estate, also to reduce the proportion of cash carried in offices and banks and to materially increase the amount and proportion of investments in real estate mortgages and policy loans.

In view of the fact that life insurance companies held over $1,700,000,000 in real estate mortgages and their ratio to other assets has been steadily increasing, it seemed desirable to make a critical examination of these securities by a geographical distribution of amounts loaned on farms compared with other real property, average interest rates, etc. To this end we invited the co-operation of the life insurance companies of the country and received responses giving data by states and class of securities from 125 companies and tabulated the investments of the only large company which declined to report. So our tables include the mortgage loans of 126 companies whose real estate mortgage loans amounted to 97 per cent of all such loans held by American companies. The total loans, divided between farms and other real property, but not separated by states, supplied by 22 other companies, enables us to show the separation between farm and other real property loans of 984 per cent of all the outstanding mortgages of American companies. Of these 148 companies, 17 make loans only on farm property, 15 only on real property in cities, towns, or villages, while 116 loan on both farm and city properties. The amount loaned by the 17 farm loan companies is $12,827,709. The amount loaned by the 15 city loan companies is $426,260,163, and the amount loaned by the 116 companies loaning on both is $1,158,014,595. There are 102 American companies whose figures are not included, but as their combined mortgage loans amounted to but $29,262,938, or 1 per cent of the total held by all American companies, their absence will not affect materially the completeness of this tabulation of life insurance mortgage investments.

The total mortgage loans of these 148 companies amounted to $1,677,102,467, of which $654,650,505.72, or 39.03 per cent, were on United States farms; $993,480,170.03, or 59.24 per cent, were on other real property in the United States, and the balance-$28,971,792.14, or 1.73 per cent-was loaned on real estate mortgages in Porto Rico and foreign countries, most of it in Canada.

The proportion of mortgage loans on farms varies all the way from thirteen-hundredths of 1 per cent in the Middle Atlantic group of States to 86 per cent in the Northwestern group, the average for 148 companies in America being 39.72 per cent of their total United States mortgage loans. In the Eastern States the amount loaned on

farms is negligible, in the Central, Northern, and Southern groups the farm loans rise to considerable amounts, but it is in the great Southwestern and Northwestern sections, whose agricultural development in the last fifty years has been so marvelous, that the great bulk of the life insurance farm loans has been placed. On the other hand, we find that over half of the loans on real property other than farms have been placed in the populous commercial and manufacturing sections of the New England and Middle Atlantic States, which contain very nearly half of such property values of the entire country. B. Investment Banks or Bond Houses

213. THE MARKETING OF BONDS'

BY THEO. H. PRICE

The process of bond distribution is carried on mainly by three groups of men, or institutions. While there is much overlapping in the functions performed, those engaged in the marketing of bonds may be roughly differentiated as to the field in which they are most conspicuously active. These three groups are: (1) the houses of first purchase, (2) the underwriters, (3) the houses of distribution. This may be conceived of as three concentric circles, thus:

I Adapted from an article on "Commerce and Finance," Outlook, CVI (1914), 429-30, 598-601.

The houses of first purchase compose a group small numerically but strong financially. Until recently it was supposed that membership in the so-called "Money Trust" was a condition of inclusion within this group. This idea is now exploded, for it is realized that some of the houses in the inner group are both able and willing to act with absolute independence. In New York there are perhaps seven or eight firms who may be classified as "houses of first purchase" for bond issues of five million dollars or over. In Boston there are three, or possibly four, and in Chicago and Philadelphia two each.

In the cities named, as well as in St. Louis, Cleveland, Baltimore, Pittsburgh, Cincinnati, Denver, and San Francisco, there are a number of concerns that are entirely competent to take the initiative in handling relatively small issues, but when the amount involved exceeds three or four millions it is generally found necessary to enlist the services of one of the larger organizations. Under conditions as they are and have been, few houses have had the enabling credit and capital required to buy outright a large issue of bonds and the prestige necessary to insure their subsequent distribution. The would-be borrower cannot afford to deal with any concern not able to promptly say Yes or No to his proposition, and large resources, commanding position, and a reputation for success are essential to any firm or corporation that would buy ten or twenty million dollars' worth of bonds and thereafter market them profitably.

When such an issue has been bought, the buyer almost invariably proceeds at once to minimize his risk in the transaction by distributing it among the underwriters. The function of this group will be better understood in the light of etymology. The distribution of risk which is now called insurance was at first accomplished by an agreement among merchants to share the hazard of each other's ventures. This agreement, being expressed in writing, was signed by the various parties thereto, and in so signing they wrote their names under it, thus becoming underwriters or insurers. This is precisely what is done in the underwriting of a bond issue, except that the principle of co-operation is applied, not only to diminish risk, but to increase the probability of a reasonable profit. To make this clear the illustration of a concrete case is necessary. Let us assume that a firm of bankers, having agreed to purchase $20,000,000 of 4 per cent bonds at 90, determine to offer them to the public at 94 and to pay the distributing houses who may finally dispose of them 1 per cent for their services and expenses in distribution. If and when the bonds are

sold the net price received by the houses of original purchase will be 924, which would leave them 2 per cent profit less expenses. It is, however, quite possible that bonds will not be sold at 94, in which case the original purchasers might find their money indefinitely tied up or have to accept a substantial loss to release it. To guard against this contingency, and before offering the bonds at 94, they proceed to divide their possible profit with other houses or individuals who are willing to share the risk and become underwriters.

These underwriters agree to buy the bonds at 91 if they are not taken by the public at 94, less the distributor's commission of 1 per cent, or 921⁄2 net.

If the sale is a success, the underwriters, having agreed to buy at 91 the bonds sold at 921, receive 1 per cent for the risk they have assumed. If it is not a success, they must take the bonds at 91, and the original purchasers are thus assured of 1 per cent profit on the transaction, out of which all expenses must be paid.

For the chance of making 1 per cent on the amount of the commitment, the underwriters face the possibility of having to tie up their capital indefinitely or accept a heavy loss; and the losses so accruing during the past two years would surprise the uninitiated and disabuse them of the idea fostered by financial novels and the drama that participation in a Wall Street syndicate implies a certainty of profit. In the selection of underwriters care is generally taken to secure concerns or individuals whose opinions are influential in investment finance. This is done on the assumption that an underwriter who is assured of 1 per cent profit, if the sale is successful, will do what he can to make it so. As a matter of fact, however, this theory is not to be relied upon in practice, so far as the American markets are concerned. It is thought to be an important factor in French finance, from which it is supposed the idea of the "underwriting syndicate" was derived, but in the United States sentiment is properly opposed to it upon the ground that no one can disinterestedly advise the purchase of securities by the sale of which he will profit.

The duties and responsibilities of the underwriters are therefore comparatively simple and need not be further enlarged upon. There remain to be considered the "Houses of Distribution," as a result of whose activities the bond finally passes into the hands of the investor. These houses are very numerous. Some of them have large capital and great organizations, and others which distribute many securities depend entirely upon their "connections" and a clientèle

with whom their relations may be social as well as financial. Many investors prefer to deal with a firm whose senior partner is never too busy to give them his personal attention, and the son or son-in-law of an influential officer in an insurance company or savings bank often becomes a partner in a small bond house for the patronage he is supposed to command.

Outside the "Houses of Distribution" proper are various groups of investors who generally act somewhat in accord. Such groups include:

I. An insurance company and its directors, who, if rich men, probably buy for their own account some portion of a bond issue that their company has taken.

2. A firm of bankers or a bank in a smaller city that supplies a local investment demand.

3. A European group or syndicate that acts as a secondary distributor or buys securities against which it issues its own debentures, as in the case of the Scotch trust companies and the investment associations of Holland.

4. Individual trustees or lawyers charged with the investment of large estates, who are generally willing to anticipate their requirements if anything specially choice is for sale.

5. Trust companies and their correlated banks, whose purchases may be either for the trust funds of the former or as an investment for the deposits of both.

6. Savings banks, which, taken as a class, are the largest institutional buyers of the classes of bonds to which they are restricted by the laws of the various States.

The list of the various subsidiary groups among which the distributor of bonds finds his best market might be extended almost indefinitely, but those described will give a reasonably clear idea of what may be called the headwaters of the investment stream that must be kept continually flowing into the bond market.

A general description of the works of the larger houses is as follows: Each of them maintains offices in New York, Boston, Chicago, and London. Each of them employs about eighty salesmen, whose salary, expenses, and commissions average probably $6,000 a year apiece. Their American offices are all connected by private wires, and it is no uncommon thing for them to dispose of $5,000,000 worth of bonds in a day. To do this it is, of course, necessary that they should be in constant touch with institutions, brokers, or groups