The capital stock of each bank, required before beginning operations, shall be $750,000, divided into shares of $5 each, which may be subscribed for by any person, firm, corporation, or state, or by the United States. If not fully subscribed in thirty days, the remainder shall be subscribed by the United States. Stock owned by the government shall receive no dividends. Each loan association and the United States government shall have one vote per share of stock held, and no other shareholder shall be permitted to vote.

National farm loan associations.-The federal land banks carry on their loan operations through local associations of borrowers similar to building and loan associations. "Ten or more natural persons who are the owners, or about to become owners, of farm land qualified as security for a mortgage loan under this act," may unite to form such a national farm loan association; no persons except borrowers on farm land mortgages may become members or shareholders. The general management is vested in a board of five directors.

The capital stock of the national farm loan associations, will depend in amount upon the volume of loans outstanding, since a share of stock is issued for each $200 (or major portion thereof) extended as a loan and paid off at par and retired whenever the loan is paid in full. The borrower receives dividends accruing on stock outstanding. Voting is by number of shares, except that no shareholder may cast more than twenty votes. Shareholders are "held individually responsible, equally and ratably, and not one for another," for all debts and obligations, to double the amount of their stock holdings. This means that they follow American practice rather than the pattern of European co-operative associations.

Joint stock banks.-These banks are organized upon the same plan as the federal land bank so far as possible. Instead of the board of nine appointed and elected directors, they have a board of their own choice, not less than five in number. There shall be at least ten incorporators, and the government shall not be a stock subscriber. They may not issue bonds in excess of fifteen times the amount of their capital and surplus, though federal land banks may issue to twenty times their capital and surplus. They must have a capital of at least $250,000 subscribed; one-half of it must be paid up before beginning business, and all must be paid up before bonds may be issued. Their bonds must be readily distinguishable in form and color from those of federal land banks. The zone of operations is limited to the state in which their principal office is located, and one other state contiguous to it.

OPERATION OF THE SYSTEM

Method of making loans.-The farmer who desires to secure a loan on his land has two courses open to him. He may borrow from a joint stock land bank direct, as he would borrow from the ordinary mortgage company. Or he may borrow from a federal land bank, through a national farm loan association, if one has been organized in his community or if he can interest a sufficient number of other borrowers to effect such organization. Each application for a loan is passed upon by a loan committee of the association, who appraise the land, and make a detailed report. No loan shall be approved by the directors unless all three members of the loan committee favor it. Before the loan is finally granted, a second examination is made by the appraiser of the federal land bank from which the funds are to be secured. The associations may loan only upon the security of first mortgages on farm land of their members and not to exceed 50 per cent of the value of the land for agricultural purposes and 20 per cent of the value of permanent insured improvements. Loans may not be less than $100 nor more than $10,000 in amount, and a charter will not be granted before the total of loans applied for is at least $20,000. No loans shall be made to any person who is not at the time, or shortly to become, engaged in the cultivation of the farm mortgaged, and his borrowing must be for one of the following purposes: (a) to provide for the purchase of land for agricultural uses; (b) for the purchase of equipment, fertilizers, and live stock necessary for the proper and reasonable operation of the mortgaged farm; (c) for buildings and improvements of farm lands; (d) to liquidate indebtedness incurred for purposes (a), (b), and (c).

The manner in which the farm loan association secures funds to loan to its members is as follows: It shall subscribe for capital stock of the federal land bank of its district to an amount equal to 5 per cent of the amount of the loan desired. This stock is held by the land bank as collateral security, but the association shall receive any dividends it may earn. The farm loan association may then indorse the first mortgage which it has received from its members, and turn it over to the federal land bank in exchange for funds either current funds or farm land bonds, at the option of the borrower. In case of default on any mortgage the farm loan association is liable as indorser.

Naturally the joint stock land banks are freed from the restriction upon federal land banks of loaning only to members of farm

loan associations; the size of loan granted to one person and the purposes for which loans may be made are also left to their own discretion. The interest rates which they charge may not exceed 6 per cent nor be more than 1 per cent above the rate established for the last series of farm loan bonds issued by them. Their mortgages must provide for amortization payments.

The rate of interest charged the farm borrower is not to exceed the interest rate on the last issue of farm loan bonds put out by the land bank through which the loan is secured, plus a charge of not more than 1 per cent to cover the cost of administration and a profit. This gross rate, however, shall not be more than 6 per cent per annum. In granting the loan the federal land bank is authorized to charge the applicant reasonable fees to cover the actual cost of appraisal and determination of title. Legal fees and recording charges imposed by law in the state where the land to be mortgaged is located may also be included in the preliminary costs of negotiating mortgage loans. These costs the borrower may pay or he may have their amount added to the face of his loan, to be discharged by amortization payments. Furthermore, each annual or semi-annual payment by the borrower shall include, besides the amount due for interest on his loan, such an additional sum as will amortize the debt within an agreed period not less than five years nor more than forty years. After five years from the date of the loan, additional payments of $25 or any multiple thereof may be made or the whole remaining principal may be paid up on any instalment date.

Issue and sale of bonds.-The method by which both federal and joint stock land banks finance their loan operations is through the sale of debentures. These are to be known as "farm loan bonds," and shall be issued by land banks only under specific authorization of the Federal Farm Loan Board. Each district is to have a farm loan registrar, appointed by the Federal Farm Loan Board, to whom land banks desiring to issue bonds may bring the mortgages which they have taken from borrowers (through farm loan associations or otherwise). If these securities are approved by the Federal Farm Loan Board, the land bank is given farm loan bonds of equal amount in exchange therefor. The mortgages are retained by the registrar as collateral, being assigned to him in trust by the land bank.

Farm land bonds shall be issued in denominations of $25, $50, $100, $500, and $1,000, and shall run for specified maximum and

minimum periods, subject to retirement at the option of the land bank at any time after five years from the date of issue. They shall bear interest coupons payable semi-annually, at a rate of interest not greater than 5 per cent per annum. In case either interest or principal remains unpaid after the assets of a defaulting land bank have been liquidated and distributed, such losses shall be assessed upon solvent land banks in proportion to the farm loan bonds each has outstanding. These bonds are exempt from national, state, and local taxes.

Interest, amortization, or other payments received by federal or joint stock land banks must be credited upon the mortgage held by the farm loan registrar, each such payment being reported to the registrar by the land bank. All such payments upon principal shall constitute a trust fund in the hands of the land bank; they may be applied by a federal land bank (a) to pay off their own farm loan bonds as they mature, (b) to purchase at or below par farm loan bonds issued by themselves or any other federal land bank, (c) to loan on first mortgages, (d) to purchase United States government bonds. Joint stock land banks may make similar disposition of such payments, except that in (b) they are free to purchase, at or below par, any farm land bonds. The securities so purchased or the cash constituting a trust fund for the ultimate redemption of mortgages must be deposited with the farm loan registrar as substituted collateral for the payments which have been made upon these mortgages. When they have been paid in full, the registrar shall cancel and deliver them to the proper land bank for delivery to the original maker or his representative. 199. SHORT-TIME "PERSONAL CREDITS" NOT PROVIDED1

It is noteworthy that although the Committee on Rural Credits was directed to consider not only a plan for farm mortgage loans but also a plan for so-called "personal credits," it has accomplished nothing, so far as is known, on the latter subject. There has been a growth of the view that under existing conditions it is difficult to provide for personal loans to farmers beyond what is now done through the use of existing banking machinery. The section of the Joint Committee on Rural Credits to which was assigned the work of preparing a bill relating to personal credits has, at all events, thus far furnished nothing, perhaps with the idea that the subject would be better deferred until the problem of long-term credit has been disposed of.

'Adapted from "Washington Notes" in the Journal of Political Economy, XXIV (1916), 186.

X

INVESTMENT BANKING INSTITUTIONS

Introduction

In this chapter we are to consider a type of financial institution very different from those we have thus far been studying. In the main the function of the commerical bank is to make loans for business purposes by the use of its own capital, accumulated earnings, and credit. Moreover, the loans made are for short periods only, and the funds are supposed to be devoted to quickly liquidating commercial operations. In contrast with this the function of the investment institution is to collect funds from those who do not wish to assume the responsibility of employing them productively and to turn them over to those who do-to transfer the savings of society to the channels of productive industry. They are unlike commercial institutions, also, in that investment funds are put out for long periods of time and are specifically devoted to capitalistic or slowly liquidating enterprises.

Investment institutions are of two classes-the savings bank and the bond house, now often called investment bank. At bottom these institutions are performing a virtually identical function-that of transferring funds from one class of people to another-but they operate quite differently. The savings bank collects the scattered savings of a community and loans them in turn to those who are in need of funds for the development of business enterprises. These loans are largely made by means of investments in the securities of corporations, the bank receiving the interest on the securities while paying to its depositors a somewhat lower rate. The bond house, on the other hand, starts at the opposite end. It undertakes to find a market for the securities of corporations, that is, to place them in the hands of investors. It purchases the bonds or stock certificates of a corporation at one price and endeavors to sell to investors at a higher price. Among the largest investors in the securities offered by bond houses are the savings banks themselves, though a substantial and constantly increasing proportion go directly to private investors. Where the securities are sold to savings banks one might say that