TERM, 30 YEARS. RATE OF INTEREST, 5 PER CENT. SEMIANNUAL PAYMENTS, $35.00.-Continued

What can you do for the landowner in such states as Iowa or Illinois? Frankly, I don't see anything you can do that you are not doing already. In Iowa, for example, loans on farms range from 5 per cent to 5 net, probably 6 to the farmer. When farmers in these states quit investing in outside states they will take care of their borrowing neighbors on a smaller margin of security than you will and will eventually put you out of business.

The local banker, and often without expense, lends to the farmer and takes a mortgage. The larger bank in the city takes it off his hands, or the insurance companies East and West. In fact, these companies are now eager for mortgages at 5 per cent net to them. In short, with two-thirds of the banks in Iowa owned or at least controlled by farmers, it seems to me that they have about all the credit they need.

The rate of interest might be reduced 1 per cent, if it were practical to organize landschaften in these corn states. In fact, we can readily see how a few large landowners, by combining their credit and increasing it by becoming mutually liable for the debts of their organization, might secure a reduction of 1 per cent per annum. With our mixed population, however, this is not practical. The average loan in Iowa -and I presume it is so in Illinois, eastern Kansas, and Nebraskais about $4,000, and the average farmer would gladly pay $40 a year 1 Adapted from United States Investor, XXVI (1915), 1986–87.