THE FEDERAL FARM LOA.N SYSTEM IN OPERATION A.C.WIPRUD THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES THE FEDERAL FARM-LOAN SYSTEM IN OPERATION THE FEDERAL FARM-LOAN SYSTEM IN OPERATION By A. C. WIPRUD of the Minnesota Bar Vice President of the Federal Land Bank of Saint Paul HARPER & BROTHERS PUBLISHERS NEW YORK AND LONDON The Federal Farm Loan System in Operation Copyright, 1921, by Harper & Brothers Printed in the United States of America G-V "^ To J. A. O. FREUS Sincere and Unfaltering Friend 62680: > CONTENTS PAGB Preface xi Introduction. By W. G. McAdoo xiii CHAP. I. Framework of the Federal Farm-loan System ... i Economic conditions preceding rural-credit legislation; the origin of co-operative land credit; history of the enactment of the Federal Farm Loan Act and the object its authors had in view; the Federal Farm Loan Board; method of mapping out districts and estabUshing land banks; the Federal land banks; the national farm-loan associations, their purpose, form, and accomplishment. IL Method of Financing 20 The commercial banks and the long-term credit needs of the farmer; funds that arc available for long-term investment; original capital stock of the land banks; government aid feature; further stock subscriptions to capital of the land banks; bond issue, metliod and Hmitation; sale of bonds, in- cluding original methods not specifically contemplated by law; decision of the Supreme Court of the United States on the constitutionality of the Farm Loan Act; purchase of Federal farm-loan bonds by the United States Treasury. in. Federal Farm-loan Bonds 37 Debenture and land-mortgage bonds; history of early de- benture companies in the United States; fundamental differ- ences between the farm-loan system and the early debenture companies ; practical advantages of Federal farm-loan bonds as an investment; the security underlying a Federal farm- loan bond; standardization of bond issues; the tax-exempt feature; stability of a land-mortgage bond, citing compara- tive quotations on Landschaften and Imperial bonds in Germany. IV. Federal Farm Loans 49 Definition of a farm-mortgage loan; fixed capital for the business man and for the farmer; long-term credit needs of CONTENTS CHAP. PAGB the American farmer; distinctive features of the Federal farm-loan system — that is, low uniform interest rate, long- term loan, and amortization plan of repayment of loan; ad- vantages of a Federal farm loan; rulings of the Farm Loan Board; purposes for which Federal farm loans have been made. V. Federal Farm Loans {Continued) 63 Methods of farm appraisal; factors involved in valuing security for a Federal farm loan; the loan committee of the national farm-loan association; the land-bank appraiser; conservative record of appraisals ; insurance; cost of making a Federal farm loan, how defrayed; farm-loan system estab- lished for small farmer; tho tenant farmer; Federal farm loans applied for, canceled, or rejected, and made; standard of loaning service. VI. Co-operative Features of the Federal Farm-loan System 78 The Federal farm-loan system essentially an American sys- tem; co-operative structure of the national farm-loan asso- ciation; practical advantage of subscriptions to capital stock by farmers who borrow; control of association lodged in members; personal liability of shareholders; associations may accept deposits under certain conditions; members of association may co-operate for other purposes; co-operative structure of land banks and system as a whole; forming of associations dispelled prevailing ojjinion that American farm- ers would not co-operate; problems in organizing associa- tions; number of associations in the United States; organi- sation of association by shiftless and unworthy farmers; attitude of local bankers, citing experience of a banker in the seventh land-bank district; occupation of secretary-treas- urers; the local bank and the association. VIL Service Aside from Making Loans 92 Broad interpretation placed on the Farm Loan Act; the land banks as financial agents of the United States; the land banks assist in the fiscal operations of the government; co- operation between the United States department of agricul- ture and the Federal farm-loan system ; service rendered by the legal department of the land banks; additional services rendered by the land banks in improving economic condition of farmers; the social and economic problems of our rural CONTENTS CHAP. PAGE communities; statistics show decrease in rural and increase in urban population; underlying causes for cityward trend, the remedy, and the part the Federal farm-loan system plays. Appendix A 103 The joint-stock land banks. Appendix B m The text of the Federal Farm Loan Act. • Appendix C 229 Bibliography. Appendix D 236 Opinion of the United States Supreme Court in the case of Charles E. Smith vs. the Kansas City Title & Trust Co. Index 259 PREFACE The work here presented is the outgrowth of a paper read before a class in Economic History in the School of Business, University of Minnesota, in De- cember, 1919. In the preparation of the statistical material the author has had at his disposal the statements and documents which have been issued by the Federal Farm Loan Board and the several land banks since the establishment of the Federal farm-loan system. These have been supplemented by such other mate- rial as appears in the Bibliography (Appendix C) and the author's observations as an official of the land bank located in St. Paul, Minnesota. The true object of the Federal Farm Loan Act is not generally understood, though the processes of its operation are not difficult to comprehend. If this presentation assists in a measure toward a general understanding of the real object and worth of this new rural-credit system, it has served a purpose. The author's thanks are due to the officers of the Federal Land Bank of Saint Paul, and especially to President E. G. Quamme, for their many kindly sug- gestions; to Prof. N. S. B. Gras, of the University of Minnesota, who assisted in the arrangement of this work; and to Miss Marian Rubins, of the University of Minnesota, for criticism in the preparation of the manuscript and the reading of the proof. A. C. WiPRUD. St. Paul, Minnesota. January, ig2i. INTRODUCTION It is with pleasure that I accept Mr. Wiprud's invi- tation to write an introduction to his interesting and useful essay on the Federal Farm-loan System. The public is not sufficiently informed about this great system of agricultural credit which is one of the crowning achievements of the Wilson administration. Even the farmers who are its chief beneficiaries lack adequate knowledge of the law and, therefore, are not realizing the full measure of its benefits. Every book and publication which disseminates reliable in- formation about this farm credit system is perform- ing useful service. Mr. Wiprud's contribution is therefore very opportune. By the terms of the law it fell to my lot, as Secretary of the Treasury at that time, to become chairman {ex- officio) of the Federal Farm Loan Board, and together with four able men who were appointed members of that board, George W. Norris of Pennsylvania, Charles E. Lobdell of Kansas, W. S. A. Smith of Iowa, and Herbert Quick of West Virginia, to hold hearings throughout the United States, to divide the country into twelve Federal farm-loan districts, and to establish a Federal land bank in each. The banks were organized in the latter part of 1916. Before they had gotten well under way the United States became involved in the European war, so that jciv INTRODUCTION the system has not had a fair chance to function under conditions of peace and normahty. Notwith- standing this fact, the banks have made encouraging progress, as is evidenced by the great number of long- time amortization mortgage loans which have been placed among the farmers of the country. During the years 191 7 and 1918, when the demands occasioned by the war for credit were so imperative and controlling, it was necessary to stop public offerings of Federal farm-loan bonds, but it was essential to keep the land banks functioning so that the farmers could secure needed credits. The Congress, therefore, authorized the Secretary of the Treasury to purchase, during the years 191 7 and 191 8, not exceeding $100,- 000,000 per annum of bonds of the Federal land banks. While this took care partially of the emergency, it destroyed, for the time being, the market for land-bank bonds, and postponed the diffusion of that general knowledge of Federal farm-loan securities which the distribution of the bonds among private investors would have produced and which is so essential to the successful operation of the system. Now that the banks have resumed business, it is more than ever important that the investing public, as well as the farmers, shall have a comprehensive understanding of this great system of agricultural credit. While I shall not attempt to discuss it in detail, I should like to call attention to one point, namely, that two kinds of banks are authorized under the farm-loan law : first, the Federal land banks, twelve of which are in operation and cover by their jurisdiction the whole of continental United States; INTRODUCTION xv and second, the joint-stock land banks, which are voluntary organizations and are jjermittcd to do busi- ness only in the state where their principal office is located, and in one contiguous state. The business of each class of banks is restricted to the making of first mortgage loans on farm lands on the amortiza- tion plan only. The Federal land banks are largely government in- stitutions because practically the whole of their capi- tal stock was subscribed by the United States Treas- ury, and until that is repaid the Federal farm-loan board exercises a determining influence upon their operations. These land banks can make loans only through the agency of what is called National farm- loan associations, which arc organizations of farmers who wish to borrow money. ^ This is the so-called co-operative plan of farm credits. It possesses many meritorious features and is or ought to be the back- bone of any agricultural credit system. The primary purpose of the Federal land banks is to take care of the smaller loans which may be needed by farmers who are actually engaged in cultivating their farms, and they are not permitted to lend to any one borrower more than $10,000. Their field of operation is therefore limited. But agriculture in this country has been developed on such a large scale that a sys- tem of credit which cannot accommodate borrowers who want loans in excess of $10,000 is manifestly in- adequate. The Congress therefore very wisely au- thorized another class of banks — the so-called joint- * Where no Farm Loan Association" exists, the Federal Farm Loan Board may appoint agencies through which the Federal Land Banks may make loans. xvi INTRODUCTION stock land banks. They depend wholly upon private initiative and capital for their organization and are permitted to make loans not exceeding $50,000 ^ to any one borrower. So that, with the Federal land banks and the joint-stock land banks, the Congress has established an agricultural credit system with authority to make loans to individual borrowers se- cured by long-time mortgages on farm lands, up to, but not exceeding, $50,000. During the war with Germany the operations of the joint-stock land banks, like those of the Federal land banks, were greatly restricted. Now, however, they are free to do business again. I am sorry that Mr. Wiprud has not brought out more fully the advantages of, as well as the necessity for, the joint-stock land banks, because the field for each class of banks is so large, and they complement each other so beneficially that our agricultural industry wiU not be satisfactorily served without both. Not only did the war arrest the progress of the Federal land banks and the joint-stock land banks, but shortly after the armistice an attack was made by certain selfish interests on the constitutionality of the Federal farm-loan law. This started a long litigation which finally resulted in a decision (February 28, 1921) of the Supreme Court of the United States sustaining the validity and constitutionality of the Farm Loan Act. Between the war in Europe, which suspended the oper- ation of the land banks, and the war in the Federal courts, which put them out of business until the recent decision of the Supreme Court, the Federal and joint- stock land banks have had small chance to serve the ' The act imposes no limitations but the regulations of the Federal Farm Loan board places this restriction. INTRODUCTION xvH country, but the system was founded on right and necessity, and has, therefore, survived. The exemptions from taxation of the mortgages made by farmers to the banks, and of the bonds issued by the banks upon the security of such mortgages, was the chief point of attack in the courts. But these exemptions must be maintained because they are abso- lutely necessary if the farmers are to be assured an ample supply of long-time credits at reasonable rates of interest. There is no reason why the farmers should not receive the benefits of these tax exemptions on the long-time amortization loans authorized by the law. They cannot otherwise command the necessary capi- tal at reasonable rates to carry on their vital opera- tions, and certainly the importance of their business entitles them to as favorable accommodations as are granted to other industries. So long as states and municipalities make their bonds free from all taxation, the bonds of the land banks are brought into competi- tion with such tax-exempt securities ; therefore the tax exemption must be extended to the bonds of the land banks, if the farmer is to get the long-time credit he needs at reasonable rates of interest and on reasonable terms. Happily this question was settled by the decision of the United States Supreme Court and the way is now cleared for the operation of the Federal land bank system upon a scale which ought to bring great and lasting benefits to the farm industry of the United States. It is a strange thing that throughout American his- tory so little constructive and comprehensive work has been done to conserve the agricultural industry of the xviii INTRODUCTION country. This industry is absolutely vital to the existence and prosperity of the people. Farmers as a class do not want superior advantages or benefits con- ferred upon them by legislation. They do want equal opportunity, and to get that equal opportunity they must have sufficient credit facilities at all times, and these must be available to them on as reasonable terms and at as low rates of interest as are allowed to our business men and manufacturers, due regard being had, of course, to the security offered and to the con- ditions applicable to each. In other words, agricul- tural credit should be as available as commercial credit, and upon equally favorable terms all things considered. This new agricultural credit system, the Federal farm-loan system, is a genuine blessing to the farmers of the United States. It will prove its usefulness more and more as it grows and develops. We must see to it that neither selfish nor designing interests, nor sub- servient nor crooked politicians, shall be permitted to emasculate or weaken or destroy it. What the farmers have gained after years of hard and painful fighting, they must keep. The farm-loan system can be ex- tended and enlarged by judicious legislation so that it will be more serviceable to the farmer than the exist- ing law. To cite an instance, I think the Act should be amended so as to permit the Federal Lands Banks to make loans up to $25,000. But a wonderful beginning has been made, and with sympathetic and intelligent administration by the Farm Loan Board and friendly co-operation on the part of the Congress and the President of the INTRODUCTION xix United States, this great system of agricultural credit will become a very rock of Gibraltar for agricultural prosperity. If this is now supplemented by an intelli- gent system of warehousing and by co-operative or- ganizations for the financing, marketing, and distribu- tion of farm products, a new and brighter future will open to the American farmer. W. G. McAdoo. New York, June, 1921, THE FEDERAL FARM-LOAN SYSTEM IN OPERATION THE FEDERAL FARM-LOAN SYSTEM IN OPERATION I FRAMEWORK OF THE FEDERAL FARM-LOAN SYSTEM THE Federal farm-loan system was provided for by an Act of Congress, in 1916, and established in the same year. Its purpose is to supply to Ameri- can farmers the long-term credit which will enable them to develop and expand their farming operations. The establishment of a national rural-credit system in this country was not the work of a small group of men, nor the result of merely a few years of agitation and effort. The subject had been discussed periodi- cally by our statesmen, bankers, economists, and oc- casionally by our farmers, since the early days of our history. It was in the decade preceding the enact- ment of the law, however, that public sentiment was crystallized to such a degree as to bring about official action. The previous lack of progress or improvement in our rural credit facilities is attributable to eco- nomic conditions, chief of them our abundance of cheap land. So long as the West beckoned to the land hungry, and especially to those who could not 2 THE FEDERAL FARM-LOAN afford a farm in the well-developed sections of the country, the problems of rural fmance had been of secondary importance, because it was possible for anyone, whether his means were great or small, to secure some land to farm. Within the present gen- eration, however, the extensive public domain of the West has been settled, and with this settlement has come the rise in land values.* Increased land values called for larger amounts of capital and more inten- sive methods of farming. Attention then turned to the subject of farm finance, which became a question of first importance. Co-operative credit for agricultural purposes orig- inated in the United States, and not in Europe as is popularly supposed. The idea was conceived in Con- necticut. In 1732 sixty-one landowners of the colony of Connecticut organized the New London Society United for Trade and Commerce.'^ They paid for stock subscribed by giving their promissory notes secured by mortgages on their lands. The only bor- rowers from the society were its stockholders, who had complete control of its management. The char- 1 There are still tracts of public lands open for settlement within irrigated districts. These lands, however, have not been attractive to the settler, largely because he finds the price of the land and the cost of operating it high, and because he has insufficient knowledge of the methods employed in farming irrigated land. _ The comparatively high prices charged for irrigated land are not indicative of the value of land in the vicinity, except as such land is itself irrigated, and cannot be attributed merely to settlement. The same problems of financing exist here, for an irrigated farm, even more than other high- priced land, must be operated intensively. » The public Records of the Colony of Connecticut, vol. vii, p. 390. See also: "Currency and Banking in the Province of the Massachusetts Bay," by Davis, in American Economic Association Quarterly, May, 1 901. SYSTEM IN OPERATION 3 ter granted it by the Connecticut Assembly author- ized it to emit against these secured notes bills with- out interest, which became popular immediately and circulated freely as money. This effort, however, was discontinued, owing to the opposition of the govern- ment of the colony. And to European countries, par- ticularly Germany, is accorded the honor of establish- ing rural-credit systems and bringing them to a high degree of efficiency and usefulness. Since the venture of the Connecticut landowners, a few attempts have been made to establish state rural credit institutions by legislative action, but fur- ther efforts have been discouraged, owing largely to the lack of interest on the part of the farmer-borrowers and to the imperfections of the earlier systems. The efforts that were made, however, stimulated certain individuals who were interested in improving farm- credit facilities and introducing co-operative credit into the United States, to discuss through the press and otherv\dse what had been accomplished in Euro- pean countries and on this continent.^ This work was aided by official investigations, the earliest publication on the subject appearing in 1892.^ By 1 910 the question was beginning to be widely discussed. In March, 191 2, the President of the 1 "The Schulze-Delitzsch Banks," by Villard, in Journal of Social Science, 1 869. "Currency and Banking in the Province of the Massachusetts Bay," by Davis, in American Economic Association Quarterly, Decem- ber, 1898, and May, 1901. "Co-operative Credit Associations of the Province of Quebec," by McPherson. Thesis sul:)mitted to the faculty of the Graduate School of Arts and Literature of the University of Chicago (1910). For other works see the Bililiography. * "Co-operative Credit in Certain European Countries," by Peters, in United States Department of Agriculture Bulletin. 4 THE FEDERAL FARM-LOAN United States, through the Secretary of State, in- structed the embassies in Germany and Italy and the legations in Belgium and the Netherlands to conduct investigations and make report on land credit in those countries. In the year 1913 Congress au- thorized the appointment of the United States Com- mission to co-operate with the American Commission appointed the previous year by the Southern Com- mercial Congress,^ for the purpose of investigating co-operative agricultural organizations and institu- tions in Europe. The reports of these commissions contain a fund of information bearing on rural credit institutions in European countries. ^ The report of the United States Commission^ in- cluded a draft of a proposed rural-credit law, which constituted the formal recommendation of the com- mission, and was known as the Moss-Fletcher, or Commission, bill. This bill authorized the establish- ment of small and independent joint-stock land banks (originally to be organized with a minimum capital stock of $10,000, which was later raised to $100,000), with power to issue bonds against first mortgages held by them on farm lands. These banks were to be under Federal supervision, and were intended to make loans direct to farmers. As a result of the work of the congressional committees on banking and cur- 1 The Southern Commercial Congress, at its convention held in April, 191 2, at Nashville, Tennessee, authorized the ajipointment of a national representative commission to visit Europe for the purpose of studying the various rural credit systems in operation there. This commission was composed of about seventy-five delegates, represent- ing twenty-nine states and four provinces of Canada, and was known as the American Commission. 2 Senate Documents Nos. 214, 261, and 380, Sixty- third Congress. » Senate Document No. 380 (January 29, 1914). SYSTEM IN OPERATION 5 rency during the years 1913 and 1914, there was foiTTiulated and introduced into Congress what be- came known as the HoUis-Bulkley, or Committee, bill. This bill provided for not less than five regional Federal land banks, with power of issuing bonds sim- ilar to that provided for in the Commission bill. Farmers desiring loans from such banks, however, were not to obtain loans direct, but would be com- pelled to become members of local farm-loan associa- tions, through which loans would be obtained from the land banks. No action was taken on either the Commission or the Committee bill, but the bill finally enacted into law contained the outstanding features of both, and therefore has been termed a compromise. On account of disagreement in Congress with refer- ence to the matter of Federal aid in providing rural- credit facilities, the whole subject was referred to a joint congressional committee on rural credits in the spring of 1 91 5. The bill drafted by this joint commit- tee, with certain changes, became law, July 17, 1916, and is known as the Federal Farm Loan Act. The Act is a clear, concise, and comprehensive piece of legislation. The language is specific and not diffi- cult of interpretation. This is not generally the re- sult where so many individuals and groups of individ- uals in and out of Congress have asserted their ideas and demanded that they be incorporated into law. It is a commonly known fact, for example, that the Federal Reserve Act has been difficult of interpreta- tion, and Congress has found it necessary to amend the Act to make clear its meaning. The farm-loan system has functioned successfully without any cor- 6 THE FEDERAL FARM-LOAN recti ve or interpretative amendments; in fact, the law was not amended until May 26, 1920, almost four years from the date of its passage.* At that time a series of amendments was recommended to Congress by the Farm Loan Board as being "desirable in the direction of eliminating expense and lost motion." ^ It was practical experience in the operation of the system that had demonstrated them to be necessary, and they cannot, therefore, be considered the result of faulty drafting or poor judgment on the part of the authors of the Act. The purpose of the Farm Loan Act is to furnish to our agricultural industry a channel through which it can market its security in accordance with its needs. What is meant by the credit needs of agriculture will be discussed later.^ It is sufficient for the present to state that credit in the form best adapted to the wants of American farmers had not been previously pro- vided; in fact, their needs had been subordinated to the demands of mortgage houses and other institu- tions dealing in mortgage loans. The question was not whether a particular loan would enable a farmer to carry out his individual project, no matter how beneficial it might be in the development of his farm, but how money could be placed to the best possible advantage for the individual or institution having money to loan. That this worked a hardship on the farmer is apparent, for not only was he compelled to accept money under terms and conditions which in • Public Document No. 182, Sixty-sixth Congress. 2 Third Annual Report of the Federal Farm Loan Board, p. 18. * See chaps, iv and v. SYSTEM IN OPERATION 7 many instances were unnecessarily burdensome, but he was never certain that he could secure funds when they were most needed. The Federal farm-loan system attempts to remedy this situation to the mutual benefit of the farmer and the lender. The necessary machinery is to be operated under the supervision of the government. In the Treasury Department of the United States is established the Federal Farm Loan Bureau, supervised by the Federal Farm Loan Board, in which the con- trol of the entire system is centralized. The members of this board consist of the Secretary of the Treasury, who acts as chairman ex officio, and four members appointed by the President of the United States. These four members are appointed to serve a term of eight years. The initial task of the Farm Loan Board was of lasting consequence. Continental United States, ex- cluding Alaska, was to be divided into twelve loaning districts and a Federal land bank established in each district, with its principal office located in such city within the district as the board should designate. Though the Farm Loan Act provides for the read- justment of the boundaries of these districts from time to time, it is hardly likely that any readjustment will be made, in view of the work that would be involved in transferring loans, records, and documents from one district to another, as well as in the complete revision in methods employed within each district. In any organization of nation-wide scope, a readjustment of its principal units necessitates a more detailed revision of its whole mechanism. The judgment of the Farm 8 THE FEDERAL FARM-LOAN Loan Board in mapping out the land-bank districts in the first instance was, therefore, virtually final. A series of hearings was conducted by the board during the months of August, September, October, and November, 191 6, for it was early decided that the ' ' farm-loan needs ' ' of the country could not be prop- erly determined from reports and statistics. During the above period fifty-three hearings were held in forty-four states, at which farmers, as well as officers of farmers' organizations, county agents of the Depart- ment of Agriculture, local bankers, and others had an opportunity to submit such information as bore on the needs of their community. In this manner the Farm Loan Board secured a mass of maps, charts, and statistical information of great value and interest. In determining the size and boundaries of the Fed- eral land-bank districts, the Farm Loan Board took into consideration the following nine factors: 1. Total land area. 2. Area of land in farms. 3. Area of improved land in farms. 4. Nxmiber of farms mortgaged at that time. 5. Amount of outstanding mortgage indebtedness. 6. Value of farm' lands and buildings. 7. Gross value of farm products. 8. Total population. 9. Rural population. The results obtained by averaging these factors the board modified by two other considerations — first, whether the prevailing rate of interest in the state in question was such as would be likely to lead to a rapid shifting of farm loans from existing hold- ers to Federal land banks, and, second, whether the SYSTEM IN OPERATION 9 proposed district was well developed agriculturally, or whether its agricultural resources were still largely undeveloped. Consideration was also given to argu- ments in favor of creating "one-crop" districts or dis- tricts in which farming conditions were similar. It was the judgment of the board, however, that what- ever advantages could be claimed for districts so established in the making of appraisements and pass- ing upon loans by the directors of a bank, they were overbalanced by the fact that a crop failure in such districts "might involve an undue proportion of fore- closures and temporarily prejudice the credit of the Federal land bank of that district." The board was also of the opinion that those states whose farm-loan securities were not well or favorably known would be better served if combined with states more favored in this respect than if a district was composed entirely of such less-favored states.^ The principal factors in determining within each district the city in which the land bank should be located were: 1. A reasonable approximation to the geographical center. 2. Prompt and frequent train and mail service. 3. Climatic conditions that would not impair the efficiency of the force. 4. Congenial environment. The board expressed itself as being opposed to the location of the banks in such centers of population as New York or Chicago, for the reason that the principal function of the banks was to serve the "farm-loan needs" of the country and they should therefore be 1 First Annual Report of the Federal Farm Loan Board, pp. 9-10. lo THE FEDERAL FARM-LOAN located in cities having a more active interest in agri- culture.^ The Farm Loan Board is assisted by farm-loan registrars, one appointed for each land-bank district, to supervise the issue of farm-loan bonds and have custody of all securities underlying such bonds. Land- bank appraisers are also appointed by the board and assigned to each district to determine the value of the property offered as security. These two functions — the approval of the issue of bonds and the final ap- proval of the security underlying them — constitute the most important functions of the board. It is through these that it exercises a rigid control of the activities of the land banks. The organization of each of the land banks was placed in charge of a temporary board of five directors.^ To it fell the detail work of organizing and systematiz- ing incident to the establishment of a new institution. This work was made more difficult by the early de- mands made for the banks' service and the immediate influx of applications for loans. ^ It is the duty of the * First Annual Report of the Federal Farm Loan Board, p. lo-ii. ^ These five directors were appointed by the Federal Farm Loan Board, as provided by law, and constituted only the temporary man- agement of the bank. After subscriptions to the stock of any land bank by national farm -loan associations shall have reached the sum of $100,000 — which will be when the bank has made loans to the amount of $2,000,000 — the Act provides that the permanent organization is to supersede the temporary one. The permanent organization is to consist of nine directors, six of whom, known as "local directors," shall be chosen by, and be representative of, farm-loan associations, and the remaining three, known as "district directors," shall be appointed by the Farm Loan Board to "represent the public interest." The delay in putting this latter feature of the system into operation arises out of the problems of financing the system. (See Chapter II and footnote, p. 30.) ' During the first six months of operation approximately $200,000,000 in applications for loans were received by the land banks. SYSTEM IN OPERATION II g ^ n o g e < ■«; kj o o ^ .J « u (d « Q < U b. ^ 1-1 S5 m i ■a; tfj n ^ < « H M en a a a bt u H w I— ( » w H n fe ^ O 55 z 1-4 o m l-t > (4 ■>-4 1— < Q U W H Q Z en H O l-H (4 o fc R en in o P< < a 12 THE FEDERAL FARM-LOAN land bank to receive applications, assign them to the appraisers for inspection and valuation of the proper- ties offered as security, and through its board of direct- ors approve applications for loans if the findings so warrant. When a stipulated amount of loans have been approved and remittance made (in the aggregate not less than $50,000), bonds are issued by the land banks in an equal amount against such loans as secur- ity. This function constitutes the primary business of each of the twelve land banks. The bookkeeping work in connection with the making of loans and the issuance of bonds and the filing of all records is, of course, done by the land banks. ^ The authors of the Farm Loan Act, however, real- ized that the land banks were too far removed from the farmers to render satisfactory service. It was necessary to establish a smaller unit, somewhat similar to the agencies established under the prevailing prac- tice of farm-mortgage banking, to which the farmer would have ready access and to which he was known. The purpose of the authors of the Farm Loan Act was to get away from the agency system and to establish in its place co-operative associations of farmer-borrowers through which the business of the system could be transacted, thereby eliminating the added expense of the old method of making farm-mortgage loans. The ' The Farm Loan Act (Section 16) provides for the organization of joint-stock land banks under the direct supervision of the Farm Loan Board. These banks are, as the name signifies, joint stock companies, which are financed by private capital and in which the farmer-borrower has no financial or other interests. While the joint-stock land banks are a distinctive part of the Federal farm-loan system, the purpose of this book is to present the system in its co-operative aspects rather than to give a technical analysis of all of the provisions of the Farm Loan Act. (See Appendix A.) SYSTEM IN OPERATION 13 national farm-loan association feature of the Farm Loan Act is an adaptation of the basic principle of co- operative land-mortgage banking — co-operation of borrowers — as developed in European countries, and therefore cannot be said to be an experiment. There was, however, some doubt whether this principle could be successfully applied to American conditions. The authors of the Farm Loan Act guarded against such a contingency by authorizing the appointment by the land banks of special local agents, in the event of failure to form farm-loan associations in any given territory.' In making the national farm-loan associations an essential part of the farm-loan system Congress sought to cultivate a spirit of co-operation among farmers. It is plain that a number of farmers associated together for a definite purpose can present a stronger case than one farmer standing alone. It is the old story over again of the gentleman who, knowing he was about to die, called his sons to him. He had a bundle of sticks in his hand. He gave one to each of them and said, "Break it," and each stick was easily broken. And he took as many sticks as there were boys and tied them together, and he said, "Break that." And they could not break it. What is true of that bundle of sticks is » The Farm Loan Act authorizes the appointment of an agent (one year from the date the Act became effective, which was fixed by the Farm Loan Board as one year from August 7, 191 6, the date on which the board quahfied and organized) where it appears that a national farm-loan association cannot be formed, such agent to be a "duly incorporated bank, trust company, mortgage company, or savings institution, chartered in the state in which it has its principal office." Owing to the rapidity with which the farmers have organized farm- loan associations in every section of the United States, only eleven agents have been appointed thus far (December I, 1920), all of them being in the seventh land-bank district. 14 THE FEDERAL FARM-LOAN just as true of our daily efforts. We cannot do much in this world as individuals. This applies with equal force to our farmers, though they have been known to be essentially individualistic and not inclined to- ward co-operation in any form. In many sections of the United States, however, individualism has given way to organized effort on the part of the farmers, particularly in the marketing of their products. . It was the hope of Congress, in providing the association feature, that the farmers would realize the advantages of co-operation in financing and would tend to asso- ciate for other legitimate ends. Congress did not intend, nor does the Farm Loan Act intend, to encourage the extension of credit with- out adequate security. The object Congress sought was to determine ways and means whereby farmers could improve the form and quality of their security. In arriving at a solution of this problem many pro- posals were made. The most extreme involved the making of loans direct to the farmers from govern- ment funds. The principle finally adopted, however, was that the Federal government should encourage and assist in the establishment of the necessary machinery and supervise its operation; that, aside from such assistance, as will be hereafter explainedS the govern- ment's cash or credit should not be utilized for the improvement of farm credit. The machinery for the carrying out of this principle is found in the national farm-loan association, through which, by collective indorsement, the farmers can so improve their security as to entitle them to credit on a sound investment basis. 1 vSce chaps, ii nnd iii. SYSTEM IN OPERATION 15 ft: < o 0) z I u u. d z o 15 z I (A < 0) is: z < ffi z < IL Si: *> ft if II ii SS "IS' i < (0 u. o )^ Z o z < < u D U u. kl z 0) Z h < O o (/) en < z < o J z < Z o z zj LJ ui I- I- O -I < I > O Qe lu Oe i I- z UJ O < z < z i6 THE FEDERAL FARM-LOAN National farm-loan associations are the local organi- zations upon which the Federal farm-loan system is based, and through which the land banks carry on their loaning operations. National farm-loan associations are corporations chartered by the Farm Loan Board, the charter delimiting the territory within which each association may operate. The area covered by an association is rarely larger than that of a county, though associations are not confined to county lines. These associations do not lend money to their mem- bers. Their function is rather to enable members to meet certain requirements and thus obtain loans from the land banks on better terms than from other sources. In addition to the work of appraising a member's property offered as security, transmitting all papers and documents to the land bank, and other work incident to closing a loan, the local association contributes to the financial standing of a member's security by indorsing the borrower's mortgage note. The local association thus performs services for the farmer member which otherwise would be performed by other agencies at added expense. Ten or more farmers, applying for $20,000 or more in loans, must in the first instance unite to form an association. The initiative lies with the farmers because the association is the only door through which they can enter into the benefits of the system.^ It was freely predicted, in and out of Congress, during the consideration of the Farm Loan Act, that the farmers would not associate for the purpose of organ- izing farm-loan associations because they were reluc- *See footnote i, p. 13. SYSTEM IN OPERATION 17 tant to make public their financial needs. This should not be and is not true of farmers who are interested in securing credit for productive purposes. Inasmuch as the Farm Loan Act limits the purposes for which loans can be made to the development of agriculture, specifically enumerating those purposes, the farmers have rapidly come to realize that any publicity inci- dent to securing a Federal farm loan is notice to the world that they are properly developing and expanding their farming operations, a fact of which they can be justly proud. The rapidity with which farm-loan associations have been formed throughout the entire United States is evidence of the fact that the American farmers will co-operate when they realize that it is to their advantage to do so.^ The aflairs of each association are in charge of a board of five or more directors who are elected annu- ally.- This board elects from its number a president, ' Three thousand nine hundred and sixty-six national farm-loan as- sociations had been organized up to December 31, 1920. In fact, there are more associations formed than there are counties in the United States. There is very little agricultural territory not already included within the boundaries of one or more existing associations. It is, therefore, unlikely that there will be any appreciable increase in the number of associations from this time on, inasmuch as those already formed will tend to increase in size and strength, thus attracting to themselves any prospective borrowers and obviating the necessity of forming new associations within their territory. Any increase in num- ber, however, will be offset by the policy of the Farm Loan Board of encouraging the consolidation of the weaker associations. ^ The Farm Loan Act provides that the directors of national farm- loan associations shall be elected "in the manner prescribed for the election of directors of national banking associations," and that they "shall hold office for the same period as directors of national banking associations." Section 5145, Rev. Stat. (Section 232, National Bank Act, as amended, etc., 19 19), provides that directors "shall be elected by the shareholders" and "shall hold office for one year." The instructions of the Comptroller of the Currency relative to the organization and powers of national banks, 1919 (Section 72), states that "in all elections of directors . , . each shareholder shall be i8 THE FEDERAL FARM-LOAN a vice president, and a loan committee of three mem- bers. It is also their duty to choose "in such manner as they prefer" a secretary-treasurer, who need not be a member of the association. The secretary- treasurer is the active executive officer of the associa- tion, and upon his ability, energy, and interest in the association depend largely its success and growth. He is custodian of the association's funds, securities, records, and documents and carries on its routine busi- ness, such as the disbursement of funds forwarded by the land bank, collection and transmission to the land bank of all payments made on loans and the like. He is also required to ascertain and report to the land bank any delinquencies upon the part of the members of the association in the matter of the taxes due upon lands mortgaged to the bank. To insure the proper per- formance of these duties, the secretary-treasurer is required to give a "suitable" surety bond as pre- scribed and approved by the Farm Loan Board, to which, in fact, he must make a complete report quar- terly of the operations of the association. The com- pensation of the secretar}''-treasurer, the expenses allowed the loan committee, and the like, must be entitled to one vote on each share of stock held by him" (see Section 8, Farm Loan Act); "the date of the annual meeting of the share- holders of a national bank is fixed in the articles of association, and those shareholders who attend this meeting may transact the business of that meeting — that is, elect directors, although stockholders repre- senting a majority in interest are not present. . . . Only stockholders will be elected directors who receive a majority of all the votes cast at the election." The section of the National Bank Act above quoted, and the Instructions of the Comptroller of the Currency, govern the election of directors of national farm-loan associations, with the ex- ception contained in Section 8, of the Farm Loan Act, which reads, "The maximum number of votes which may be cast by one share- holder shall be twenty." SYSTEM IN OPERATION 19 arranged by the associations themselves and adjusted according to their local conditions and needs. By a recent amendment to the Farm Loan Act, a limitation to the amount that can be levied for this purpose is fixed at one per cent of the amount of the loans applied for.* It is evident that as time goes on the operations of the farm-loan associations will become extensive. In fact, at this writing (February, 192 1) there are a number of associations whose membership exceeds two hundred, and to whom loans have been made in excess of a half million dollars. These associations own as much as $25,000 of stock in the Federal land banks of their respective districts, upon which they have re- ceived $1,500 or more in annual dividends on a 6-per- cent basis, which, with a few exceptions, the land banks have established. The operations of the farm- loan associations compare favorably with those of the larger country banks, and emphasize the necessity of the greatest care in the conduct of their affairs. From the farm-loan association, up through the superstruc- ture of land banks to the Farm Loan Board, the system is so interwoven as to form a complete financial fabric. Therein lies its strength. 1 Public Document No. 182, Sixty-sixth Congress. II METHOD OF FINANCING nPHE making of loans presupposes, of course, funds -*• with which to make them. First consideration must therefore be given to the problems of financing the Federal farm-loan system, for its success rests upon its ability to secure funds in ample and continuous volume from a reasonably certain source of supply. In considering what constitutes the source of money supply, we should, of course, direct our attention to the commercial banks, for it is to them that a large part of the money of the nation is intrusted. The cash deposits which they receive, and which are the basis of their loans, they must at all times be prepared to restore either on demand or within a comparatively short time. For this reason they cannot properly invest in other than short-term mortgages or thirty to ninety days' personal credits. In other words, deposits must be invested so that a steady stream of payments is flowing into the banks, giving them a chance to expand or contract their loans in response to the rise and fall in the supply of deposits. A commercial bank can make loans for a period sufficiently long to cover the ordinary commercial transaction, but from a practical banker's point of view ought not to make loans for a longer period, and therefore funds from SYSTEM IN OPERATION 21 a commercial bank cannot be invested in long-term mortgages, regardless of how beneficial they may be to agriculture. Through the Federal Reserve Act an attempt was made to extend greater accommodations to American farmers. National banks were encouraged to make personal loans to farmers for periods of six months, and were, to a limited extent, permitted to loan on im- proved farm lands for periods not exceeding five years. ^ While this was a step in the right direction, it did not increase appreciably the funds available for farm loans, because the five-year maximum period was not suffi- cient to care for the farmer's long-term requirements, and because the commercial banker was inclined to keep well within the loaning limit prescribed by law. The commercial bank has a legitimate claim to the deposits of the nation for the exclusive purpose of making loans to the business man to carry through a commercial transaction, or to the farmer for a short period of time. What funds, then, can be said to be available for long-term investment, at low rates, and in ample supply? It is evident that an investment of this character, if it possesses safety and ready convertibility, need not carry a high rate of interest. Funds available for such an investment can be said to include the savings of the school-teacher, clerk, minister, and wage earner; the proceeds of life in- surance in the hands of widows and other beneficiaries; funds belonging to estates, minors, and wards; funds of insurance companies, benevolent orders, and socie- ties of various kinds; and endowments of colleges, 1 The Federal Reserve Act, Sections 13 and 14. 2 2 THE FEDERAL FARM-LOAN hospitals, museums, and other institutions. These are the funds that should be available to the farmers on long-term mortgages. Their sum total is enormous. But it is important that the farmer's security be made as attractive an investment as possible to individuals or institutions controlHng these funds, and that the funds be placed in the hands of the farmer on the most favorable terms. To serve this double purpose the Federal farm-loan system was designed. It was necessary before any land bank could begin business that a relatively small capital stock be sub- scribed. The amount fixed was $750,000, divided into shares of $5 each. While the Farm Loan Act provided that any individual, firm, corporation, or the government of any state, or the United States, was eligible to subscribe for stock in any land bank, as a matter of fact only a small portion of the stock was taken by the public. It remained for the Secre- tary of the Treasury, as contemplated by the Act, to subscribe on behalf of the United States nearly all of the capital stock of all of the land banks.^ The stock held by the government receives no dividends, but carries voting power. The proposal of government aid in establishing a rural credit system was a source of protracted dis- cussion during the consideration of the subject of rural credits in Congress. Staunch exponents of indi- 1 As required by law, books were opened by the Farm Loan Board to receive public subscriptions to the capital stock of the respective land banks. Only $107,870 in stock was subscribed by the public in all the land banks, and it therefore remained for the Secretary of the Treasiuy to subscribe the balance— $8,892,130 — on behalf of the United States.— First Annual Report of the Federal Farm Loan Board, p. 13. SYSTEM IN OPERATION 23 viduaHsm, as proclaimed by Adam Smith, were op- posed to government aid in any form. There were those (shall we call them socialists?) who believed that the government should do that which, as a mat- ter of fact, the individual could do much better, advocating a system saturated with government aid. Some beb'eved that the days of individualism had gone forever and were equally opposed to the other extreme. For convenience they may be called mod- erate, believing that the government must step in to do certain things that the public welfare seemed to demand, leaving as much of the general business of the country as possible to individual effort. The rural-credit bill as finally enacted into law conformed to the views of the moderates, affording another illus- tration of the compromising character of American legislation. The discussions of government aid in official docu- ments and periodicals of the time contain many in- teresting arguments. This aid to agriculture was ad- vocated because of existing conditions and because of grants made to other industries, particularly the shipping and railroad industries. It is clear, however, that the use of funds subscribed by the government to capital stock in the land banks can be justified only upon the ground of performing a public service, such as the improvement or development of Ameri- can agriculture. It could not be countenanced if such funds were to be used to encourage speculation or diverted to other than a public purpose. The Federal farm-loan system was to be launched in the interests of agriculture — to develop and promote the basic in- 24 THE FEDERAL FARM-LOAN dustry of the United States— which, if its establish- ment depended upon subscriptions from the pubHc, appeared impossible.^ Congress, having decided that the Farm Loan Act was a measure in the interest not only of agriculture but of the nation at large, insured its immediate establishment by placing at the dis- posal of the land banks government funds in such amount as was necessary to complete their capital stock subscriptions. These funds, however, do not constitute a permanent investment on the part of the government. The Farm Loan Act provides that when the amount of capital stock subscribed by national farm-loan associations in any land bank aggregates $750,000, the land bank shall apply semiannually 25 per cent of further stock subscriptions to the re- tirement of the stock originally subscribed. This is now being done.^ The contribution, then, of the gov- ernment to the establishment of the land banks was the use, for a limited time, of capital, the right to dividends on which is expressly waived in the Farm Loan Act. If the land banks were limited merely to turning over their capital, they would function in a compara- tively small way. The capital of each land bank would be exhausted within a few weeks after it com- menced to close loans. It was therefore necessary to make provision for the raising of funds with which to make further loans. To accomplish this purpose Congress provided that the land banks should issue 1 See footnote i, p. 22. 2 Of the amount ($8,892,130) of stock subscribed by the government, $2,059,450 has been retired.— ConsoHdated statement, issued by the Farm Loan Board as of December 31, 1920. SYSTEM IN OPERATION 25 bonds based on the collective security of many in- dividual mortgages on real estate. European experi- ence had shown that land-mortgage bonds, issued under strict government supervision, form an ideal investment because of their great stability of value, uniformity, and convertibility into cash upon mod- erate notice. A security of this nature could be mar- keted at low rates and in considerable volume. The Farm Loan Act authorizes the issuance of bonds on the theory that if the bank exhausted a por- tion of its capital in making loans, it could pledge these loans as security for bond issues, sell the bonds, and receive the proceeds before the capital of the bank would be exhausted. This theory, however, overlooked the fact that the capital of some of the land banks was not sufficient for their business; that a large part of this capital was necessarily tied up in a float — that is, payments pledged to farmers or in transit, those loans being not then available as secur- ity for bond issues; and that the mechanical proced- ure of converting loans into bond schedules and bonds into cash involved a necessary but prohibitory delay. While the Farm Loan Act authorizes the issuance of bonds in series as small as $50,000, as a matter of actual practice bonds have been issued only in series of $250,000, and sold in large blocks for delivery at some future date, in order to insure the uninterrupted operation of the land banks. Some limitation, of course, had to be placed upon the extent to which the land banks could issue bonds. This the Farm Loan Act set at twenty times the land bank's capital and surplus, which means that in ad- 26 THE FEDERAL FARM-LOAN dition to the mortgages placed as security for each bond issued, the land bank holds in the shape of capital and surplus one dollar in cash or in quick assets for every twenty dollars of Federal farm-loan bonds outstanding. The Farm Loan Act provider, for increase in capital stock, in that each borrower is required to subscribe an amount equal to 5 per cent of his loan in the capital stock of the national farm- loan association,^ and the association in turn sub- scribes an equal amount of stock of the land bank. Owing to the fact that the Act authorizes land banks to make loans up to twenty times their capital and surplus, it is evident that the amount of loans that can be made through the system is unlimited, because the ratio between the loans made and the capital stock of the land banks automatically adjusts itself to twenty to one, as the volume of business increases.^ The desirability of Federal farm-loan bonds from a long-term-investment standpoint, does not, as has '■ This 5-per-cent stock subscription of the borrower is paid back to him when his loan is paid and is not in the nature of an extra bonus or charge. It is an investment upon which the borrower receives such dividends as may be declared. 2 Every land bank carries to reserve account 25 per cent of its earn- ings, as required by law. This must be done until said reserve account shows a credit balance equal to 20 per cent of the outstanding capital stock of the land bank. When the reserve equals 20 per cent of the outstanding capital stock, but 5 per cent of the net earnings must be carried to reserve. Dividends can be paid to national farm-loan asso- ciations only after the above amount is set aside to reserve. A national farm-loan association must carry to reserve 10 per cent of its net earnings until a credit balance equal to 20 per cent of its outstanding capital stock is shown. When the reserve reaches that amount it is necessary to carry only 2 ]3er cent of its net earnings to this account. The above amount must be set aside to reserve before any dividends are paid by the association to its members. The consolidated statement issued by the Federal Farm Loan Board as of December 31, 1920, discloses that the twelve Federal land banks have carried to reserve account $958,473. SYSTEM IN OPERATION 27 been stated, depend upon the rate of income, but rather upon their stabiHty, safety, and convertibiHty at the will of the holder. An examination of the nature of the security underlying a Federal farm-loan bond reveals both stability and safety.^ Land-mort- gage bonds have long been recognized as a first-class security in European countries, and it is expected that, with proper encouragement, they will be so recognized in America. Congress realized the importance of re- moving any barriers that stood in the way of making available the accumulation of funds in national trust companies for investment in Federal farm-loan bonds, in that they are made lawful investments for all fiduciary and trust funds. ^ Those states whose laws did not permit of such investment by savings banks, trust companies, and insurance companies, have like- wise, with a few exceptions, made such provisions as were necessary to make these funds available. The full success of the farm-loan system rests upon its ability to market its bonds. It was not possible for the land banks to operate on their capital in a satis- factory manner, if bonds were to be issued and sold in small amounts. The continuous operation of the system could be assured only by the sale of bonds by the tens of millions and in anticipation of the loaning needs of the land banks for a future period.^ While the 1 See chap. iii. 2 The Federal Farm Loan Act, Section 27. ' Though Federal Farm Loan bonds were sold in anticipation of the future loaning needs of the land banks for a given period, it was neces- sary to deliver the bonds sold as called for by the purchasers. The land banks, of course, could not absorb the proceeds of a bond sale imme- diately — that is, invest the proceeds in first mortgages and issue bonds against them, for they could only disburse funds as their opera- tions required. The Farm Loan Board, therefore, on behalf of the 3 28 THE FEDERAL FARM-LOAN security underlying farm-loan bonds could not be questioned, the Farm Loan Board realized that as yet they were unknown to the American investor. For this reason, principally, the board secured the co- operation of certain bond houses, "with large 'clien- teles' of investors and an established reputation for dealing in conservative investments," ^ who formed a syndicate for the purpose of assisting the farm-loan board in introducing the Federal farm-loan bonds on the American bond market. This arrangement was at the time eminently satisfactory. The amount of interest the land banks are obliged to pay on their bonds determines the interest rate to be charged to the farmers who borrow. Since the primary purpose of the Farm Loan Act was to pro- vide capital for agricultural development at the lowest possible rate, it was of course the duty of the Farm Loan Board, under the above arrangement, to offer the bonds at the lowest rate consistent with their ability to command a market. The board concluded that it was possible to market a 43^-per-cent bond at such a premium as would net the purchaser 4%, per cent, the rate to the borrower being fixed at 5 per cent. Thus a spread or margin of a little over 3^ of one per cent was realized by the banks to cover expense of operation. 2 The ready sale of these bonds at this land banks, purchased United States government bonds or certificates of indebtedness, which were temporarily used as security for such bonds as were called for, substituting first mortgages for these bonds as loans were made. This expedient, which is authorized by the Farm Loan Act, not only enabled the land banks to supply farm- loan bonds as called for, but made available to the land banks at call large amounts of funds for loaning purposes. 1 First Annual Report of the Federal Farm Loan Board, p. 17. 2 This spread or margin did not, of course, meet the expense of the SYSTEM IN OPERATION 29 rate bears ample testimony to the desirability of Federal farm-loan bonds as an investment under the conditions then prevailing. The success of the first bond sale, however, did not foreshadow equal success in the future. The United States was well into the European war and the prob- lems of government financing were assuming large proportions. While there had been no difficulty in marketing nearly $30,000,000 in farm-loan bonds be- tween the first^ and second- Liberty-loan issues, at a substantial premium, during the succeeding six months the government had absorbed nearly $6,000,000,000 in capital. Anticipating this situation at the time the United States entered the European war, the Farm Loan Board had prepared an amendment authorizing the Secretary of the Treasury to buy farm-loan bonds from time to time at par during each of the following two years to an amount not exceeding $100,000,000 in each year, to be subject to resale and redemption at the same price. It was thought that some expedient of the kind might be necessary, inasmuch as the offer- land banks during the first year. As a consequence, there was an im- pairment of the banks' capital. The total impairment of capital of the twelve banks on April 30, 19 18, which was practically at the close of the first year, was $411,954. In the succeeding quarter it was re- duced by $26,834 to $385,120, and in the four months ending Novem- ber 30 it was reduced by $246,594 to $138,526. — Second Annual Report of the Federal Farm Loan Board, p. 16. See footnote, p. 32. The above does not take into consideration the salaries and expenses of the Farm Loan Board, which are paid by congressional appropria- tion as provided by Section 3 of the Farm Loan Act. The Farm Loan Board, however, in its Third Annual Report (p. 18), recom- mended an amendment to the Farm Loan Act authorizing the pay- ment of salaries and expenses of the board by assessment upon the land banks instead of by direct appropriation of public funds. This amendment would place the system entirely on a self-supporting basis. * May, 191 7. * October, 191 7. 30 THE FEDERAL FARM-LOAN ing of government bonds might temporarily destroy the market for Federal farm-loan bonds. This amend- ment was, however, not presented to Congress until December, 191 7. The syndicate of bond houses had not, as had been anticipated, renewed their contract on December i, 191 7, owing, so they said, to the dis- turbed financial conditions. This situation was very embarrassing to the land banks, inasmuch as they had, on that date, commitments actually exceeding $100,000,000 which they were legally bound to meet (loans which the land banks had agreed to close). Had it been possible for the Farm Loan Board and the land banks to have done so, it would have been the part of wisdom to have established a bond-selling agency of their own, but the system was in no way organized to establish such an agency and conduct a bond sale of such magnitude without several months' preparation. In view of this situation, Congress passed the amendment in the form prepared by the Farm Loan Board, and it was approved January 18, 1918.^ ^ This amendment authorized the Secretary of the Treasury to purchase from any Federal land bank, at par and accrued interest, farm-loan bonds issued by that bank, such purcha* not to exceed in the aggregate $100,000,000 in each of the fiscal years ending June 30, 191 8, and June 30, 1919. It was further provided that any bonds so purchased might at any time be repurchased by the issuing bank at par and accrued interest for the purpose of redemption or resale, and that any bonds held by the Treasury one year after the termination of the pending war should be redeemed or repurchased upon thirty days' notice from the Secretary of the Treasury. Under authority of this amendment, there were sold to the Treasury farm-loan bonds to the amount of $149,775,000, of which about $135,000,000 were held by it on September 30, 19 19. This amendment also provides that "the temporary organization of any Federal land bank, as provided for in Section 4 of said Federal Farm Loan Act, shall be continued so long as any farm-loan bonds purchased from it under the provisions of this amendment shall be held by the Treasury. ..." SYSTEM IN OPERATION 31 The bonds issued from the time of organization up to April 30, 191 8, including those purchased by the Treasury under the above amendment, bore interest at the rate of 4^^ per cent. The Farm Loan Board, with a view to relieving the Treasury of the United States of the necessity of buying farm-loan bonds, and re-establishing them as a security to command the confidence of the investing public, decided on a bond sale as soon as possible after the ist of May, 1 91 8. The subscription period of the third Liberty loan extended to May 4, and it was known that another offering was to be made in the early fall. This, then, gave the maximum period of approximately four months within which to conduct a sale. In view of the existing conditions, the board was of the opinion that a 43^-per-cent bond was unsaleable and therefore fixed the rate at 5 per cent, and the rate to the farmers who borrow was advanced to $14 per cent. The selling commenced on May 20 and closed on June 5, 1 91 8. The sales within these sixteen days amounted to $56,000,000. This was enough to take care of the loaning requirements of the banks up to October i, 1918. The readiness with which the bonds were absorbed emphasized once more their desirability as an invest- ment. No further offerings were made until June, in the following year. After the funds realized from the second bond sale had been exhausted, in deference to the wishes of the Treasury authorities, bonds were sold to the Treasury until after the conclusion of the Victory Loan campaign. Farm-loan bonds during the fall of 1 918 and the spring of 191 9 were quoted 32 THE FEDERAL FARM-LOAN at a substantial premium. This was true not only of the s's of the second issue, but of the 4K's of the first. In view of these conditions, the rate of interest on the bonds offered during June, 1919, was fixed at 4K per cent. At this time all of the land banks had not overcome the impairment of their capital. The rate, therefore, to the farmer-borrowers was not re- duced, but remained at 5 per cent.* Within ten days the entire issue — $54,000,000 — was sold, and this, it was estimated, would care for the needs of the banks up to December, 191 9. The services of the syndicate of bond houses were enlisted in this sale also under arrangements similar to those agreed on during the first and second bond sales. This method of selling bonds, however, was not wholly satisfactory. It is evident that if the land banks had been free to choose their own times and methods, bond sales could have been made under more advantageous conditions, but it must be re- membered that during this entire period the United ' On the present volume of loans the banks are realizing from borrow- ers a rate about nine tenths of i per cent higher than the rate which they are paying on their bonds. On such loans as represent their capital, against which no bonds have been issued, they are realizing 5K per cent. The gross annual profit on interest account, therefore, ap- proximates at this time $3,500,000. At the beginning of the year it was materially less, but it grows, and it must continue to grow, with each succeeding month that shows an increase in the volume of loans. From this profit must be deducted all expenses in excess of the aggre- gate of fees charged to borrowers. The consolidated statement of condition of the twelve Federal land banks as of November 30, 191 8, showed an excess of expenses and interest charges from organization to that date of $138,526. (See footnote 2, p. 28.) The similar statement of November 30, 1919, shows an excess of earnings over expenses and interest charges of $1,461,440.88. It is apparent, therefore, that the net earnings of the twelve banks were $1,599,966.88. — Third Annual Report of the Fed- eral Farm Loan Board, p. 10. SYSTEM IN OPERATION 33 States was involved in war, and it was necessary to subordinate every interest to the exigencies of the Federal Treasury. Therefore, it appeared to be the part of wisdom to centralize the efforts of the land banks in conducting bond sales, and enlist the co- operation of certain large and well-known bond houses to insure their success. The Farm Loan Board, how- ever, did not look with favor on such an arrangement as a permanent one. "It is our belief," the board's first annual report states, "that, in harmony with the other co-operative features of the Act, the sale of bonds directly by the banks to the investors, should be stimulated in every way possible." The board stated further that while it was not as yet prepared to make recommendation, it felt that the "process of issuing bonds would be very much expedited and sim- plified if all the loans of all the banks were assembled and bonds issued against them by a single bank, so that all farm-loan bonds might be absolutely identical in every particular except denomination." After the sale of June, 191 9, it was evident that farm-loan bonds were readily marketable under or- dinary conditions. Their rating on the bond market was exceptionally good, reflecting the confidence and approval of the American investor. These conditions were favorable to the working out of some arrange- ment by the land banks and the farm-loan board to dispose of bonds without assistance from the outside. While plans along these lines were being developed, the long-threatened suit to contest the constitution- ality of the Farm Loan Act was instituted. This suit was begun in August, 191 9, in the form of an equity 34 THE FEDERAL FARM-LOAN proceedini^ in the United vStates District Court for the western district of Missouri. The case was heard October 30 and 31, the complaint being by order of the court dismissed, and the vaHdity of the Farm Loan Act sustained. An appeal was immediately taken to the Supreme Court of the United States, where the case was heard on January 6, 1920. On April 28, the Supreme Court ordered a reargument of the case, which was heard on October 14 and 15, 1920. The court rendered its decision on February 28, 1 92 1, upholding the constitutionality of the Fed- eral Farm Loan Act in its entirety. During the liti- gation it was, of course, not possible to conduct a successful bond sale. The validity of the Act creat- ing farm - loan bonds was being contested in court and, regardless of the confidence that might be ex- pressed as to the outcome of the pending suit, the average investor, as a matter of ordinary prudence, would await the decision of the court. For this rea- son no bonds were offered while the litigation was pending. While the funds realized from the bond sale of June, 1 91 9, were held to be sufficient to care for the needs of the banks up to December, 191 9, as a matter of fact the banks, with one or two exceptions, were sup- plied with loanable funds until about February i, 1920. The banks, in the course of operation, had accumulated a large volume of approved applications, though on February 4 they had ceased to receive appli- cations, except subject to closing after the Supreme Court had rendered its decision. Anticipating an early decision, the banks made use of their credit SYSTEM IN OPERATION 35 through commercial banks to take care of the most pressing appHcations. The delay in rendering a de- cision, occasioned by the order for reargument, created an emergency whereby it became necessary for Con- gress to extend the provisions of the Act of January 18, 1 918, to care for loans approved before March i, 1920.^ An impartial examination discloses the fact that the stabilizing influence effected by temporary govern- ment support through the purchase of farm-loan bonds was essential at the time to the continuous operation of the land banks. ^ But conditions have changed. Now that the validity of the Federal Farm Loan Act can no longer be assailed, the financing of the farm- loan system becomes a problem of marketing, at the most favorable terms, an unexcelled security. It is entirely possible that at times general financial con- ditions may affect the bond market adversely and necessitate the sale of Federal farm-loan bonds on terms less favorable than under ordinary circum- stances. But the establishment of bond-selling ma- chinery would tend to create an even demand and to a large extent nullify the effect of adverse economic conditions in the United States. This machinery ^ The total amount of farm-loan bonds purchased by the Secretary of the Treasury was by this extension increased to about $175,000,000. ^ The land banks have received deposits from the Secretary of the Treasury, as contemplated in Section 32 of the Farm Loan Act. While this provision of the Farm Loan Act has been criticized as Ijeing a special privilege, as a matter of fact similar deposits are made in national banks. In either case the Secretary of the Treasury is author- ized to use his discretion in making such deposits and satisfactory security must be given. The Farm Loan Act provides that these deposits must not exceed $6,000,000 in the aggregate at any one time and that the interest rate charged thereon by the Treasury must not exceed the interest charged for other government deposits. 36 THE FEDERAL FARM-LOAN might well take the form of a subvsidiary fiscal agency, within the farm-loan system, organized to centralize the efforts of the land banks in disposing of Federal farm-loan bonds, not only within our own country, but in the markets of the world. Ill FEDERAL FARM-LOAN BONDS A FEDERAL farm-loan bond is a debenture. A ■^ mortgage bond and debenture are, of course, essentially the same, but there is an important distinc- tion that should be borne in mind. A mortgage bond is secured by certain specified and designated mort- gages, while a debenture is secured not by specific mortgages, but by the general assets of the institution issuing the debenture. Federal farm-loan bonds come within the definition of a debenture, inasmuch as the Farm Loan Act specifically provides that the assets of all of the land banks constitute security for all bonds issued by them.^ This feature of the Act makes possible the sale of bonds (debentures) as has been described in Chapter IL As we have seen, the land banks estimate what their needs will be for a given period and a bond sale is conducted based on this estimate. In other words, bonds are issued and sold in advance of making loans, in anticipation of the loaning requirements of the land banks for a given period. Had the Farm Loan Act restricted the land banks to the issuance of mortgage bonds in accordance with the usual practice, the operation of converting mortgages into bonds and disposing of the bonds ^ The Federal Farm Loan Act, Section 21. 38 THE FEDERAL FARM-LOAN would have been slow and unsatisfactory. The banks would first have had to make the loans, place the mortgages in trust as a special security for the bonds issued, and then offer the bonds on the market. While in practice the mortgage hond and the debenture serve the same purpose, it is apparent that in a system caring for such a large volume of business as does the Federal farm-loan system, the debenture form, as usually understood, is not only desirable, but essential.^ The debenture bond has not played an important part in the history of England and America, but the experience of these countries with this method of financing has been of value. While the issuance of land-mortgage bonds and debentures is usually asso- ciated with European land-mortgage banks, the United States is not entirely unacquainted with the issuance of debentures, based on farm mortgages. During the late 'eighties and early 'nineties a number of institutions — about one hundred and sixty — in the New England and North Atlantic states, undertook to sell deben- tures of this nature. The disastrous ending of these companies is still fresh in memory, while those estab- lished in European countries have developed into large and successful institutions. The general nature of the ' It is also contended that the Federal farm-loan bonds are in reality- collateral trust bonds in that they are obligations of the land banks, secured by the deposit, in trust, as collateral to the same, notes (as distinguished from first mortgages) of various farmers, which are in turn secured by mortgages on real estate. (Opinion of M. C. Elliott, counsel, Federal Farm Loan Board, rendered June lo, 191 8.) This distinction as to form of security is in its nature a legal one, and refers to a ruling bearing on the question of whether or not notes secured by farm-loan bonds can be discounted by national banks. The nature of the security underlying a Federal farm-loan bond, or, as it is more properly called, land-bank bond, is discussed in this chapter. SYSTEM IN OPERATION 39 security was the same in that it consisted of mortgages on real estate. This being the case, inquiry must be made into the methods of operation. The underlying principles of the bond-issuing institutions of Europe were entirely lacking in these early debenture com- panies. They were not subject to inspection or super- vision under Federal law, whereas European institu- tions were safeguarded by a careful system of state supervision. No standard governing mortgage securi- ties existed, and therefore it was possible to use inflated estimates in land values. There was no protection fund in the form of stock subscriptions and reserve, or any restrictions as to the ratio between the bonds issued and their capital and surplus. These provisions are fundamental in European institutions. The great- est undermining influence, however, in connection with the operations of these early debenture companies was the practice of substituting inferior mortgages for collateral securities withdrawn. This, coupled with the fact that they operated without restriction or super- vision from any source, brought about their speedy collapse. The early history of American banks and insurance companies is a parallel and was equally dis- couraging. It was not until the banks and insurance companies were placed under government regulation and inspection that a sound system of banking and insurance was established. The underlying principles of co-operative rural credit upon which European systems have been built were recognized by the authors of the Federal Farm Loan Act. They reaHzed that a successful system must be launched under the auspices of the govern- 40 THE FEDERAL FARM-LOAN mcnt Itself and that the government must in a measure maintain supervision over its operations; that the distinctive features of European long-term mortgage credit — that is, the issue of land-mortgage bonds and the methods of amortization payments — should b? in- corporated in any American system of land-mortgage banking; and that the system must be so built as to command the confidence of the investing public in order that it might have at its disposal at all times ample funds to care for its needs. This confidence is assured by so safeguarding the land banks as to pre- vent a repetition of the conditions which led to failure in the early debenture companies. The utmost care is taken in granting of credit (to be described in Chap- ters IV and V), and this leads to the selection of con- servative mortgage securities and renders less likely the use of inflated estimates in land values. In addi- tion thereto, the Farm Loan Act provides for capital stock, and a reserve, and places restriction upon the issuance of bonds, in accordance with the approved practice of similar institutions in Europe. The prac- tice of the debenture companies of improperly sub- stituting mortgages held as collateral to their bonds is guarded against in the Farm Loan Act by a provision bearing on the duties of the farm-loan registrar.^ Notwithstanding the early American experience of debenture companies, the advantages of the mortgage bond or debenture from an investor's point of view was 1 The farm-loan registrar is charged with the duty, under bond, of seeing that Federal farm-loan bonds outstanding do not exceed the amount of the collateral security pledged. Such security may be either first mortgages, United States government bonds, or cash. — ^The Fed- eral Farm Loan Act, Section 19. SYSTEM IN OPERATION 41 apparent. Under the prevailing practiee of the farm- mortgage loan business of the United States — where the note and mortgage is sold directly to the investor — the investor is subjected to a great deal of trouble and inconvenience. In the first place, he must either have personal knowledge of all of the circumstances affect- ing the security or he must rely for such information upon a third party. If he relies on his personal knowl- edge he must of course assure himself as to the validity of the title to the land, give attention to the upkeep of taxes and insurance, and personally make collection of interest and principal when due. In the event that a third party, such as a mortgage company or mort- gage bank, furnishes information and performs this service, the investor must, of course, ascertain for himself the reliability of the mortgage company or bank, which it is often difficult for him to do. The investor, too, may not find it easy to secure a mortgage in just the amount which he desires to invest or for the period of time most suitable to him. There are no such disadvantages if the farmer's security is converted into Federal farm-loan bonds. These bonds are standardized as to form and amount. They are issued in convenient denominations for a suitable period of time, and with convenient and reH- able means for the collection of principal and interest. Federal farm-loan bonds run for a period of twenty years, but are redeemable five years from the date of their issue. The five-year redemption provision corresponds to the minimum period for which a Fed- eral farm loan can be made. Bonds are issued in denominations of $40, $100, $500, and $1,000. They 42 THE FEDERAL FARM-LOAN are issued in registered and coupon forms, interest being jjayable semiannually at the bank of issue, both principal and interest being payable in gold or lawful money. Interest coupons are payable at any Federal land bank or Federal Reserve bank in the United States. (See sample form of bond on following page.) The security underlying Federal farm-loan bonds con.sists in the first instance, of mortgages on farm lands, carefully selected according to reliable and uni- form standards. These mortgages, pledged as col- lateral, are secured by the personal undertaking of the borrower ; by the security of the mortgaged land, at least double in value to the amount of the loan ; by the capital, reserves, and earnings of the local asso- ciation indorsing the loans; and by the liability of the members of the indorsing association to double the amount of the stock held by them. In addition to the security of all of the mortgages issued by all of the land banks, at least equal in amount to the out- standing bonds, every farm-loan bond is secured by the capital, reserves, and earnings of the land bank which issued them and by the capital, reserves, and earnings of the eleven other land banks. Manifestly these are adequate safeguards. The outstanding feature of this new system of land- mortgage banking is standardization, not only of the credit granted (to be further discussed in the chapters on loans), but also of the form of security placed on the market. Through standardization, coupled with satisfactory assurances that those standards will be maintained, it has been possible to command a market for Federal farm-load bonds in such volume as to mm, A ^^^ ^^M^OIil^^ C10017 COUPON BOND 1922-37 ISSUED NOV. 1.1917. REDEEMABLE AFTER NOV. 1 . 1922. PAYABLE NOV. 1.1937. INTEREST PAYABLE HAYl AND NOVEMBER 1. tlJKO JKli^^^ i' lOO ^ ^ /y///rfm//i'//Y//, VM/'W'^//)i(//m/K '//»///< wyM/ ^r/>»0 m.i//,/// _J/fr//////y»//y////-///r/w/r//i'/y/ry///or//f//'j/wiy//'/'/''/M/^ y//r.jr///f'/////:_y///'///_//if///. ''//f'/o''/^y/'.i/-//////-/r//': ' (j2///'/f/////a/J///Or/'f///urAy,yrr/yM/y:yM///^^^ S1vF?Ay p ./m yr/o' CERTIFIOVTE OP FAnM LOiXN COMM ISSIONER . j'////'m///''/:iM///-f/.ji//-Ms/<'w// /U^M/Zy/yvy/' t/////a)//ry////- /. I /ly}}/ '///'//'m//////y////U/a/m// //if//f/'j m'/Mif//// /y^W/r'/u// ,//w//m////A>////- // pr /z/Az/'///v/ /// /r//r ST. PAUL. MINNESOTA. NOV. 1. 1917. ACT OP CONGRESS APPROVED JULY 17. IBI«. C10017 itrn/iytniiy S' c SYSTEM IN OPERATION 43 provide funds for the continuous operation of the land banks. Of equal importance to the investor and the farmer- borrower is the provision in the Federal Farm Loan Act by which all farm-loan bonds are exempted from Federal, state, municipal, and local taxation.^ This exemption makes these bonds especially attractive to investors and assists in reducing materially the rate of interest charged the borrowers. While there was considerable opposition to this feature of the Farm Loan Act, the commission that investigated rural credit systems in European countries, and contempo- rary writers as well,'-^ were of the opinion that it was essential to the establishment of a successful national system of rural credits in this country. The United States Commission, in its report to Congress,^ stated clearly and forcibly its position on the subject of tax exemption; in fact, its statement can be said to be a summary of the principal arguments made by the advocates of this feature of the Farm Loan Act. The commission's statement follows: Finally, the commission has recognized that, in order that the farmer shall get the benefit of the lowest interest rates, these land- bank bonds, as well as the mortgages or deeds of trust held by the banks as security for the same, must be exempted from taxation. It will be conceded that the tax upon a mortgage ultimately comes out of the borrower, either directly or in the shape of an increased interest rate on the loan. The proposed securities are based on land, and land is the one asset which is always taxed and which ' The Federal Farm Loan Act, Section 26. 2 Senate Document 380, Sixty-third Congress. House Document 494, Sixty-fourth Congress. Senate Document 630, Sixty-fourth Con- gress. Morgan, Land Credits, chap. xii. Herrick, Rural Credits, chap. xix, p. 224. 3 Senate Document 380, Sixty-third Congress. 4 44 THE FEDERAL FARM-LOAN cannot evade taxation. The farmer must pay his proportion of governmental charges, because his land is always there and the assessor can always reach it. The Federal government has no con- trol over this tax on land and does not attempt to control it. But it is recognized that a tax on the mortgage created by the farmer upon this land, or a tax upon the land-banlc bond issued by the bank on the security of such mortgage, must ultimately be paid by the farmer in the shape of increased interest charges. As an essential to the carrying out of any reform which will meet the farmer's requirements, this species of double taxation must be done away with. Consequently the bill provides for the exemption from taxation not only of the capital stock of the banks to be so organized, but also of all the mortgages and deeds of trust held by the bank and of all the land-bank bonds issued by the bank against such mortgages and deeds of trust. In exempting the capital of the bank from taxation the bill follows the Federal Reserve Act, on the theory that the same privilege in this respect should be extended to agricultural banks as to commercial banks. And in exempting from taxation the mortgages and deeds of trust, and the land-bank bonds issued against the same, the commission has recognized that such a tax is simply an additional charge against the farmer who had already paid the direct tax on his land. It will be impossible to secure money for the farmer on the best terms vmless and imtil such an exemption goes into effect. The Supreme Court of the United States, in the case of Smith vs. The Kansas City Title and Trust Company,^ has ruled on the validity of the tax- exemption feature of the Farm Loan Act. Any dis- cussion thereon must of course deal with it as a practical or economic question and not as a legal ques- tion. The provision for exempting Federal farm-loan bonds from taxation constituted the crux of the op- position to the Federal farm-loan system. The tax- free bonds issued by the land banks, it was contended, were a great menace to the country. This assertion was made despite the fact that approximately $i6,- i U. S. ; 41 Sup. Ct. Rep. 243. (See also Appendix D.) SYSTEM IN OPERATION 45 000,000,000 in tax-free securities in the form of state, county, municipal, drainage, irrigation, and other bonds, had been issued and absorbed by the investing public. The menace of tax-free securities apparently did not become evident until they appeared in the form of Federal farm-loan bonds, which, at this writing (February, 192 1), constitute less than 7 per cent of the total tax-exempt bonds in this country. In the sale of their bonds, the land banks are pro- hibited from competition with railroad bonds and industrials by the high rate of interest which such bonds bear. They do not compete with other mort- gages because in order to secure funds to meet their requirements, it was necessary to place the farmers' security on the market in the form of debentures. The competition that the land banks have to meet in the sale of their bonds, therefore, is with govern- ment, municipal, and other bonds, which are tax free. Congress conferred the tax-exemption privilege upon the land banks so that they could compete with tax- free bonds on an even basis. Conceding, for the sake of argument, that this tax- exemption privilege is a subsidy to American farmers, is it to be condemned on that account ? Are subsidies an innovation in this country? For reply we have but to turn to history. "Infant" industries have flourished in this country under a protective tariff, transcontinental railroads have become a reality through subsidies in the form of land grants, and our merchant marine has been fostered by subven- tions in various forms. Until recently, our agricul- tural industry has developed despite inadequate 46 THE FEDERAL FARM-LOAN financing. This was possible, as we have seen, largely because of the abundance of cheap lands. However, with the passing of our vast public domain came the need for more capital. In order that capital be made available in such form and under such conditions as to meet the needs of agriculture. Congress established the Federal farm-loan system and extended to it the privilege of tax exemption. The question of tax exemp- tion is one involving the whole theory of taxation and will undoubtedly receive due attention from writers on the subject. It is sufficient to state here that in the opinion of those who believe that the Federal farm-loan system has a place in American economic life, the tax-exemption feature, under present condi- tions, constitutes the very life blood of the system and its continued existence depends thereon. The statement is often made that a land-mortgage bond is the best possible security. If European ex- perience, and more particularly that of Germany, is a criterion, this statement is undoubtedly true, for it is there shown that the land-mortgage bond is "safer than a government bond." Land debentures of the Silesian Landschaft during the Napoleonic wars fell to 84, then to 70 and 50, while those of the Prussian government sank to 20. Again, during the revolution of 1848, which seriously affected all values, the land debentures of the Landschaften of Silesia and Pomer- ania were quoted at 93, of West Prussia at 83, and of East Prussia at 96. At the same time, Prussian gov- ernment bonds were selling at 69, the stock of the Bank of Prussia at 63, and the stock of the government railroads fell from 90 to 30. In 1850, while the 3.5 SYSTEM IN OPERATION 47 per cent government bonds of Prussia were at 86.5, those of the Silesian Landschaft were quoted at 93.75, those of the Landschajt of Posen at 102, and of the Landschaft of Mecklenburg at 103.^ The writer was able to secure, through the United States Department of State, quotations on both government and land- mortgage bonds in Germany, from June 30, 1914, to November 29, 1919. These quotations are of such interest that they are reproduced on the following page. These statistics disclose the stability of land-mort- gage bonds and their desirability as a long-term in vestment. While, of course, the period of operation of the land banks has been too brief, and not only international conditions, but our domestic affairs, as well, have been too uncertain to permit of any accurate deductions being made, it is safe to predict that Federal farm-loan bonds will display stability equal to that of any of the rural credit-bonds of Euro- pean countries. ^ Herrick, Rural Credits, pp. 81 and 82. 48 THE FEDERAL FARM-LOAN PRICE OP GERMAN STANDARD BONDS Imperial 4% Imperial 3^% Imperial 3 % Prussian Consols 4% Prussian Consols 3K% Prussian Consols 3 % Kur u Neumark Landschaft4%. . . Kur u Neumark Landschaft 2>A% ■ East Prussische Landsehaft 4%. . . East Prussische Landschaft 2>y2%- East Prussische Landschaft 3 % . . . Posen Landschaft 4% Posen Landschaft 3K% Posen Landschaft 3 % Schleswig-Holstn. Landsch. 4%. . . Schleswig-Holstn. Landsch. 3K%. Schleswig-Holstn. Landsch. 3%. . . Westphalian Landschaft 4% Westphalian Landschaft sH%- ■ ■ • Westphalian Landschaft 3% Pomeranian Landschaft 4% June 30 Dec. 31 Jun.- 30 1914 1918 1919 99 . 00 79.00 69.00 86.20 66.00 63.00 76.80 60.00 60.00 99.00 83.00 74 00 86 . 20 68.00 63 . 00 76.90 62.00 60.00 96.25 loi .00 85.00 96.00 93 25 94.00 83.00 79.00 76.00 74.00 99.80 100.00 84.00 92.00 76.00 80.00 93.20 1 1 1 . 00 83.00 103.00 75.00 95.00 94 50 109.00 85 . 00 95 • 00 75.00 85 . 00 9.S.25 105.00 Nov. 29 1919 65.70 61 .70 63.60 65.00 57 50 55-75 93.00 85.00 74-75 74-75 69.00 101.00 90.25 102.25 97 . 00 PRICE OF FEDERAL FARM LOAN BONDS' Nov. I Mav I Nov. I Mav 12 Nov. I May I Oct. 26 1917 1918 1918 1919 1919 1920 1920 Federal faTn loan 4i%,due 1937. • • lOI 100 Sold on 4% basis at loii looJi lOO-IOI 92-96 90 bid. None offered Federal farm loan S%, due 1938 • - - Sold on 3.85% basis at 104 i 1035-104 102-103 99-101 07-97i Federal farm loan 4i%,due 1939- . . . . . looj-ioi 92-96 90-91 Federal farm loan 4J%.due 1938. . . Not shown. for reason th at issue all sold to banks. ' The above table is presented through the courtesy of the National City Bank of New York. IV FEDERAL FARM LOANS THE new plan of granting farm loans, the plan which received definite national recognition in the Federal Farm Loan Act, gives equal consideration to the problems and needs of the farmer and of the investor. In this respect it was somewhat revolution- ary, for previously farm loans had been made solely from the investor's standpoint, and the wants of the farmer had been given little or no consideration. A true farm loan is one that is to be repaid from the earnings of the land. Nevertheless, farm loans, so- called, have been made in the United States with no thought of such redemption. They have run for peri- ods of from three to five years, although in most cases it was manifestly impossible for the farmer-borrower to repay his loan from the earnings of his land within so short a time. The terms upon which farm loans have been made have worked as great a hardship as have the unnecessarily high interest rates charged American farmers. Institutions and individuals who have had money to lend have not seemed to realize that the financial needs of farming are different from those of other industries, and must be differently met, if farming is to continue to develop properly and the country at large to prosper. To accomplish the pur- 50 THE FEDERAL FARM-LOAN pose of the Federal Farm Loan Act it has been neces- sary to disregard, in a measure, established precedents and forms in the making of farm loans, and to set up new standards. These new standards, however, are not experiments, for while they are new in this coun- try they have been established in many foreign coun- tries for over a century, and are the result of years of experience in land-mortgage banking. The distinctive features of the new system can be summed up conveniently, as follows: long term of loan, uniform low rate of interest, and the amortiza- tion plan of repayment of loan. In considering the term of the loans it is to be remembered that we are dealing with loans which the farmer employs in the acquisition and improvement of his land and the purchase of equipment, commonly called fixed capital, and not with circulating capital, which is used for short periods in growing and harvesting and market- ing crops. The problem of supplying circulating capi- tal is essentially different from that of providing fixed or permanent capital. The former is not germane to a discussion of the Federal farm-loan system, for that system was established to provide a channel through which the farmers of the country could market their long-term securities, and does not provide for their short-time or personal needs. In the establishment or development of a business enterprise, fixed capital is provided for by the sale of bonds or stock on a basis which will enable the business itself to retire the bonds or make the stock a profitable investment from its own earnings. In addition, loans are made by commercial banks to SYSTEM IN OPERATION 51 business institutions in accordance with their abiUty to repay. Because of rapid turnover, the demands of the merchant or manufacturer can be satisfied if these loans run from three months to three years. With the estabhshment of the Federal Reserve system the commercial world has erected for itself a magnificent financial structure, giving elasticity to a hitherto rigid system of banking, and doing everything possible toward solving its financial problems. The financial needs of farming are different from those of any other industry. The farmer is unable, in any but exceptional cases, to market bonds of his own upon the security of his farm. His fixed capital forms a larger proportion of his investment than does the business man's. His turnover is not so rapid. He buys live stock, machinery, buildings, and land, and it is many years before he can realize upon them profit- ably. If he had to repay a loan in three or five years, the farmer would naturally hesitate before building a barn, silo, or hog house, before constructing a fence or purchasing dairy stock. Such investments may be precisely the ones that would make his farm a more productive unit, but the earnings of the farm in so short a period of time could not take care of the neces- sary loan. The farmer would, of course, renew his loan when it fell due, but he would run grave risk of the money market being unfavorable at the time, and even if he did renew it there would be additional costs, such as commissions, recording charges, abstract fees, registration taxes, etc., incident to such renewal. The farmer who desires to equip his farm with costly but necessary agencies of production must have credit 52 THE FEDERAL FARM-LOAN for a comparatively long period of time, with the privilege of gradually extinguishing the principal as the interest is paid, and with the further right of ex- tinguishing the entire princijDal whenever he desires to do so. The Farm Loan Act provides that the rate of interest shall not exceed the rate on farm-loan bonds by more than I per cent, and in no event be in excess of 6 per cent, exclusive of amortization payments. Statistics of the United States Department of Agriculture show that the average rate of interest and commissions on farm-mortgage loans exceeds 6 per cent in thirty-six states and rises as high as lo per cent in the states of Montana, Wyoming, and New Mexico.^ The low rate feature of a Federal farm loan is obviously a source of great saving to the farmers in most of the states of the United States. The interest rate charged to borrowers has been made uniform throughout the United States. This was not specifically provided for in the Farm Loan Act, but was necessitated by the bond situation. It was obviously impossible for a land bank operating on the Atlantic seaboard to market its low-rate bonds when the bond buyer at the same time could secure a similar bond, bearing from 2 to 3 per cent higher rate, in the Western states. The result of variation in rate would be that some of the land banks would be over- financed, while others would not be able to sell their bonds except at a prohibitive discount. Therefore, in order to insure the financing of all the land banks, a 1 The United States Department of Agriculture, Bulletin No. 384, p. 2. SYvSTEM IN OPERATION 53 standard bond has been issued — standardized not only as regards maturities and the security underlying them, but also as regards the interest rate. Heretofore the interest rate on land mortgages has varied from district to district. ^ Two reasons for this at once occur to our minds. One is variation in the supply of capital and the other is the variation in risk. It is apparent that in localities where there is a large demand for funds during certain seasons of the year and a small demand during other seasons, a com- paratively high rate must be charged in accordance with the seasonal requirements. There are econo- mists who contend that it is wrong arbitrarily to level the interest rate throughout the entire United States. They argue that interest rates are governed by local conditions somewhat as freight rates are governed by water competition. That this was true under the old system of mortgage banking, where every loan made was individually handled, is unquestioned. The cost of making a loan — inspecting the property and nego- tiating a loan — varied with the accessibility of the property and whether the loan was made with local money or with outside capital. The costs of inspecting necessarily vary even under the Federal farm-loan system, but because this system has graded or stand- ardized all loans and made more systematic the work of the appraiser, they vary less than under the old system and have been considerably reduced. These graded loans, when made, become security for bonds 1 The average rate throughout the United States varied from as low as 5.2 per cent to as high as lo.i per cent. United States Depart- ment of Agriculture, Bulletin No. 384, pp. 4-6. 54 THE FEDERAL FARM-LOAN issued. The investors purchasing such bonds, of course, know that the security conforms to certain standards. The cost of negotiating the farmers' loans in the form of bonds is no greater for one locaHty than for another, if they are sold through one channel, such as the Federal farm-loan system. As has been noted, variation in risk leads to varia- tion in interest rates. It is contended that low rates can be commanded only in those districts in which in- vestors have complete confidence. The proponents of a uniform rate of interest, however, contend that money is worth no more in Minnesota than it is in Illinois, pro- vided the risk remains the same. A $i,ooo loan on a farm worth $2,500 in northeastern Minnesota should be just as good as a $10,000 loan on a farm worth $25,000 in Illinois, provided the same standard of valuation is used, such as the earning power of each farm. The ratio of security is the same. There is no experience table, ^ however, back of the northeastern Minnesota loan as there is back of the Illinois loan. But loans that are made throughout a large territory, such as the United States, based upon a certain percentage of the value of the land for agricultural purposes, so distribute the risk as to make it practically negligible. While recognizing the need for cheaper money for agriculture, the authors of the Federal Farm Loan Act realized that of equal importance were the condi- tions and terms upon which loans were to be made. The Farm Loan Act acknowledges the truth that a 1 Reference is had to the history of making farm-mortgage loans in a given territory — that is, the average loan made on a given tract over a period of years taking into consideration the legitimate increase in land values, percentage of losses, and the like. SYSTEM IN OPERATION 55 farmer who makes his living solely from his farm cannot pay the purchase price of the land or the cost of the permanent improvements except from the net earnings of his industry — that is, the surplus after he has paid taxes, the cost of upkeep and necessary family expenses. Accordingly, it provides for loans running from five to forty years. ^ This makes the life of the loan, or the length of time which the loan is to run, wholly optional with the borrower. All Federal farm loans are made on the amortiza- tion plan. The term amortiztion is as yet unfa- miliar to the average American. In time it will be- come a part of everyone's vocabulary, for it is the only basis upon which a farm loan should be made if the welfare of the farmer is to be taken into consid- eration. Amortization is a term applied to the process of reducing indebtedness (throughout a period of years) by installment payments of a fixed amount, which include interest and a part of the principal. For the purpose of illustration, let us assume that a farmer borrows $1,000 through the farm-loan system, at 53^-per-cent interest, and on a "i-per-cent amorti- zation." 2 He pays $65 a year in semiannual payments 1 While Federal farm loans cannot be paid off until after five years from the date they arc made, except at the option of the land bank, payments in any multiple of the amortization installments or in full can be made on any interest-paying date without any bonus or com- mission. After the five-year period the farmer-borrower has an absolute right to pay off his loan on any interest period. Consequently, if interest rates should fall, the farmer could pay off his mortgage and borrow again on more advantageous terms. On the other hand, if interest rates should rise, the land bank could not make the farmer borrower pay the increased rate, for the agreed rate holds good until the mortgage falls due, and in the meantime the amortization pay- ments extinguish the loan. ^ The amount paid on principal bears a direct relationship to the period of time for which an amortized loan is made. Thus, while 56 THE FEDERAL FARM-LOAN of $32.50 each until the loan is discharged. That is, of course, 6)^^ per cent per annum on the sum borrowed. We commonly say that he is paying 53-<2-per-cent in- terest and I per cent on the principal, and that on this "i-per-cent amortization" the loan will be extin- guished within thirty-four and a half years. But the way it v/orks out is this. His first payment is applied as follows: $27.50 to the payment of interest and $5 to reduction of the principal. The interest on the next payment is figured at 53^ per cent on the reduced amount of principal of $995 (because of his first pay- ment on principal of $5), and is applied as follows: $27.36 on interest and $5.14 on the principal. He continues making payments of $32.50 each six months during the thirty -four and a half years, but the interest payment is constantly growing smaller and the pay- ment on the principal is steadily growing larger, so that at the end of the period of thirty-four and a half years he will pay $1.71 interest and $30.79 on the principal. By means of these small payments his prin- cipal is reduced little by little so that at the end of thirty-four and a half years it is entirely paid up. If the farmer chooses to pay a larger amount on principal, which he is compelled to do in certain of the * ' special- ized" farming districts, such as the fruit-growing sec- tions of California, his loan will be retired within a shorter period. The advantages of the long-term, amortized Federal farm loan are many. In the first place, the farmer an annual payment on principal of i per cent of the original amount of a loan made on a 5>^-pcr-cent interest basis retires it in thirty-four and a half years, a payment of 2 per cent will liquidate the same loan in twenty -four and a half years. SYSTEM IN OPERATION 57 ' U) ' III I- < biQ: ft-l >-o ^ c a P ^1 < s w i« 5^ 5!2 OO OO CO <3 L^ U) t8 f:i ?:: to OO —- OO OO 00 C3 O C» ^ t8 a CO OD uS CVl C54 Cvl "^ 'i^ ^ Csi c»J CS4 ;^ "^ ij*" C>J cs c^ C^ CVI Csl §^ S^ ^ <:f iSf :^ to lO LO S <=>. <=» csi rri 1^ LO 5^ ^ CO ^^ O i 3C o 2: OQ OQ or> uj ^ C3 < s fe ^ 2 ^s M °°- i? ^ S CO 0> 0> r^ CO J:9 g^ ^ S*' s^ r:: ci^ .s> 2J g* CO <0 c»)CNoCit>»;CoxaJcMi2 CVjCS»f^<^CMC>»CSlCS|CMCN« Si CM I I -S Si gl S8 THE FEDERAL FARM-LOAN who secures such a loan is rcHeved of the dread of foreclosure, for if he keeps up his annual or semi- annual amortization payments the principal will never fall due. When the loan has run its full period it is paid. These payments are small and do not exceed the amount paid as interest in most of the states of the Union. Aside from stimulating thrift and encour- aging systematic saving, long-term credit of this nature will enable the farmer to have on hand a greater surplus of funds. As a consequence, he will become a cash customer for the merchant and a de- positor in the local bank. Any rural-credit system which enlarges farming operations, increases the pro- duction of the soil, or stimulates the agricultural in- dustry, as does the Federal farm-loan system, adds to the value of the capital stock of every bank located in a farming section, increasing its dividends, surplus, and profits. A Federal farm loan can be made only when it is secured by a first mortgage on farm land within the land-bank district in which the bank is located, and only to a "natural person," who is the owner or about to become the owner of qualified farm land. No loan can be made, however, unless such person is "at the time or shortly to become, engaged in the cultivation of the farm mortgaged."^ The Farm Loan Board has defined an actual farmer as "one who conducts the farm and directs its entire 1 Federal farm loans, therefore, cannot be made on rented farms, though a renter who is about to acquire title may secure a loan. The meaning of the term qualified farm land is necessarily indefinite. What lands are qualified as security for a Federal farm loan depends upon factors such as the soil conditions, market facilities, rainfall, and the likq, which make up the value of the land for agricultural purposes. SYSTEM IN OPERATION 59 operation, cultivating the same with his own hands or by means of hired labor. An owner, to borrow under the Farm Loan Act, must be responsible in every way, financially and otherwise, for the cultiva- tion of his land. A loan cannot be made to a corpora- tion, guardians, executors, administrators, or trustees. There is an exception in that a guardian may borrow if such guardian is father, mother, husband or wife, and has a joint interest in the property of the ward.^ The guardian, in such case, must sign individually the note and mortgage and act as a member of the national farm-loan association. As has already been stated, the purpose that the framers of the Farm Loan Act had primarily in view was the development of agriculture. In order that the loans made through the farm-loan system be directed toward this end, they specifically provided the purposes for which a loan may be made. These purposes are enumerated in Section 12, subdivision 4, of the Farm Loan Act, as amended, as foUows: Such loans may be made for the following purposes and for no other: (a) To provide for the purchase of land for agricultural uses, (b) To provide for the purchase of equipment, fertilizers, and live stock necessary for the proper and reasonable operation of the mortgaged fann; the term "equipment" to be defined by the Federal Farm Loan Board, (c) To provide buildings and for the improvement of farm lands; the term "improvement" to be defined by the Federal Farm Loan Board, (d) To liquidate in- debtedness of the owner of the land mortgaged incurred for agri- cultural purposes, or incurred prior to the organization of the first 1 This ruling of the Farm Loan Board has afforded relief in many instances where death intervened while the loan was in the process of closing; in fact, in a number of cases, under this ruling, the ward was able to retain the farm and continue its operation, which would not have been the case had the loan not been closed. 5 6o THE FEDERAL FARM-LOAN farm-loan association established in and for the county in which the land is situated. The Farm Loan Board has ruled that under the term equipment may be included the improvements needed in the conduct of the farm to facilitate its operation, including teams, as well as machinery, tools, and the like. The term improvement has been defined to include anything in the form of a beneficial structure or any useful, permanent, physical change tending to increase the productive value of the farm ; for example, clearing, tiling, draining, fencing, and building. In determining what land is acceptable as security for a federal-farm loan, the Farm Loan Board has held that "it is not necessary that all the land included in the mortgage shall be under cultivation"; that "one of the purposes for which money may be bor- rowed is to prepare land for cultivation"; that "a reasonable amount of pasture land in connection with a farm is desirable"; and that "such pasture land may be appraised in such appraisal." The board has ruled further that "loans may be made on lands which are primarily agricultural lands, on which, how- ever, there are leases carrying the right to remove oil, gas, or other minerals, provided that the extent to which such use may interfere with the use of the land for agricultural purposes be taken into consideration"; and that "the land bank require the borrower to in- clude in his mortgage his rights under such lease"; and that "any proceeds therefrom shall be applied to the payment of the mortgage." Where lands under drainage projects are subject to a fixed annual charge the board has ruled that "this charge may be regarded SYSTEM IN OPERATION 6i as of the same nature as a municipal or school-district tax, which does not prevent the making of a loan on such land, but must be taken into account in apprais- ing its value." Orchard lands and lands under irrigation or drain- age projects have been subjects of special considera- tion by the Farm Loan Board. Orchard lands in many sections of the United States are highly devel- oped and very productive. In some cases, however, these lands have no value for other agricultural pur- poses. The Farm Loan Board has taken the view that "the value consists of the trees and not of the land, and trees are not a 'permanent, insurable im- provement' in that they are subject to utter destruc- tion by either freezing or neglect." As a consequence, the board ruled that "where the lands have a basic agricultural value, such value shall be the basis for loans"; that "orchards shall not be regarded as per- manent improvements, but shall be taken into con- sideration as enhancing the general value of the land and in determining its productive value." A con- sideration of the difficulties presented in making loans on irrigation and drainage projects necessitated em- ploying an experienced engineer. Considerable discussion took place during the early period of operation as to what constituted a farm for the purpose of making a loan under the farm-loan system. Applications were submitted for loans on lands which, in fact, were summer homes or suburban lots. This problem was solved by the Farm Loan Board by applying an economic test, as stated in the following rule: 62 THE FEDERAL FARM-LOAN A farm must be of sufficient area to yield at the hands of an ordinary capable farmer, putting it to the use to which it is gen- erally adapted, and using average methods, an income sufficient to support the family of the applicant and discharge the interest and amortization payments.^ While the period of operation of the farm-loan sys- tem is yet too brief to hazard a prediction as to the beneficial effects which will rerult from the provision of the Farm Loan Act specifying the purposes for which loans may be made, it is of interest to note that, from a detailed statement issued by the Farm_ Loan Board covering 83,826 loans aggregating $251,- 426,600, II per cent of the amount loaned was used for the purchase of land mortgaged, and 2 per cent for the purchase of other land, making a total of 13 per cent for the purchase of land; 9 per cent for buildings and improvements; 2 per cent for imple- ments and equipment; 3 per cent for the purchase of live stock; 59 per cent for the liquidation of existing mortgages; 9 per cent to pay other debts; and 5 per cent for the purchase of stock as required in the Act.^ To insure against the use of the proceeds of Federal farm loans for other than productive purposes, the Farm Loan Act was amended in April, 1920, prohibit- ing the refunding of any mortgages unless the indebt- edness was incurred for agricultural purposes.^ The far-reaching effect of this compulsory direction of money to productive channels will benefit not the far- mer alone — its value to the country at large will in time manifest itself by higher standards of living. 1 The use of the term average has reference to the methods of farm- ing in a given locality and not to an area as large as a state or land- bank district. ' Second Annual Report of the Federal Farm Loan Board, p. 8 8 Public Document No. 182, Sixty-sixth Congress, Section 4. V FEDERAL FARM LOANS (CONTINUED) THE success of any system of making farm loans depends upon the correct appraisement of land values. Whatever safeguards there may be in the way of restrictions upon purposes for which loans may be made, limitations on the amount to be loaned to a certain percentage of the farm value, or the establish- ment of insurance funds against losses, of surpassing importance is the correct valuation of the security underlying the loans. If the work of appraising is carelessly or faultily performed, the result is soon re- flected in an increasing number of foreclosures and overdue interest payments. This condition, unless cor- rected, leads to serious difficulties and eventual disaster. The methods of ascertaining the value of farm prop- erty are perhaps as varied as there are men engaged in the work of farm appraisal. The scientific appraiser informs us that the value of the land plus the value of the buildings, when the buildings meet the "average adequate" needs of the fanii, is the value of the farm; the personal element is important, though, under a national system of loaning such as the Federal farm- loan system, a matter of secondary consideration. We are told further that the value of the land and build- ings is arrived at through another factor — i.e., the net 64 THE FEDERAL FARM-LOAN earning power of the farm. Inasmueh as the earning power of the farm is affected by the personal element, we are again told that the personal element is equal to the difference between a liberal and a conservative loan and, in fact, determines which it shall be. The practical appraiser bases his valuations upon his find- ings, which can be interpreted to mean experience plus powers of observation. While a valuation placed upon a farm by either of these two appraisers may be sound, as a matter of fact the appraiser who combines scientific analysis with good judgment obtained through years of experience is much better equipped for his work than either of the other two mentioned. In a discussion of the method of arriving at the value of farm property and the basis upon which loans are made, one must use as his text the plain mandate of the law itself. Section 12, subdivision 5, of the Act, provides that : ... no such loan shall exceed fifty per centum of the ^'a]ue of the land mortgaged and twenty per centum of the value of the per- manent insured improvements thereon, said value to be ascertained by appraisal, as provided in section ten of this Act. In making said appraisal, the value of the land for agricultural purposes shall be the basis of appraisal and the earning power of said land shall be a principal factor. In order that this provision of the law might be more clear to the loan committee of the national farm-loan association, the Farm Loan Board issued the following ruling : The appraisement of a faim shall represent the best judgment of the loan committee as to the value of the land in ciucstion, the principal factor being the productivity of the land when used for agricultural purposes, but taking also into consideration the sala- bility of the land and prevailing prices in the community. SYSTEM IN OPERATION 65 Section 10, paragraph 3, last sentence, of the Act, provides that "no such loan shall be made by said bank unless said written report^ is favorable." The Farm Loan Act, then, specifically recognizes the three traditional factors of farm appraisal — the land, buildings (improvements), and, to some extent, the personal security. While the personal element is a factor of considerable importance in the making of a Federal farm loan, for obvious reasons it is not and never can be the controlling factor under this system of making land-mortgage loans. One of our captains of finance is reputed to have said, "I would rather loan a million dollars to a man of good character than upon the best security in the world." While this is a splendid tribute to the worth of good character and lends emphasis to the oft-repeated statement that good character has become a favorite ground with bankers to lend upon, it is manifestly impossible in a national system of land-mortgage banking to consider the personal element of equal importance with the real security. Through the Federal fann-loan system loans are made by the tens of millions annually and this does not permit of intimate contact (except within the national farm-loan associations) with each bor- rower. Further than this, Federal farm loans are made for a period of a lifetime, during which the security — the farm — may change owners a great many times. The personal element may, however, be sufficient ground for the rejection of an application for a loan, regardless of the other two factors of the appraisal. The earning power of the land is sxjccifically recog- * The report by the government appraiser. 66 THE FEDERAL FARM-LOAN nized by the authors of the Farm Loan Act as the fundamental factor in arriving at its agricultural value. The sale value, however, bears a close relationship to the income-producing value or earning power of a farm. Where this is not the case, it is probable that other factors enter in, such as climatic or community advantages. There are, of course, instances of undue land inflation which seem to jar the relationship of all values and lend color to t^.c statement that the sale value is only indicative of the extent of the risk in making loans. A thorough knowledge of conditions, however, is sufficient to discount any sudden fluctua- tions in land values.^ An apphcation for a Federal Farm Loan is first ap- praised by the loan committee of the national farm- loan association, through which the application is made. 2 This committee submits a detailed written report, not only upon the value of the farm property and the character of the appHcant, but also regarding the neighborhood generally. This report, together with the committee's recommendations, is passed on by the board of directors of the association, which, in case it approves the same, elects the applicant to 1 To meet a situation of this kind the Farm Loan Board ruled that "where a farm has sold within a year at a price materially higher than the last previous sale, such enhanced price was not to be taken into consideration in making an appraisement"; and that "with a few negligible exceptions, not more than $ioo an acre was to be loaned on land devoted to general agricultural purposes, even in those sec- tions where sales were being made at prices ranging from $250 to $400 an acre." 2 An amendment to Section 10 of the Act authorizes the designation by the loan committee of the secretary-treasurer or some other person to make the necessary investigation on its behalf, but the result of this investigation must be signed by the members of the loan com^ mittee. — ^Federal Farm Loan Board, Circular No. 11, p. 5. SYSTEM IN OPERATION 67 membership and transmits the report with its recom- mendations to the land bank. The land bank, upon receipt of the application and report of the loan com- mittee and board of directors of the national farm- loan association (on one printed form), instructs a land bank appraiser to inspect the farm which is to be security for the loan. After making exhaustive in- vestigation, the appraiser submits his report and rec- ommendations to the land bank. The land bank has then before it all the essential facts, corroborated by its own investigator, together with such collateral facts as bear on the general conditions in the locahty, like the average rainfall, character of the soil, the water supply, transportation and market facilities, educational and social advantages. The method of arriving at the value of farm lands above outlined has proved to be eminently satisfac- tory. While it may appear somewhat cumbersome, experience has demonstrated that, once the machinery was established, it operated efficiently and rapidly. The fact that the Farm Loan Board reports but two instances where it has been necessary to take proper- ties in foreclosure, is evidence of the conservative character of the loans that have been made.* Assum- ing that the sale value is the best possible criterion by which to judge the value of the land for agricultural purposes, the Farm Loan Board has had data compiled on the sale of farms which constituted security for Federal farm loans. While the figures given do not include every sale made, they do cover 2,178 typical cases during the fiscal year that ended November 30, * Third Annual^Report_of the Federal Farm Loan Board, p. 13. 68 THE FEDERAL FARM-LOAN 19 1 9. These figures show that of the above number of sales, the loans made by the banks represented 39.98 per cent of the farm values as determined by the appraisers, and 33.41 per cent as determined by subsequent cash sales. They show further that these sales represented an advance of 19.46 per cent over the appraiser's valuation.^ The above observations and figures relate, of course, to the system as a whole, and do not indicate the peculiar difficulties in valuing farm property in certain land-bank districts. To illustrate: in almost every section of the country land has a per acre value. Such is, however, not the case in the New England states. A farm is bought and sold as a unit and not on a per acre basis. Ready sale does not depend upon the earning power of the land or the number of acres in the unit, but upon the desirability as a place of resi- dence — a combination of fine old buildings, fields, meadows, and babbling brooks, with some woodland, being more desirable than the most fertile acres. Under such conditions the problems of farm appraisal become very complex. But it is not New England alone that is confronted by peculiar local conditions. Other land-bank districts have had difficult problems in connection with appraising lands in their individual territory; in general these problems have been solved through the co-operation of the officers of the land bank and the Farm Loan Board. When the property of the applicant for loan has been appraised and the loan allowed by the land bank, the api:)licant is required to furnish abstract of title * Tliird Annual Report of the Federal Farm Loan Board, p. 14. SYSTEM IN OPERATION 69 and insurance in such amount as the land bank may designate. The abstract of title is then examined by the legal department of the land bank, the necessary legal papers drawn, executed, and recorded, and the loan closed. The practice of the land banks is to re- quire insurance to the amount of 60 per cent of the value of the permanent structures on the farm.^ Though the bulk of the insurance furnished is written in mutual companies, especially the small farmers' mutuals, a considerable amount is also written in old- line insurance companies. In certain sections of the country, owing to the remoteness of the property and the undesirability of the business, it is impossible for the owners to get insurance at all, and this has caused no little trouble and annoyance to the borrower and to the land bank. Together with other disadvantages, such as lack of uniformity of policies and mortgage clauses, it has prompted the Farm Loan Board to sug- gest that "the Federal land banks . . . write fire- insurance policies on permanent structures on the farms of the borrowers,"^ to the end that policies be 1 The Farm Loan Doard has ruled "that, wi^'h due discretion and discrimination in individual cases, tire insurance should be required whether it is a factor in the security or not. It is believed that where permanent improvements do not exceed the value of, say, JP300, they should not be taken into consideration as a factor in the loan, nor should insurance be required." The board expressed itself as follows on the desirability of insurance: "First, that without insurance, destruction of the buildings on a small farm might destroy its value as a farming unit. With insurance the borrower will be enabled to replace his buildings and contintie to live on the farm, or the loan will be reduced to a point of safety by the application of the funds from the insurance to the loan; second, the system owes some duty to the borrowing farmers in an educational way, and the board feels that it is well enough for the banks to encourage the habit among farmers of protecting themselves against loss by fire or other elements." ^ Second Annual Report of the Federal Farm Loan Board, p. 13. 70 THE FEDERAL FARM-LOAN issued uniform as to conditions, covenants, and mort- gage clauses, and all commissions be eliminated and the overhead expenses reduced. Obviously, certain advantages could be derived from such an undertak- ing. On the other hand, there is the objection that must come to the mind of anyone; namely, that the system has already a sufficiently large task to per- form, and that it is questionable whether the govern- ment should take over the function of insurance when individual effort is capable of performing it. The expenses of the land banks consist largely of the cost of making appraisements of land and ex- amination of title. To cover this cost the land banks are authorized under the Act to charge ap- pHcants for loans reasonable fees not exceeding actual cost. These fees are, however, materially less than the cost of the service, the difference being supplied from the earnings of the land banks. As has been stated,^ the land banks are realizing from borrowers a rate about nine-tenths of one per cent higher than the rate which they are paying on their bonds. From the loans made which repre- sent the bank's capital, against which no bonds have been issued, the land banks are realizing 53^2 per cent. The sum of these two items constitutes the gross an- nual profit on interest account. From this must be deducted all expenses in excess of the sum total of the fees charged to arrive at the net profits of the land banks. In accordance with the provisions of the Federal Farm Loan Act, each land bank carries to reserve ac- ^ See footnote, p. .•ja. SYSTEM IN OPERATION 71 count 25 per cent of its net earnings.^ Only after it has done so may it declare a dividend to the national farm-loan associations within its district. The na- tional farm-loan association, in turn, must carry 10 per cent of its net earnings to reserve account, ^ after which it may declare a dividend to its stockholders. Each borrower is required, through his farm-loan as- sociation,^ to become a stockholder to the extent of 5 per cent of the amount of his loan. He borrows at a 53/^-per-cent rate, but on a loan of $1,000 he receives only $950, being required to invest $50 in stock. Unless he receives a dividend on his stock he is paying $55 annually on a loan of $950, or about at the rate of 5.8 per cent, which, of course, is reduced by such amounts received as dividends on his stock. The Farm Loan Board calls attention to the fact that the dividends distributed for the year ended November 30, 1919, represent only 26 per cent of the net earnings of the land banks.'* It has the following comment to make thereon: While stockholders in a co-operative enterprise, whose stock- holding is enforced and not voluntary, have rights which should be respected, the board nevertheless feels that the credit of the banks as constant sellers of securities should be fortified to the fullest possible extent, and that they and their bondholders should be made absolutely secure by the accumulation of a surplus sufficient to take care of any eventuality, however unlikely, which it is at all possible to anticipate. When this object has been attained, dividends will undoubtedly be declared, and paid in a greater amount * See footnote, p. 26. ' Ibid., p. 26. * Except when a loan is made through an agency, in which case the borrower subscribes for a similar amount of stock in the land bank direct. * Third Annual Report of the Federal Farm Loan Board, p. 1 1 . 72 THE FEDERAL FARM-LOAN than at present, which, of course, will proportionately reduce the rate of interest to the farmers who borrow. The needs of agriculture cannot be construed to mean the financing of the so-called large farmers, for under usual conditions they are not in urgent need of credit. The land banks are not designed for capitalis- tic owners of farm lands, but for the great number of small cultivators who are the backbone of agriculture. Therefore, the Farm Loan Act requires that borrowers must be engaged, or about to be engaged, "in the cultivation of the farm mortgaged." The interpreta- tion which the Farm Loan Board has placed on this provision conforms to the spirit of the Act. It has ruled that farm owners who operate their farms, with or without hired help, and who therefore assume all the risks connected with the business, are entitled to loans under the Act. While this ruling prohibits the making of Federal farm loans on farm lands operated by tenants, whether on a share or money rental basis, it does not bar the tenant who wants to become a farm owner from securing a Federal farm loan. Suppose a tenant farmer has only $600 or $700 and desires to purchase a farm. The farm, we will say, is worth $5,000; the land $4,000, and the buildings $1,000. On this valuation the tenant could secure a maximum loan of $2,000 on the land and $200 on the buildings, or $2,200, for which he would give in ex- change a first mortgage on the farm. The $2,200 he pays to the seller as a first payment, retaining his savings for operating expenses. The seller would then take a second mortgage for the balance due, which he can do with perfect safety, giving a certain period SYSTEM IN OPERATION 73 of years to pay it out. A second mortgage in the past has not been a very desirable investment, for the rea- son that the holder took an additional risk which the holder of a first mortgage did not take; that is, if it became necessary to foreclose in order to protect him- self, the holder of the second mortgage had to buy out the holder of the first mortgage. In the transaction stated above, where the tenant secures a Federal farm loan, the situation is entirely different. Federal farm loans are made for a long period of time, on the amor- tization plan, and at a low rate of interest. In other words, such loans are made with a view to keeping the man on the farm. In the event, however, he defaults and it becomes necessary for the land bank to fore- close, the second mortgagee, acquiring title by fore- closure of his mortgage or by quit-claim deed from the borrower, can take over the first mortgage, being only required to pay the exceedingly small amortization installments as they come due, and not the entire loan. He may, of course, take the $2,200 paid to him by the purchaser, or so much thereof as is necessary, and pay it back to the land bank and get the farm again free from incumbrance. The popular idea of a second mortgage must therefore be revised when considering it in connection with a Federal Farm Loan. A number of local bankers, acting as secretary-treasurers of national farm-loan associations, have adopted with marked suc- cess the above plan of assisting tenant farmers who are worthy and who desire to become farm owners. That the land banks have operated with the pur- pose of rendering service to agriculture, rather than of building up enormous "dollars and cents" totals, 74 THE FEDERAL FARM-LOAN is reflected in the consolidated statement of financial condition, issued by the Federal Farm Loan Board. ^ Since organization, the statement discloses, 259,349 individuals have applied for loans aggregating $757,- 344,907. Of the amount applied for but $367,834,014 have been loaned to 131,035 farmers. The percentage of shrinkage in the number and amount of applica- tions is approximately 50 per cent, or a ratio of one loan closed to two applied for. The reasons for this shrinkage are numerous. During the early organiza- tion of the system it was found tha't an impression prevailed in many sections of the United States that the funds loaned were government funds, ^ which would be freely distributed without a business-lil'Ce considera- tion of the security offered. The disillusionment of those individuals who submitted applications under this mistaken idea was speedy, for it soon became known that the provisions of the law were being strictly adhered to and that no loans would be made on worth- less security or for speculative purposes. There were also individuals who submitted applications for loans with no thought of completing them, but merely to secure a government valuation of their property. This practice brought about a ruling by most of the land banks requiring a fee of five dollars be submitted with each application. This fee was credited to the appli- cant in the event the security offered was appraised; if the application was withdra-wTi before appraisal, the fee was returned to the applicant. ^ At the close of business, October 31, 1920. ^ Federal farm loans are not in any sense government loans. The funds from which they are made are created by the sale of Federal Farm Loan Bonds. vSYvSTEiM IN OPERATION n The granting of a Federal fann loan is controlled at four points in the process of making the loan. First, loans may be rejected by the farm-loan association; second, by the land-bank appraiser; third, by the Federal land bank; and fourth, by the Farm Loan Board. All canceled, withdrawn, or rejected loans come within one of these classifications. In those sections of the country where land values are high, the $10,000 limitation fixed by law has automatically caused the rejection of a great many loans. Farms that are rented, unimproved land, and land which is not dependable farming land have not been accepted as security for loans. A great number of loans have been withdrawn voluntarily by the applicant for various reasons. For instance, a farmer makes applica- tion in the month of May for closing on the first day of August of the same year. In July he finds that he will likely harvest a good crop and receive good prices. As a consequence he feels that he will be able to get along without making a loan, and therefore with- draws his application. In many instances the appli- cant has been unable to furnish an abstract disclosing a merchantable title to the land upon which he desires a loan. As a consequence, the land banks have had no alternative but to reject his application. It mani- festly would be of little value to enumerate further the reasons for the shrinkage referred to above, for every application canceled, withdrawn, or rejected is governed by a different set of facts and must be con- sidered by the proper officials in the light of all the circumstances affecting the case. This emphasizes the fact that the making of loans through the Federal 6 76 THE FEDERAL FARM-LOAN farm-loan system, as through any other loaning in- stitution or system, is not automatic or impersonal, but depends upon the ability, efficiency, and experience of those officials and employees within the system in whom is lodged the responsibility of valuing the security and allowing loans. The best possible criterion by which to judge the standard of service the farm-loan system has rendered since its establishment is the number of farmers it has served. Though loans may be made to the amount of $10,000, the figures quoted above indicate that no attempt has been made to "get big loans" to swell the totals of the system. On the contrary, the average loan is about $2,800. In those land-bank districts which embrace the older regions where land values are comparatively high, the average loan is, of course, larger. In other districts, in which the greater part of the loaning area is composed of undeveloped sections, the average is, naturally, lower. While the system of land-mortgage banking which prevailed prior to the establishment of the Federal farm-loan system rendered a distinct service to the agriculture of this country, agriculture had, as a rule, not only paid too heavy toll for this service, but it had not been granted under the most favorable terms end conditions. The primary purpose of the Federal Farm Loan Act is expressed in the first clause of its preamble, "To provide capital for agricultural devel- opment." If the operation of the machinery estab- lished in pursuance to the provisions of the Act has fallen short of this accomplishment, it should be dis- placed by one which comprehends it. If the farm- SYSTEM IN OPERATION 77 loan system has demonstrated its ability, within the short period since its estabUshment, to meet this need, then it should receive the heartiest co-operation from those individuals and institutions who are in a posi- tion to assist in its work. VI CO-OPERATIVE FEATURES OF THE FARM-LOAN SYSTEM THE Federal farm-loan system is not an adaptation, as is popularly supposed, of rural-credit systems established in foreign countries. In fact, its frame- work in no way resembles that of any other system, although it embodies some of the more important principles of the co-operative land-mortgage credit associations {Landschaften) of Germany. The farm- loan system as established is designed to meet Amer- ican conditions and needs, with a view to rendering service to the country at large and not to any particu- lar state or section. In European countries rural- credit systems were established in a small way for the benefit either of the very poor or of the very rich, and only through evolution and development have their services been extended and made available to farmers in general. While the structure of the farm-loan system in no way resembles that of foreign co-operative land-mort- gage credit systems, it rests upon the same foundation. The fundamental principle upon which all are based is co-operation of borrowers — that is, instead of the farmer-borrowers receiving their loans independently and individually, they organize, pool their securities, and thus obtain the most favorable terms. This prin- SYSTEM IN OPERATION 79 ciple is of prime importance to the establishment and development of a land-mortgage credit system in the United States. It was impossible for the farmers to obtain credit in accordance with their needs through independent or individual action. By associating themselves for the purpose of improving their credit facilities, they could place on the market a superior security. For this reason the national farm-loan asso- ciation was made an integral part of the farm-loan system. The national farm-loan association is a corporation, chartered by the Farm Loan Board, having perpetual existence unless, of course, it liquidates or consolidates with another association. It is not so much an aggre- gation of capital, though it has capital stock, as an association of individuals united for the purpose of improving their credit facilities. The farm-loan association is self-governing as re- gards its local affairs. The supreme authority is lodged in its board of directors, elected by the mem- bers of the association. This board in turn elects officers, and designates a person, who need not be a member of the association, to act as secretary- treasurer. The secretary-treasurer, as has been pre- viously stated, carries on the routine and clerical work of the association and is vested with authority to con- duct its current business affairs. New members are admitted only upon a favorable vote of a majority of the board of directors. The association then, through its board of directors, de- termines in the first instance the qualifications of the applicant. Our first thought is that this power would 8o THE FEDERAL FARM-LOAN be abused, but experience has shown that no deserving applicant has been refused consideration, while there are many instances where ne'er-do-wells have been very pointedly informed that the association would not become an indorser of their obUgations until their methods of farming showed improvement. This fea- ture, judiciously administered, will undoubtedly prove a stimulant to improvement and go far toward mak- ing membership in a national farm-loan association a badge of honor. The Federal farm-loan system was designed for the bona fide farmer and not for the speculator. In order that the farmer may reap the real benefits of the farm- loan system, the Farm Loan Act provides that the capital stock be subscribed by the farmers who borrow and not by the outside investing public. If the act had provided for pubhc subscriptions of stock the benefits would have gone to the subscriber and not to the fann- ers who borrow. It would have been of advantage to the outside public to increase the rate charged the borrower to "as much as the traffic would bear," for then their profits would have been greater. It was just such a policy of rate-setting that the Farm Loan Act was designed to prevent and does prevent. The farmers who borrow through the farm-loan system, and thereby become stockholders, are not so much interested in profits from their stock as they are in securing a loan at a low rate of interest. This can be assured only if they own the stock, because they can then dictate what the interest rate shall be, subject only to the rate at which farm-loan bonds could be marketed (allowing a small per cent above this rate SYSTEM IN OPERATION 8i necessary to defray the expenses incident to operating the farm-loan system). Any surplus is returned to the farmer-borrowers in the form of dividends. Under this plan they secure their loans at absolute cost. As has been stated, the farm-loan association is primarily an association of persons and not a combina- tion of capital. To insure against a few of the larger borrowers dominating the affairs of the association, through control of its capital stock, the Farm Loan Act provides that a member shall have one vote for each share of stock held by him, but in no case can a member cast more than twenty votes. In the man- agement of the association, therefore, majority rule prevails, for a member borrowing $2,000 casts the same number of votes as does the member who has secured a $10,000 loan. The members of the farm- loan association have at all times an influence in the management of its affairs in accordance with the co- operative spirit which permeates the farm-loan system. The Farm Loan Act provides for a double liability as the extent to which members of a farm-loan asso- ciation obligate themselves in case of default, though in European countries unlimited liability has been an accepted principle of co-operative credit. The term double liability was familiar to the people of the United States, for the stock in national banks and in most state banks, as well as many other forms of corpora- tions, carries this obligation, which undoubtedly ac- counts for its inclusion in the Farm Loan Act. This feature is in its nature a safety device, and an addi- tional assurance to the investor. Before the double- HabiHty provision can be resorted to, the land itself 82 THE FEDERAL FARM-LOAN must have depreciated over 50 per cent, the buildings be practically destroyed, and the association's funds exhausted. This eventuality is exceedingly remote. It must also be borne in mind that Federal farm loans are all made on the amortization plan, whereby the principal is being reduced annually or semi- annually, thus increasing the margin of security and reducing the land bank's equity every six or twelve months. Because of the conservative method of mak- ing loans, considered with the factors stated above, it is exceedingly unlikely that the h ability feature will ever become operative. It is of value, of course, as an additional assurance to the bond buyers and as a means of insuring a continued interest in the affairs of the association on the part of those members who might otherwise feel that they had no further concern with the association or its affairs, inasmuch as their own needs had been cared for. Among the enumerated powers of the national farm- loan association is the authority to issue certificates, bearing interest at not over 4 per cent annually and running for not longer than one year, against a deposit of current funds. These certificates are convertible into Federal farm-loan bonds when presented to the Federal land bank of the district in amounts of $25, or any multiple thereof. This provision of the Farm Loan Act was intended to encourage saving and the sale of farm-loan bonds in rural districts. It is pat- terned somewhat after the method employed by cer- tain co-operative credit institutions in European coun- tries designed to raise funds with which to make loans. In fact, many European institutions make SYSTEM IN OPERATION 83 loans solely from funds deposited with them, and do not issue debentures or bonds at all. This method of financing was possible by reason of their small begin- nings and steady growth over a long period of years. A land-mortgage system, however, of such proportions as to meet the needs of American agriculture, could not be financed in this manner without a disturbance of the already well-established and splendid system of savings banks and trust companies. It is doubtful whether any legislation could divert the deposits of thesb institutions in sufficient amounts to meet the requirements of a national land-mortgage system. While this feature of the system has not been called into operation, it is hoped that when money conditions become more steady, it may be a means whereby the farm hand and the tenant farmer may deposit their savings until they have enough to purchase an equity in a farm and secure a Federal farm loan thereon. The development of this provision of the Farm Loan Act may do much toward solving the tenant problem and eliminating absentee landlordism. While the Farm Loan Act does not permit the na- tional farm-loan association as such to function for any other purpose than those specifically provided by law, there is no reason, the Farm Loan Board points out, . . . why the usefulness of the association should stop with bor- rowing merely because their legal powers stop there. There is no reason why the farmers united in any national farm-loan association should not also associate themselves together for buying, for selling, for personal credit at the bank, or any other co-operative purpose. This point was further emphasized by the former commissioner of the Farm Loan Board when he said: 84 THE FEDERAL FARM-LOAN . . . the real object of Congress in providing the association fea- ture was to show the farmers the benefit of co-operation. When they saw what co-operating in borrowing had done for them, Congress believed that the farmers would tend to co-operate in all kinds of directions.^ The co-operative Idea embodied In a national farm- loan association extends through the entire farm-loan system. The farmer who borrows in the first instance subscribes to stock in the local association, and the association in turn subscribes an equal amount of stock in the land bank. As the Farm Loan Act pro- vides, the land banks will ultimately be owned co- operatively by the national farm-loan associations of the land-bank district, such associations being them- selves co-operatively owned by their members. The co-operative feature of the system extends even fur- ther, for the Farm Loan Act provides that land banks shall be liable for the obligations of every other land bank in proportion to the amount of their resources. It is therefore manifest that the system is co-operative from the ground up, so constructed in accordance with American ideas and ideals as to insure steady growth and sound development. The rapid forming of associations in every land- bank district dispelled the prevailing opinion that the farmers of this country would not co-operate for the purpose of improving their credit facilities. The con- tention was that in so far as American farmers were concerned there was no "tie that binds." This coun- try, it was said, was the melting pot of the countries of the world; consequently there were no bonds of an- 1 Address by Commissioner George W. Norris, delivered at Lansing, Michigan, October 14, 1919. SYSTEM IN OPERATION 85 ccstry, religion, ideas, and habits, such as made pos- sible the great co-operative credit systems in European countries. Moreover, we had no farm communities, so it was said. On account of the relatively large area of farms, our farmers lived in solitary houses. These factors, it was contended, were not conducive to co- operative effort, no matter how desirable it might be. After the system was launched, they were found to be theoretical obstacles only. The American farmer took readily to co-operative enterprise when it was demonstrated to be to his interest to do so. There were problems, however, which had to be overcome. The attempts in certain land-bank districts to form farm-loan associations along national, religious, or racial lines were discouraged, except in those localities where they did not interfere with the service the land banks had to render. Among the problems which the Farm Loan Board was called upon to solve can be mentioned the most desirable size for an association, the number of members, amount of loans, and extent of territory covered; the compensation of the secre- tary-treasurer, and the members of the loan com- mittee ; the amount and terms of surety bonds ; over- lapping of territory; the furnishing of abstracts of title; and the propriety of proposed charges for ap- praisal or determination of title. These problems involved questions of policy which the Farm Loan Board solved by adopting ' * such a ruling as would best carry out the purposes we believed that the Congress had in view in the passage of the Act." During the first year of operation, 1,839 national farm-loan associations were organized in the United 86 THE FEDERAL FARM-LOAN States.^ The following year this number was increased to 3,439,^ and at the end of the third year 4,018 farm- loan associations had been organized in all of the land- bank districts.^ Of the total number of farm-loan associations organized throughout the United States, 128 charters have been canceled, by consolidation or otherwise, leaving 3,890 associations in actual opera- tion.'* On December 31, 1920, there were 3,966 asso- ciations, which indicates that the organization of new associations is practically at a standstill.^ This is not due to any lack of interest upon the part of the farmer borrower. As the reader will recall, the number of associations is now in excess of the number of coun- ties in the United States. It follows that there is very little agricultural territory not already included within the territory of an existing association. The number of associations, therefore, will practically remain con- stant, and those already estabhshed increase their size and membership. In certain localities the forming of national farm- loan associations was undertaken by individuals whose object was to secure "easy money." They had no intention of building up permanent organizations in order that their benefits could be extended to their neighbors in the future. Fortunately, these attempts were not many. They emphasize, however, the im- portance of the personal factor in the forming of an association. Good, substantial farmers having formed » First Annual Report of the Federal Farm Loan Board, p. 30. * Second Annual Report of the Federal Farm Loan Board, p. 19. « Third Annual Report of the Federal Farm Loan Board, p. 20. *0n November 30, 1919. Third Annual Report of the Federal Farm Loan Board, p. 20. » Fourth Annual Report of the Federal Farm Loan Board, p. 5. SYSTEM IN OPERATION 87 an association were of course loath to admit shiftless and unworthy farmers to membership. There were locahties, however, where the shiftless and unworthy- farmers took things into their own hands and organized for the purpose of "getting some of this easy money." In one of the middle Northern states, the organization of two national farm-loan associations was begun in the same county. The first association had twenty-two charter members, whose applications for loans aggre- gated $45,000. The appraiser's valuations of the security offered placed the value of the land at $49,755 and the buildings at $14,375, which of course indicates that the amounts applied for were unduly high. Eighteen of the applications were approved by the land bank in an amount aggregating $26,400, approxi- mately one half of the amount applied for. Only three applications were granted in full. As a result this association was never completed. The second associa- tion began with twenty-seven charter members, whose applications totaled $54,950. The land-bank appraiser valued the security offered as follows: the land, $84,680, and the buildings, $44,510. Twenty-three of the applications were approved in the amount applied for and the association formed. It is clear that the second association represented a higher type of farmers than did the first association. Those farmers, how- ever, in the first association who made bona fide ap- plication for Federal farm loans were taken care of by an arrangement whereby they were transferred to the second association through consolidation of the two associations. Thus, while the shiftless were ex- cluded from membership, the benefits of the Farm 88 THE FEDERAL FARM-LOAN Loan Act were not denied to any worthy farmer in that locality. In those sections of the country where the lack of farm credit was not a decided handicap, the organiza- tion of national farm-loan associations presented a problem quite different from that in the newer and less-developed sections. It was often difficult "to get the association started" because of the desire of the farmers not to "antagonize" the local bankers. While there was ground for this feeling in some localities, in most districts it was far from being justified. The experience of a certain banker in the seventh land-bank district is typical. This banker in organizing his bank had taken in as stockholders some of the leading farm ers in his community. He established his bank on the principle that it had a service to perform not only to its stockholders and depositors, but to the com- munity as a whole. In the early part of 191 7, several farmers, who were customers of the bank, made in- quiry in regard to the Federal farm-loan system. The banker stated franldy the nature of a Federal farm loan and the service the land banks could render. He suggested that they make an effort to secure a suffi- cient number of farmers to form an association, if they were interested in securing the long-term, amortized loan which the land banks could make and which he, as a commercial banker, could not make. The neces- sary number of farmers was found and the association organized. Up to this time [the banker stated, in a letter to the author] the officers of this bank contended that the association should be handled by the farmers themselves and that it should not be SYSTEM IN OPERATION 89 handled through the bank. At the earnest request of the directors of the association, however, I accepted the position as secretary- treasurer. I had to do most of the work in the evening in order not to interfere with the work at the bank. AppHcations for loans came in so fast, however, that it was impossible to continue the work as a side line. I then got permission from the directors of the bank to merge the work as secretary-treasurer with that of the bank. This proved to be one of the best things that ever hap- pened to both the banlc and the association. It brought business to the bank from all parts of the county, for in making a Federal farm loan there usually was involved the closing up of a land deal or the transfer from one member of the family to another. Thus thousands of dollars were handled and the bank was in a position to secure time deposits for at least a part of the proceeds. The association benefited because every inquiry was given the same attention as the regular bank work and the applicant was fully informed as to the operation of the system as compared with the old method of mortgage banking. Each borrower became a booster not only for the association, but for the banlc, and both profited thereby. Of course we realize that if it were not for this fact it would not be possible for the bank to carry on the work of the association at a profit with the small salary paid the secretary- treasurer. We feel, however, that we have been repaid in added patronage and the good will of our farmers. The banker realized the fact that the farmers in his community must prosper before he, or his bank, could prosper. He had in mind the real importance of the country to the town, the interlocking of interests and consequent need of co-operation if both were to progress. The most important ofEcial of the association is the secretary-treasurer. The success of the associa- tion depends largely upon the kind of man who occu- pies that office. While the secretary-treasurer should be tactful, it does not necessarily follow that he should be a "good fellow" and allow irregularities to enter in to accommodate some member or prospective go THE FEDERAL FARM-LOAN member. He should have a knowledge of business affairs and conduct his office in a business-like manner. This does not necessarily mean that a secretary- treasurer should be a business man or a banker. The Farm Loan Board has compiled a report showing the occupation of secretary-treasurers as follows: 43 per cent of the farm-loan associations have as secretary- treasurers farmers; 30 per cent local business men; 16 per cent local bankers; 9 per cent lawyers; and 2 per cent men of other occupations.* The advantage of employing some one residing in the village or town where the association has its headquarters is appar- ent. The farmer member, having business to trans- act with the association, can do so when he comes to town on other errands. Such an arrangement facili- tates the business of the association in that the mail from the land bank, the register of deeds, and others, is received, and can be attended to the same day. An arrangement whereby the local bankers act as secretary-treasurers has been eminently satisfactory to many associations in some of the land-bank dis- tricts. This is especially true in the seventh Federal land-bank district. In two of the states of that dis- trict approximately 50 per cent of the associations have selected as their secretary-treasurer the local banker. In these states the bankers have indicated a desire to assist the farmers in perfecting their asso- ciations, and place at their disposal the auxiliary service w^hich the local banker can render in closing a Federal farm loan. This attitude on the part of the local banker has brought about a closer relationship * Second Annual Report of the Federal Farm Loan Board, p. 8. SYSTEiM IN OPERATION 91 and co-operation between town and country. What has been done in these two states has been done, though perhaps to a lesser degree, by many associa- tions in other districts. The long-term credit needs of the farmer have been cared for through the Federal farm-loan system, and the problem of supplying the short-term or seasonal requirements of the farmer is left to the country banker. This is as it should be, for the local banker is in no way equipped to make long-term loans. The money which he has on deposit is subject to with- drawal on demand or within a comparatively short time. Consequently he cannot tie up his money for a long period of time, but must so invest it that a steady stream of money flows into his bank to care for the demands made upon him. It is evident that great good will result from honest and active co- operation between the local bank and the farm-loan association. The co-operative spirit which permeates the Federal farm-loan system is therefore not con- fined to its own limits, but extends beyond, and in- vites individuals and institutions outside the organ- ization to assist in placing our basic industry — agri- culture — on a sound financial basis. VII SERVICE ASIDE FROM MAKING LOANS T^HE duties imposed by law upon those who are in '■' charge of the Federal farm-loan system involve principally the lending and collecting of money. The members of the Farm Loan Board have not, however, confined themselves to a strict interpretation of the Farm Loan Act, but have given it a broader inter- pretation in accordance with the spirit of co-operation which it embodies. This is evidenced by the service the system has rendered, aside from making loans. Certain services to the government, in addition to the making of loans to farmers, were, to be sure, en- joined by the Act upon the Federal land banks. The concluding clause of the preamble states that the system is intended "to furnish a market for United States bonds, to create government depositaries and financial agents of the United States, and for other purposes." The provisions of the law for performing these functions have been called into active operation and effectively carried out. During the fall of 191 8, the Federal land banks of Wichita, Spokane, and St. Paul were designated as financial agents of the United States, for the making of seed-grain loans to farmers in drought-stricken areas, the President of the United States having, at SYSTEM IN OPERATION 93 the request of the Secretary of Agriculture, set aside $5,000,000 for that purpose from his $100,000,000 war fund. This task involved the taking from each borrower of a note and mortgage upon the crop planted. In the discharge of this task loans were made by the land bank of Wichita to the number of 4,402 in the amount of $1,892,345; by the land bank of Spokane to the number of 6,149 in the amount of $1,949,934; and by the land bank of St. Paul to the number of 1,137 i^^ the amount of $358,559. This service was rendered to the government without charge, except the additional clerical hire made nec- essary by the transaction of the business.^ The Federal land banks have been of service to the government directly or indirectly on other occasions. The Farm Loan Act provides that 5 per cent of that part of the capital of the land bank, for which stock is outstanding in the name of the national farm-loan associations, shall be invested in United States gov- ernment bonds. As a matter of fact the land banks have at all times held United States government bonds in an amount in excess of that prescribed by law; in fact, as the Farm Loan Board points out in its second annual report, ^ an amount in excess of $7,000,000 (approximately the amount of capital stock of the land banks outstanding at that time in the name of national farm-loan associations) was invested in United States government bonds and United States certificates of indebtedness. As we have seen, it has been necessary for the land banks, in disposing of farm- 1 Third Annual Report of the Federal Farm Loan Board, pp. 18-19. 2 Second Annual Report of the Federal Farm Loan Board, p. 8. 94 THE FEDERAL FARM-LOAN loan bonds, to purchase United States certificates of indebtedness in large amounts, to be used as security in bond issues until such time as mortgages could be substituted. As the Federal farm-loan system devel- ops and expands, the land banks will undoubtedly become of greater service in the fiscal operations of the government. The provisions of the Farm Loan Act specifying the purposes for which loans may be made are of equal importance with the financial assistance rendered to the farmer-borrowers. These provisions make it a condition precedent to the granting of a loan that the proceeds be used for the purposes specified in the Farm Loan Act. As we have seen, these purposes include every productive use to which the farmer can apply the proceeds of his loan. The farmer's attention, therefore, has been directed toward using credit for productive purposes, with the result that he has mani- fested a greater interest in improved agricultural methods. This does not mean that the efforts of the United States Department of Agriculture are being duplicated, but rather that they are being assisted in a very effective manner. The purpose of the United States Department of Agriculture is to bring home to the people in rural sections the best things that have been learned of agricultural methods and needs. On the other hand, county agents of the United States Department of Agriculture have in many instances assisted in the organization of national farm-loan asso- ciations. In carrying out their duties as financial agents of the United States, the land banks of Wichita, Spokane, and St. Paul were indeed assisted by agents SYSTEM IN OPERATION 95 of the Department of Agriculture. Information has been disseminated by the extension department of the United States Department of Agriculture, and the state agricultural colleges, bearing on the advantages of the Federal farm-loan system, supplementing publications issued by the Farm Loan Board and the several land banks. The Federal land banks have rendered an inesti- mable service through their legal departments to the farmers of the country who have secured Federal farm loans. In some of the land banks as high as 30 per cent of the abstracts of title disclosed an unmarketable title to the land offered to the land bank for a loan. The legal department has listed the defects and ad- vised the farmer how to make his title marketable, thereby enabling him to secure a loan. In many states it was found that the abstracting of titles was prac- tically an unknown business. In other states, owing to the absolute destruction of many records, carelessness in the keeping and indexing of others, and the failure of landowners, in many instances, to record their evi- dence of title, it was found necessary to arrange for title insurance in order to protect the land banks from loss by reason of failure of title. ^ The result is that thousands of farmers who previously had no market- able title to their lands, and other thousands who did not know what kind of a title they possessed, have had the title to their land straightened out, for which the land banks have charged a fee so low that this service may almost be said to have been rendered gratuitously. In some districts the land banks have encouraged the ' Second Annual Report of the Federal Farm Loan Board, p. 12. 96 THE FEDERAL FARM-LOAN formation of co-operative buying and selling associa- tions, breeding associations, co-operative creameries, cheese factories, condensing stations, and potato ware- houses. They have encouraged the good-roads move- ment by informing the management of local associa- tions that they look with disfavor upon loans on farms which do not have ready access to good roads, where, as a consequence, the cost of transporting products to market is unduly high. Perhaps one of the most striking instances of the service that the land banks can render in improving the economic conditions over a large territory is found in the action taken by the Federal Land Bank of St. Paul in the summer of igi8. As a result of re- peated crop failures in western North Dakota, caused by drought, the economic condition of the farmers in that part of the state was at that time very un- favorable. The land bank sent a circular letter to every national farm-loan association in western North Dakota, calling attention to the fact that there were many grasses and feed crops that could be depended upon in periods of drought, as well as in normal years, and that instead of relying exclusively upon grains the farmers should turn their attention to the raising of live stock and keeping milk cows on the farm, so as to have a dependable income in times of drought as well as in times of plenty. The letter concluded with the statement: Hereafter we will only entertain applications from farmers who have shown from their farming operations in the past that they have a dependable income, and they must have live stock and dairy cows to assure this for the future. All loans that do not comply SYSTEM IN OPERATION 97 with these requirements will be rejected by us, because we 00 not consider them safe loans. You will imderstand that this ruling is not only to protect us and the farm -loan association, but is for the best interests of the fanners themselves. This ruling was most rigidly enforced, despite a con- siderable number of protests. The report of the State Agricultural College of North Dakota shows that the dairy production of the state increased 100 per cent during the fiscal year 1918-19, this increase being particularly large in the western part of the state. At least a part of this increase is due to the attitude of the Federal land-bank authorities. In those sections of the coimtry, particularly in the South, where lands have suffered from erosion, the land banks have insisted upon terracing as one of the conditions upon which they will make loans on rolling lands. Land-bank appraisers were instructed to in- form themselves relative to these conditions, and where damage had already occurred, and was lilcely to be increased, the land banks insisted that the borrower should terrace. Through the county agent of the United States Department of Agriculture the farmer was advised where and how to terrace. Until this had been done the land bank held out a sufficient amount of money from the applicant's loan to pay for this improvement. In other land-bank districts similar conditions arose which afforded the land bank an opportunity to be of additional service to the agricultural interests of their respective districts. The spirit of service is not confined to the Federal land banks. It is also found in the national farm-loan associations. While these associations were formed 98 THE FEDERAL FARM-LOAN primarily for the purpose of improving the credit facihties of their members, in many instances they have carried their co-operative efforts farther. In one of the large farm-loan associations in western North Dakota the secretary-treasurer, who is a banker, took it upon himself to induce each prospec- tive borrower to buy enough cows to give him a start in dairying. This secretary-treasurer also went into the sheep business in partnership with one of the members of the association, and these two men brought in cattle and sheep, supplying them to the neighboring farmers at reasonable prices. The records of the land bank of St. Paul show that there has not been a single delinquency in this association, despite the fact that it is located in a territory where drought conditions have prevailed to an extent which has caused very acute distress. In another instance, in the newer section of northern Wisconsin, a secretary- treasurer of one association prevailed upon his mem- bers to place the dividends on their stock in a fund to be used for the purpose of reloaning to any member of the association to purchase dairy cattle. During the past two years this fund has been turned over a number of times. The co-operative spirit which permeates the Fed- eral farm-loan system will go far toward solving the economic and social problems of our rural communi- ties. A great deal has been said of late concerning the trend of population from country to city. While the alarm over the depopulation in favor of urban districts is as old as history, it nevertheless behooves us to inquire into the status of this "back-to-the- SYSTEM IN OPERATION 99 city" trend at this time. This gradual migration from country to city injures in no way the welfare of the rural districts, except in so far as it has to do with farm labor. The result to the rural poi^ulation is to increase the size of the farms — that is, to widen the scope of agriculture for those who remain on the farms, and increase the price of food products to such an extent as the supply of subsistence needed for the country at large is reduced or menaced. The injury- results rather to the nation at large. It therefore becomes our duty to seek out the causes and apply the remedy. The United States Bureau of Census reports that in 1 9 10, 3 1. 1 per cent of the population of the United States lived in cities of 8,000 or more, while in 1790 there were but 3.3 per cent of such urbanitcs. In 19 10, the bureau estimated that 46.3 per cent of our people were urban (reckoning cities of 2,500 or more as urban) as compared with 38.1 per cent in 1890 and 40.5 per cent in 1900; while 53.7 per cent in 1910 were rural in comparison with 63.9 per cent in 1890 and 59.5 per cent in 1900. The preliminary estimate of the bureau for the year 1920 shows that 48.1 per cent were rural (including villages) and that 38.8 per cent of our population were actually living on farms. This same report shows that 51.9 per cent were Uving in towns of 2,500 or over. The underlying causes of the cityward trend are social and economic — social in that the farmers' heme life has been isolated, and economic to the extent that adequate facilities had not been provided for the marketing of their security. Their social requirements loo THE FEDERAT. FARM-LOAN cannot be caicd for 1 )y farm colonies or ' ' back-to-the- land ' ' movements. These have been but local in scope, with few exceptions were begun for mercenary mo- tives, and, when the dollar had been squeezed out, they were left to their fate. Social, cultural, voca- tional, and recreational needs of our rural population can, however, be met in other ways. Counter at- tractions equal in scope to those of the cities can be brought to the country; country life can be and ought to be improved; the comforts and conveniences of the city home can be brought to the country home; and rural life can be made more attractive by bring- ing to rural districts more amusements and recrea- tions for the child and the adult. The solution of the economic problem is essential to the solution of the social problem. Social advan- tages cannot be brought to our rural districts unless our farming industry is adequately financed. The farm, in the first instance, must be put on a paying basis if the community itself is to prosper. When this condition prevails rural life will become more desirable. The youth of the country will not drift to the city, but will look upon farming as an honorable and useful life, with real aims and ideals. The present importance of agriculture to civiliza- tion lies in the number of people it supports ; its ulti- mate importance lies in the fact that it must con- tinue to provide supplies for an ever-increasing popu- lation. The problems of our agricultural industry concern every member of society, and it behooves us to give them our earnest consideration. The Federal farm-loan system is a forward step toward the SYSTEM IN OPERATION loi solution of these problems in the United States. Its principal purpose is to provide for our agricultural industry an adequate market for the security it has to offer, which is the soil itself, with a view to properly developing that soil. This, in the last analysis, is the object and aim of the Federal farm-loan system. That this purpose is of great moment to agriculture and to the nation at large is not to be gainsaid. That it has and is serving this purpose is a matter of record. APPENDIX A JOINT-STOCK LAND BANKS 'T*HE Federal Farm Loan Act provides for two sepa- ■'■ rate and distinct types of banks within the Fed- eral farm-loan system — the Federal land banks and the joint-stock land banks — both of which are under the general supervision of the Federal Farm Loan Board. Since the field of operation of the Federal land banlcs was to include the whole nation, and since their establishment was mandatory, while on the other hand the joint-stock land banks were to be set up only here and there and were in all cases only per- missive, we may conclude that Congress regarded the Federal land banks as the important part of the system. The provision of the act relating to joint- stock land banks is as follows: That corporations, to be known as joint-stock land banks, for carrying on the business of lending on farm mortgage security and issuing farm-loan bonds, may be formed by any number of natural persons not less than ten. Congress, In providing for the establishment of 'joint-stock land banks, did not intend to destroy established mortgage concerns doing a reputable busi- ness. Provision was therefore made whereby such in- stitutions, or any new joint-stock land banks that 104 THE FEDERAL FARM-LOAN might be established, would be clothed with the same advantages as Federal land banks in order that all might do their part toward serving the farm-loan needs of the eountry. Any joint-stock land bank, so the Farm Loan Act provides, must have, before it is permitted to com- mence business, a subscribed capital of at least $250,- 000, one half of which must have been paid in. The stockholders, ten or more persons, elect from their number a board of directors of not less than five, who select from their number the necessary officers. The capital stock of the joint-stock land banks is subscribed by investors, the borrowers not being required to sub- scribe, as they must in case they obtain a loan through the Federal land banks. Dividends are, of course, paid only to the stockholders. The joint-stock land banks secure funds for loaning purposes, as do the Federal land banks, by the sale of bonds which they are permitted to issue up to fifteen times their capital and surplus. While the bonds of the Federal land banks have behind them the assets and credit of all of the twelve Federal land banks, those of each joint-stock land bank stand alone. They enjoy the same privilege of tax exemption as do the bonds of the Federal land banks. No joint-stock land bank is permitted to receive deposits or to transact any banking business not expressly authorized by the Farm Loan Act. The territory within which any joint-stock land bank may operate is limited to the state in which it has its principal office and one con- tiguous state. The Farm Loan Act provides that all loans made by joint-stock land banks must be on the SYSTEM IN OPERATION 105 amortization plan and shall in no case bear a rate of interest in excess of 6 per cent. While no specific limitation is fixed by the Farm Loan Act upon the amount that a joint-stock land bank may loan to any borrower (except that no loan may be made in excess of 50 per cent of the value of the land and 20 per cent of the permanent insured im- provements thereon) and while there is no stipulation as to the use of the proceeds of a loan, the Farm Loan Board, in the exercise of its general supervisory powers, has ruled that a joint-stock land bank may not make a loan to any borrower in excess of 1 5 per cen* of its capital stock, nor, in any event, in excess of $50,000. The Farm Loan Board, in order to control the purpose as well as the amount to be loaned, was of the opinion that the loans made by the joint-stock land banks should bear some relation to the primary purposes for which the farm-loan system was established, "to pro- vide capital for agricultural development," and, ac- cordingly, issued a ruling to the effect that loans are not to be made unless their purpose may fairly be said to be related in some way to agricultural development. The solicitor of the Treasury, in response to a request for a ruHng upon the subject from the Farm Loan Board, held that joint-stock land banks were subject to the same prohibition as Federal land banks against making loans to corporations. Upon review, the Attorney-General of the United States approved the opinion of the Solicitor of the Treasury. Joint-stock land banks, despite the advantages claimed by reason of the fact that they could make loans directly to farmers without the intervention of any io6 THE FEDERAL FARM-LOAN national farm-loan association, were slow in organizing. During the first year a great number of "promoters" in some of the Western and Southern states organized what were called "rural-credit associations," repre- senting that these associations would subsequently be incorporated as joint-stock land banks under the Farm Loan Act. An early ruling of the Farm Loan Board, however, to the effect that no charter would be granted to any joint-stock land bank in the organiza- tion of which there had been any expense for promo- tion soon put a stop to these fraudulent schemes. Four hona-fidc joint-stock land banks had been organized up to November 30, 191 7. By November 30, 1918, five more had been organized, making a total of nine, which in the aggregate had made loans up to that date to the amount of $7,289,870, which was less than 5 per cent of the total business done by the system. During the twelve months ending November 30, 191 9, however, the joint-stock land banks increased in num- ber from nine to thirty, the aggregate paid in capital from $2,010,850 to $8,638,650, and the total volume of business from $7,289,870 to $54,126,357.75. The Farm Loan Board, in its third annual Report to Congress, states the relative proportion of business done by the two classes of banks : In the month of November, 191 7 [the report says], the loans made by the joint-stock land banks represented 15 per cent of the busi- ness of the system for that month. In the month of November, 1918, the loans made by these banks represented 38 per cent of the system. The orders given for the engraving of farm-loan bonds bearing date November i, 191 9, to be used between that date and May i, 1920, indicate that the joint-stock land banks expect to do a volume of business in that period approximately SYSTEM IN OPERATION 107 75 per cent of that expected to be done by the Federal land banJcs. It may therefore be said that the increase in number, and the development of the business, of joint-stock land banks is the out- standing feature of the operations of the Federal farm-loan system during the past year. The development of the business of the joint-stock land banks during the year 19 19 probably did not re- sult in the absorption of any considerable amount of business that would otherwise have gone to the Federal land banks. In fact, the loans made by the Federal land banks during the year exceeded those of the pre- vious year by $25,000,000, with every indication to- ward an even greater demand for loans when the operations of the system were temporarily halted by the litigation involving the constitutionality of the Federal Farm Loan Act. The business of the joint- stock land banks, therefore, seems to have been that which would otherwise have gone to the old-line mort- gage companies. An indication of the possible profits of a joint-stock land bank is given in the Report of the Farm Loan Board above referred to as follows: For the purpose of estiinating the probable profits of a joint- stock land bank, a pure estimate is of as much value as any demonstrated results to date. It is easy to see that the gross profits of such a bank are 6 per cent on its capital and i per cent on the volume of farm-loan bonds outstanding, which represents IS per cent additional, as the amount of bonds issued may be fifteen times the capital stock. It has been the practice of these banks to realize a small premium on the sale of their bonds. These premiums, added to the charges which they are entitled to make against borrowers, should nearly balance the cost of "getting business on the books." Any balance lacking would certainly be made up out of the profits of the following year. From the gross 9 io8 THE FEDERAL FARM-LOAN earnings, which would amount to 21 per cent upon the stock, if all the money of the institution could be kept invested all the time at 6 per cent, must be deducted the loss on temporarily unproduc- tive funds and the expense of doing business. The net return is dependent upon the ability of the management to keep down expenses and minimize the amount of idle funds. As a result of agitation in Congress against the joint- stock land banks, an amendment was adopted to the Farm Loan Act (approved May 29, 1920) providing for the liquidation of joint-stock land banks. This amend- ment states, in effect, that any joint-stock land bank may go into voluntary liquidation upon a two-thirds vote of its shareholders. During the year 1920 three joint-stock land banks, two located in the state of Virginia and one in the state of Kansas, availing themselves of the privilege of this amendment, went into voluntary liquidation. The proponents of the joint-stock land-bank feature of the Farm Loan Act urge in their behalf the fact that in the making of a loan the joint-stock land banks deal directly with the farmer, and not, as do the Fed- eral land banks, through an association of farmers. Therefore they contend there is no red tape or delay in the making of a loan. In answer it has been stated that the weight of this argument loses its force from the fact that loans, through the Federal land bank, are made for thirty years or more. A farmer securing such a loan ordinarily does not demand that it be closed immediately after making application. In addi- tion it should be noted that the making of loans through the Federal land bank was greatly expedited by certain amendments to the Farm Loan Act per- mitting the handling of a loan in the country almost SYSTEM IN OPERATION 109 entirely by the secretary-treasurer of a national farm- loan association, thereby offsetting what little advan- tage there might be in making the loans directly through an agent to the farmer. The contention has also been made that joint-stock land-bank loans were more favorable to the farmer borrowers for the reason that they were not recjuired by law to invest 5 per cent of the amount of their loan in capital stock, as is the case in the event a loan is obtained through a Federal land harik. The line of demarcation between the two banks is here clearly drawn. The joint-stock land banks are owned and operated by private investors and the profits are dis- tributed in the form of dividends to its stockholders. The Federal land banks, on the other hand, are, as contemplated by the Act, owned and operated by the farmer-borrowers. They are the stockholders, their stock holdings being represented by 5 per cent of the amount of their loans. The earnings of the Federal land bank are distributed to the farmer-borrowers in the form of dividends on their stock holdings, thus proportionately reducing the amount of interest paid on their loans. It is often stated that if a farmer bor- rows from a joint-stock land bank he receives the full amount of his loan, while the Federal land bank gives him only nineteen twentieths of the amount he applies for. While technically this is true, as a matter of fact the farmer makes application for such additional amount as is necessary to cover his stock subscription. The earning power of the farmer's stock holding is, as we have seen, not of prime importance. The fact that he has a voice in fixing the interest rate, subject to pre- no THE FEDERAL FARM-LOAN vailing money conditions, is of greater consideration. On the other hand, the incentive for gain which is ever present with the joint-stock land banks makes the earning power of the stock the first consideration, as in any other privately owned and operated institution. Purpose. APPENDIX B THE FEDEl^L FARM LOAN ACT (Approved July 17, igi6) (39 Stat. 360) As amended January 18, 1918 (40 Stat. 431); April 20, 1920 (Public Document No. 182, Sixty-sixth Congress); and May 29, 1920 (Public Document No. 232. Sixty-sixth Congress). AN ACT TO provide capital for agricultural develop- ment, to create standard forms of investment based upon farm mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create Government depositaries and financial agents for the United States, and for other purposes. Be it enacted by the Senate and House oj Representatives of the United States of America short titie. ^ •> J Farm Loan Act. in Congress assembled, That the short title of f this Act shall be "The Federal Farm Loan Act." Its administration shall be under the de^Farm Loan Boa"d: direction and control of the Federal Farm Loan Board hereinafter created. DEFINITIONS Sec. 2. That wherever the term "first mortgage" is used in this Act it shall be held 112 THE FEDERAL FARM-LOAN First mortgage de- ^^ Jncludc sucli classcs of fifst HcHS Oil farm ^'^'"^' lands as shall be approved by the Federal Farm Loan Board, and the credit instruments secured thereby. The term "farm-loan bonds" shall be held to include all bonds fined"^'" '"^" ^°'^'^^ ^'^' secured by collateral deposited with a farm- loan registrar under the terms of this Act; they shall be distingiiishcd by the addition of the words "Federal," or "joint stock," as the case may be. FEDERAL FARM LOAN BOARD Sec. 3. That there shall be established at Federal Farm Loan thc scat of govenimcnt in the Department of Bureau established. , 1 /-r> 1 1 1 • . 1 . 1 the treasury a bureau charged with the execution of this Act and of all Acts amenda- tory thereof, to be known as the Federal Farm Loan Bureau, under the general super- vision of a Federal Farm Loan Board. Said Federal Farm Loan Board shall con- To consist of five sist of five mcmbcrs, including the Secretary members, including r ^ rr\ Secretary of Treasury Qi thc Trcasury, wlio sliall bc a mcmbcr and (ex ofticio), to be ap- "^ pomted by the Presi- chairman ex officio, and four members to be dent. ' appointed by the President of the United States, by and with the advice and consent of the Senate. Of the four members to be Bipartisan; must be appointed by the President, not more than citizens, and devote en- 1111 • ir i--i tire time. two shall bc appointed from one political party, and all four of said members shall be citizens of the United States and shall devote their entire time to the business of the Federal Farm Loan Board; they shall receive an SYSTEM IN OPERATION 113 annual salary of $10,000 payable monthly, salaries and expenses together with actual necessary traveling ex- penses. One of the members to be appointed by the President shall be designated by him to serve for two years, one for four years, one for six "^^""^ °^ °^^^- years, and one for eight years, and thereafter each member so appointed shall serve for a term of eight years, unless sooner removed for cause by the President. One of the mem- bers shall be designated by the President as „ . , _ ° "' Designate Farm the Farm Loan Commissioner, who shall be Loan commissioner. the active executive officer of said board. Each member of the Federal Farm Loan Board shall oath of office to be •I_^ • nfj. J J" J. i.* r 1 • • ±. taken within 15 days. withm niteen days alter notice oi his appoint- ment take and subscribe to the oath of office. The first meeting of the Federal Farm Loan Board shall be held in Washington as ^^/^^^^ ilTwashinS soon as may be after the passage of this Act, at a date and place to be fixed by the Secre- tary of the Treasury. No member of the Federal Farm Loan Board shall, during his continuance in office, Members cannot be '-' associated with other be an officer or director of any other institu- P^^^"'^^ or mortgage -' interests. tion, association, or partnership engaged in banking, or in the business of making land- mortgage loans or selling land mortgages. Before entering upon his duties as a member of the Federal Farm Loan Board each member shall certify under oath to the President that oath taken. he is eligible under this section. The President shall have the power, by and 114 THE FEDERAL FARM-LOAN Vacancies in board With tlic aclvicc and consciit of thc Scnate, filled by th« President. ^^ ^^jj ^^^ vacancy occurring in the member- ship of the Federal Farm Loan Board; if such vacancy shall be filled during the recess of the Senate a commission shall be granted which shall expire at the end of the next session. Board to appoint Thc Fcdcral Farm Loan Board shall ap- de'i^t'r" eglt'ra7s'' ""fo! point 3. farm-loan registrar in each land-bank each district, land bank ,..,. . i'j_* r • r appraisers, and land- distnct to reccivc applications tor issues or farm-loan bonds and to perform such other services as are prescribed by this Act, and may appoint a deputy registrar who shall during the unavoidable absence or disability of the registrar perform the duties of that office. It shall also appoint one or more land-bank appraisers for each land-bank dis- trict and as many land-bank examiners as it shall deem necessary. Farm-loan registrars, All to be public offi- deputy registrars, land-bank appraisers, and o'jJ!:r ',nst.uai:^-;^"!i " land-bank examiners appointed under this ''^"''^^^'^' section shall be public officials and shall, dur- ing their continuance in office, have no con- nection with or interest in any other institu- tion, association, or partnership engaged in banking or in the business of making land- mortgage loans or selling land mortgages: meTuTrTp''eciTwor''k Pwvided, That this limitation shall not apply to persons employed by the board temporarily to do special work. ^ , . ^ The salaries and expenses of the Federal Salaries and expenses ^ paid by United States. YciTm Loan Board, and of farm-loan regis- SYSTEM IN OPERATION 115 trars and examiners authorized under this scetion, shall be paid by the United States. Land-bank appraisers shall receive such com- pensation as the Federal Farm Loan Board rioar.i to fn compen- ■ 1 , 1 -r-» sation of land-bank ap- shall fix, and shall be paid by the Federal p'^i^ers to be pai.i by ■■• '' respective land banks. land banks and the joint-stock land banks which they serve, in such proportion and in such manner as the Federal Farm Loan Board shall order. The Federal Farm Loan Board shall be Roard may employ , . ^ ^ necessary administra- authonzed and empowered to employ such tive force, attorneys, experts, assistants, clerks, labor- ers, and other employees as it may deem necessary to conduct the business of said board. All salaries and fees authorized in this section and not otherwise provided for shall . Salaries and fees fixed be fixed in advance by said board and shall united states. be paid in the same manner as the salaries of the Federal Farm Loan Board. All such ext^m;rt'e'd'Yn'm%r^v'i! attorneys, experts, assistants, clerks, labor- faw^ "^ civii-service ers, and other employees, and all registrars, examiners, and appraisers shall be appointed without regard to the provisions of the Act of January sixteenth, eighteen hundred and eighty-three (volume twenty-two. United States Statutes at Large, page four hundred and three), and amendments thereto, or any rule or regulation made in pursuance thereof : Provided, That nothing herein shall prevent employees in classified service the President from placing said employees in the classified service. „ , , , , . , Federal land banks Every Federal land bank shall semiannu- """'^ ^""^"^'^ '"^^"'^"''^ ii6 THE FEDERAL FARM-LOAN showing "compe"n"at\i^ ally submit to the Federal Farm Loan Board a Syeel""'"'' """"^ *""" schedule showing the salaries or rates of com- pensation paid to its officers and employees. Board must make The Federal Farm Loan Board shall annu- annual report to Speak- , c-, .■ i. i.i_ er of the House. ally make a lull rcport of its operations to the Speaker of the House of Representatives, who shall cause the same to be printed for the in- formation of the Congress. Examinations and re- The Federal Farm Loan Board shall from ra°nd%.anks'"to be'°made timc to timc Tcquirc cxaminations and reports to board and published. riii 11 1 ^itii of condition of all land banks established under the provisions of this Act, and shall publish consolidated statements of the results thereof. It shall cause to be made appraisals Board must require of fami lands Es providcd by this Act, and X^'cll^lmortTzai shall prepare and publish amortization tables tion tables to be pub- 1.1 1111 11 .• t r 1 lished. which shall be used by national farm-loan associations and land banks organized under this Act. Must prescribe forms 'pj^g Fcdcral Farm Loan Board shall pre- for statement 01 conni- -t^ ^"oVtsf'*""^ quarterly gcribe a foHTi for thc Statement of condition of national farm-loan associations and land banks under its supervision, which shall be filled out quarterly by each such association or bank and transmitted to said board. Bulletins of informa- j^ shall bc thc dutv of thc Federal Farm tion must be prepared * fng^d'vaniagestflmoT Lo^n Board to prcparc from time to time f^'ctu^nTirZlnt bulletins setting forth the principal features fann-ioan asTodaTions*! of this Act and through the Department of Agriculture or otherwise to distribute the same, particularly to the press, to agricultural journals, and to farmers' organizations; to SYvSTEM IN OPERATION 117 prepare and distribute in the same manner circulars setting forth the principles and ad- vantages of amortized farm loans and the protection afforded debtors under this Act, instructing farmers how to organize and con- i^^^.^ors to be ad- duct farm-loan associations, and advising in- l'^ntigis'^ot%Tm-\o'in vestors of the merits and advantages of farm- niethodsoPco-^^^^^^^ t 1 1 liT •j_'"a.j' credit to be explained. loan bonds; and to dissemmate m its discre- tion information for the further instruction of farmers regarding the methods and principles of co-operative credit and organization. Said board is hereby authorized to use a reason- able portion of the organization fund provided mSe^avifiaWe" ^""'^ in section thirty-three of this Act for the objects specified in this paragraph, and is instructed to lay before the Congress at each session its recommendations for further ap- ,. Further appropria- •*^ tions to be asked from propriations to carry out said objects. congress as needed. FEDERAL LAND BANKS Sec. 4. That as soon as practicable the united states to be T-,^ iT-> T T-i -iiiii-'iii divided into 1 2 districts, 1^ ederal r ann Loan Board shall divide the none to include a frac- ,_,.. .,_ 11' A11 tional part of a State. contmental united States, excluding Alaska, into twelve districts, which shall be known as Federal land-bank districts, and may be des- ignated by number. Said districts shall be apportioned with due regard to the farm-loan reftrence'^^toTam'^iiln needs of the country, but no such district "'^'"^^' shall contain a fractional part of any State. The boundaries thereof may be readjusted from time to time in the discretion of said board. ii8 THE FEDERAL FARM-LOAN One Federal land Tlic Fcdcral Farm Loan Board shall estab- bank in each district, jj^j^ -^ ^,^^^ Fcdcral land-bank district a Federal land bank, with its principal office located in such city within the district as said Title to include name board shall dcsitTnatc. Each Federal land of city where located. ° bank shall include in its title the name of the city in which it is located. Subject to the approval of the Federal Farm Loan Board, Branches any Federal land bank may establish branches within the land-bank district. Each Federal land bank shall be tempo- Temporary manage- i i /- i- mint vcste j xr o busi^ess^coliducfeT'"^' of the Federal Farm Loan Board, by-laws not inconsistent with law, regulating the manner in which its stock shall be trans- ferred, its directors elected, its officers elected or appointed, its property transferred, its general business conducted, and the privi- leges granted to it by law exercised and enjoyed. SYSTEM IN OPERATION 121 Seventh. To exercise, by its board of Exercise incidental f , 11 ii-i/v A powers necessary for directors or duly authorized orncers or agents, conduct of business, subject to law, all such incidental powers as shall be necessary to carry on the business herein described. After the subscriptions to stock in any Federal land bank by national farm-loan asso- when $100,000 stock ciations, hereinafter authorized, shall have ioan"^ass"cfa'tions/^^I . •• . 1 /• A .1 m 1 manent officers and di- reached the sum 01 $100,000, the orncers and rectors to be chosen -. , - .,1 11 11111 1 and take over manage- directors of said land bank shall be chosen ment. as herein provided and shall, upon becoming duly qualified, take over the management of said land bank from the temporary officers selected under this section. The board of directors of every Federal Permanent directors, . ^. ^ 1111 111 1 • ri nine in number, six land bank shall be selected as heremaiter elected by farm-ioan .... , associations, three ap- specmed and shall consist of nine members, pointed by Farm Loan ■^ , Board. each holding office for three years. Six of said directors shall be known as local directors, and shall be chosen by and be representative of national farm-loan associations; and the remaining three directors shall be known as district directors, and shall be appointed by the Federal Farm Loan Board and represent the public interest. At least two months before each election Notice of election of .-, T\ T /--> •• 111 jT directors and method the i^arm Loan Commissioner shall notify of nominations pre- each national farm-loan association in writing that such election is to be held, giving the number of directors to be elected for its dis- trict, and requesting each association to nominate one candidate for each director to 122 THE FEDERAL FARM-LOAN be elected. Within ten days of the receipt of such notice each association shall fonvard its nominations to said Farm Loan Commis- sioner. Said commissioner shall prepare a list of candidates for local directors consisting of the twenty persons securing the highest number of votes from national fann-loan associations making such nominations. At least one month before said election said Farm Loan Commissioner shall mail to each national farm-loan association the list of candidates. The directors of each national farm-loan association shall cast the vote of castiiiR votes for Said association for as many candidates on oca directors. ^^.^ j.^^ ^^ thcrc arc vacancics to be filled, and shall forward said vote to the Farm Loan Commissioner within ten days after said list of candidates is received by them. The candi- dates receiving the highest number of votes shall be elected as local directors. In case of a tie the Farm Loan Commissioner shall de- tennine the choice. Farm Loan Board The Federal Farm Loan Board shall deslg- designates district di- _ ^ _ rectors; fixes terms of nate onc of the district dircctors to serve for otticc. three years and to act as chairman of the board of directors. It shall designate one of said directors to serve for a term of two years and one to serve for a term of one year. After the first appointments each district director shall be appointed for a term of three years. re^'cUvrt'^ermsTo?- ^^ the first rcgular meeting of the board of hce for local directors, (jij-cctors of cach Federal land bank it shall SYSTEM IN OPERATION 123 be the duty of the local directors to designate two of the local directors whose term of office shall expire in one year from the date of such meeting, two whose term of office shall expire in two years from said date, and two whose term of office shall expire in three years from said date. Thereafter every local director of a Federal land bank chosen as hereinbefore provided shall hold office for a term of three Repuiar term after ^y. . . . , , , first ilestRnation, three years. Vacancies that may occur in the board years. of directors shall be filled for the unexpired term in the manner provided for the original unliTpfrcd^term'by eiic- selection of such directors. '''°"' Directors of Federal land banks shall have Directors mtist be , r , 1 , , • ^ , r 1I residents of district two been tor "at least two years residents 01 the years previous to eiec- . tion; one must be en- distnct for which they are appointed or gaged in farming, elected and at least one district director shall be experienced in practical farming and actu- ally engaged at the time of his appointment in farming operations within the district. No 1' J. r TTvj 11 Jl_ 1 1-111 • Cannot be connected director of a l^ederal land bank shall, during with other banking or > . . . ~f, pf, mortgage selling insti- his continuance m ornce, act as an omcer, tutwn or partnership. director, or employee of any other institution, association, or partnership engaged in bank- ing or in the business of making or selling land-mortgage loans. Directors of Federal land banks shall re- neSljIry^expeiles'^^in jj',' , ," ,1 addition to compensa- ceive, m addition to any compensation other- tion. wise provided, a reasonable allowance for necessary expenses in attending meetings of their respective boards, to be paid by the jec?"tr"Ipp?ovart respective Federal land banks. Any com- f^™ Loan Board. 9 124 THE FEDERAL FARM-LOAN pensation that may be provided by boards of directors of Federal land banks for directors, officers, or employees shall be subject to the approval of the Federal Fanii Loan Board. CAPITAL STOCK OF FEDERAL LAND BANKS Sec. 5. That every Federal land bank shall have, before beginning business, a subscribed st^ktlo.^oo?^"''^^ capital of not less than $750,000- The Fed- eral Farm Loan Board is authorized to pre- scribe the times and conditions of the pay- Board to prescribe . . -^ 1 j. 1 4.^ conditions of payment; mcnt oi subscnptions to Capital stocK, to may reject any sub- . . . , -. . , 6cription. reject any subscnption m its discretion, and to require subscribers to furnish adequate security for the payment thereof. Par value of shares Thc Capital stock of cach Federal land IVanyZ^.^ "'''""'''' bank shall be divided into shares of $5 each, and may be subscribed for and held by any individual, firm, or corporation, or by the Government of any State or of the United States. stock held by farm- Stock held by national farm-loan associa- Lr beTTnsrerred" o'r tions shall not bc transferred or hypothe- hypothecated. ^^^^^^ ^^^ ^^^ Certificates therefor shall so state. stock held by United Stock owned by the Government of the states receives no divi- United States in Federal land banks shall receive no dividends, but all other stock shall share in dividend distributions without No stock allowed any -i-> i , • i r i ^^„^ vote except that held preference, iiacn national larm-loan asso- by United States and ^ <,/-» r ,-r rj 'i. A farm-loan associations, riation and the Govemmcnt 01 tne Unitea they being entitled to one vote on each share, gtatcs shall be entitled to onc vote for each SYSTEM IN OPERATION 125 share of stock held by it in deciding all ques- tions at meetings of shareholders, and no other shareholder shall be permitted to vote. Stock owned by the United States shall be Y'!lT^ ^*''^''- '*°'''' vJ^J\J^^I\. wvviiwv-i t-fj i,*A.v^ ■_ voted by commissioner voted by the Farm Loan Commissioner, as as directed by board, directed by the Federal Farm Loan Board. It shall be the duty of the Federal Farm Books of subscription Loan Board, as soon as practicable after the passage of this Act, to open books of subscrip-;, tion for the capital stock of a Federal land bank in each Federal land-bank district. If sta'^tlrsu^'scrTes'^af 0I within thirty days after the opening of said X'rw"s"e takfn!'^ "°' books any part of the minimum capitalization of $750,000 herein prescribed for Federal land banks shall remain unsubscribed, it shall be the duty of the Secretary of the Treasury to subscribe the balance thereof on behalf of the United States, said subscription to be subject to^"aTafler''3o"dlys- to call in whole or in part by the board of "°''"" directors of said land bank upon thirty days' notice, with the approval of the Federal Farm Loan Board; and the Secretary of the ^.secretar. ^of j^reas^ Treasury is hereby authorized and directed to pay for same, take out shares corresponding to the unsub- scribed balance as called, and to pay for the same out of any moneys in the Treasury not —^ ^Tq increase of stoclc otherwise appropriated. Thereafter no stock thereafter except to •'••'• -"^ •11 borrowers on mortgage shall be issued except as hereinafter provided, loans. After the subscriptions to capital stock by national farm-loan associations shall amount original stock retired to s$75o.ooo in any Federal land bank, said L^o^eTatfons" 'sXcnbe banlc sliall apply semiannually to the pay- *"o.ooo. 126 THE FEDERAL FARM-LOAN ment and retirement of the shares of stock which were issued to represent the subscrip- tions to the original capital twenty-five per centum of all sums thereafter subscribed to capital stock until all such original capital stock is retired at par. pa?men?" by farm-loan At Icast twenty-fivc pcr ccntum of that associations must be_,(>.i • i t r t^i ii ii i held in quick assets. part oi the Capital of any Federal land bank for which stock is outstanding in the name of national farm-loan associations shall be held in quick assets, and may consist of cash in the vaults of said land bank, or in deposits in member banks of the Federal reserve system, or in readily marketable securities which are approved under rules and regulations of the Five per cent of such Federal Farm Loan Board: Provided, That capital invested in United States bonds, not less than five per centum of such capital shall be invested in United States Govern- ment bonds. GOVERNMENT DEPOSITARIES Land banks may be Sec. 6. That all Federal land banks and designated as public . . depositaries, except for jomt-stock land banks organized under this custom receipts; and " sTats'financiai a'^gents' ^^t, whcn designated for that purpose by the Secretary of the Treasury, shall be deposi- taries of public money, except receipts from customs, under such regulations as may be prescribed by said Secretary; and they may also be employed as financial agents of the Government ; and they shall perform all such reasonable duties, as depositaries of public money and financial agents of the Govern- SYSTEM IN OPERATIOIV 127 ment, as may be required of them. And the re.fufreK°k[nd^ba^il^ Secretary of the Treasury shall require of the "^ ^''''^"* Federal land banks and joint - stock land banks thus designated satisfactory security, by the deposit of United States bonds or otherwise, for the safekeeping and prompt payment of the public money deposited with them, and for the faithful performance of their duties as financial agents of the Govemraent. No Government funds deposited under the provisions of this section shall be invested in """"y ^^ invested ■c^ morttiaHe loans or mortgage loans or farm-loan bonds. No public deposits in mortKiiRe loans or in farm-loan bonds. NATIONAL FARM-LOAN ASSOCIATIONS Sec. 7. That corporations, to be known as organization farm- . . , loan associations. national farm-loan associations, may be or- ganized by persons desiring to borrow money on farm-mortgage security under the terms of this Act. Such persons shall enter into t.on'S'state'oblTof articles of association which shall specify in sc^ed.'""'"' te^'tory general terms the object for which the asso- ciation is formed and the territory within which its operations are to be carried on, and which may contain any other provision, not inconsistent with law, which the associa- ^^^y ^ntain any tion may see fit to adopt for the regulation consLteSTwlth law. '"' of its business and the conduct of its affairs. Said articles shall be signed by the persons uniting to form the association, and a copy thereof shall be forwarded to the Federal forwS^dcd'To 'pedlra^ land bank for the district, to be filed and land bank and med. preserved in its office. 128 THE FEDERAL FARM-LOAN Associations elect not Evcry national farm-loan aSvSociation shall !n''same"mannera's*n'a'- clcct, in tlic manner prcscribed for the elec- tional banks. ,, r-i- , r , • 11 i" tion of directors of national banking avssocia- tions, a board of not less than five directors, Directors hold office one year. wlio shall hold officc for the same period as directors of national banking associations. It shall be the duty of said board of directors to choose in such manner as they may prefer a secretary-treasurer, who shall receive such Choose a secretary- compcnsation as Said board of directors shall treasurer, fix his com- . ^ . ,. 1 11 1 pensation, elect other dctcrmme. Thc board of directors shall elect ofhcers and loan com- mittee of three. ^ prcsidcnt, a vice president, and a loan com- mittee of three members. Serve without com- Thc dlrcctors and all officers except the LoTn '^BoarT appro^xs sccretary-trcasurer shall serve without com- pensation, unless the payment of salaries to them shall be approved by the Federal Farm Loan Board. All ofhcers and directors ex- cept the secretary-treasurer shall, during their term of office, be bona fide residents of the territory within which the association is au- Must be residentb of- .1,,,. 11111 1 territory served; must thoHzed to do busmess, and shall be share- be shareholders. 111 1-1 • • holders of the association. Duties of secretary- Jt shall bc thc duty of the sccrctary- treasurer specified; act -^ "' ai ic ti board and in accord- My''"over'''pro°ceids"'^ol trcasurcr of every national farm-loan associa- loi^'undlf orlri'^of tion to act as custodian of its fimds and to ance'^with'^by-"aws!'°''^' dcposit the samc in such bank as the board of directors may designate, to pay over to borrowers all sums received for their accotmt from the Federal land bank upon first mort- gage as in this Act prescribed, and to meet all other obligations of the association, sub- SYSTEM IN OPERATION 129 ject to the orders of the board of directors and in accordance with the by-laws of the association. It shall be the duty of the secre- tary-treasurer, acting under the direction of the national farm-loan association, to collect, receipt for, and transmit to the Federal land- p^y ^^^^ ^n ^oUec bank payments of interest, amortization in- ^^nV""' ^^'^^"'^ ^^"'^ stallments, or principal arising out of loans made through the association. He shall be . . ^ Custodian of securi- the custodian of the secunties, records, tie^, records, and aii documents. papers, certificates of stock, and all docu- ments relating to or bearing upon the conduct of the affairs of the association. He shall furnish a suitable surety bond to be prescribed , ■, 1 ,1 -ry 1 1 -ry T Furnish bond for per- and approved by the l^ederal i^arm Loan formance of duties. Board for the proper performance of the duties imposed upon him under this Act, which shall cover prompt collection and trans- mission of funds. Pie shall make a quarterly ^^^t^'"' quarterly re- report to the Federal Farm Loan Board upon forms to be provided for that purpose. Upon request from said board said secretary-treas- urer shall furnish information regarding the Furnish statement of ^ " ^ condition. condition of the national farm-loan associa- tion for which he is acting, and he shall carry out all duly authorized orders of said board. He shall assure himself from time to time that proceeds^ oV^oanrire the loans made through the national farm- loan association of which he is an officer are applied to the purposes set forth in the appli- cation of the borrower as approved, and shall forthwith report to the land bank of the dis- properly applied. I30 THE FEDERAL FARM-LOAN trict any failure of any borrower to comply Report failure or ..i .1 , r 1 • 1* j^* , noncompliance with ap- With thc tcmis oi his application or mortgage. plication by horrowt-r; tt 1 11 1 i • 1 , . • 1 1 1 ascertain and report He shall also asccrtam and report to said bank delinquent taxes on morttjaecd land. the amount of any delinquent taxes on land mortgaged to said bank and the name of the delinquent. The reasonable expenses of the secretary- treasurer, the loan committee, and other officers and agents of national farm-loan asso- Expenses and salary ciations, and thc Salary of the secretary- of secretary - treasurer "^ "^ paid by absociation. trcasurcr, shall be paid from the general funds of the association, and the board of directors is authorized to set aside such sums as it shall deem requisite for that purpose and for other expenses of said association. When no such Directors may levy funds arc available, the board of directors assessment on members if necessity arises. may levy an assessment on members in pro- portion to the amount of stock held by each, which may be repaid as soon as funds are available, or it may secure an advance from from Federal laud bank thc Fcdcral land bank of the district, to be in anticipation of divi- . . . ^ , , <• • dends. repaid with interest at the rate of six per centum per annum, from dividends belonging to said association. Said Federal land bank is hereby authorized to make such advance and to deduct such repayment. Ten persona owning rr« • 1 1 i 1 land may form a farm- i cn Or morc natural pcrsons who are the loan association. 111 r owners, or about to become the owners, oi farm land qualified as security for a mortgage loan under section twelve of this Act, may spe^'cXd'neqmiments ^"itc to foHH a uatioual faDH-loan associa- having directors not ^^^^ 'pj^^y gj^^^ Organize subjcct to the re- SYSTEM IN OPERATION 131 quirements and the conditions specified in '^^e'reufyird^rers^i^e? this section and in section four of this Act, so JTeeTnott'lSX! far as the same may be appHcable : Provided, That the board of directors may consist of five members only, and instead of a secretary and a treasurer there shall be a secretary- treasurer, who need not be a shareholder of the association. When the articles of association are for- Report of loan com- mittee must accom- warded to the Federal land baiik of the dis- pany articles of associa- iTu.xv^v^v^ «v^ ^ tion, with amdavit of trict as provided in this section, they shall be f^j^Sf "o^'^iands accompanied by the written report of the loan fj-^^t.ie for mortgage committee as required in section ten of this Act, and by an affidavit stating that each of the subscribers is the owner, or is about to become the owner, of farm land qualified under section twelve of this Act as the basis of a mortgage loan ; that the loan desired by each person is not more than $10,000, nor $io,ooo%o^one%^e'rson. less than $100, and the aggregate of the de- $°o,oofTith ''origirral ^ , . ■, application, so that in- sired loan is not less than $20,000; that said itiai subscription to stock of land bank can- affidavit is accompanied by a subscnption to not be less than $1,000. Jr J ^ Application must state Stock in the Federal land bank equal to five '^^11'^^^^!^^^^''^'°'' per centum of the aggregate sum desired on mortgage loans; and that a temporary organi- zation of said association has been formed by the election of a board of directors, a loan committee, and a secretary - treasurer who subscribes to said affidavit, giving his resi- dence and post-office address. to tSate'by direct! Upon receipt of such articles of association, °hart"r''°oughtTo%e with the accompanying affidavit and stock granted. 132 THE FEDERAL FARM-LOAN subscription, the directors of said Federal land bank shall send an appraiser to investi- gate the solvency and character of the appli- cants and the value of their lands, and shall then determine whether in their judgment a charter should be granted to such association. Application and affi- Thcv shall forward such articles of association davit must be forward- J . „ , . 1 T-v J ed to Farm Loan Board ^^^ ^j^g accompanymg aftidavit to the l^ed- eral Farm Loan Board with their recom- mendation. If said recommendation is un- favorable, the charter shall be refused. ^ , .If said recommendation is favorable, the Board may grant rkorra!S''''torwarV?o Fcdcral Fami Loan Board shall thereupon iSi'i:' "' ""''' """" grant a charter to the applicants therefor, designating the territory in which such asso- ciation may make loans, and shall forward said charter to said applicants through said Federal land bank : Provided, That said Fed- eral Farm Loan Board may for good cause shown in any case refuse to grant a charter. Sums to be loaned Upou rcccipt of its chartcr such national Sd"afteT'charter'''s farm-loau association shall be authorized and ^''''"^^*"^- empowered to receive from the Federal land bank of the district sums to be loaned to its members under the terms and conditions of this Act. /*. .ociat ion must n-b- Whcncvcr any national farm-loan associa- erai^1al!d'bank°to^fn tiou shall dcsirc to sccurc for any member a cent" of Toans ' apphed loan on first mortgage from the Federal land bank of its district it shall subscribe for capital stock of said land bank to the amount of five per centum of such loan, such subscription to SYSTEM IN OPERATION 133 be paid in cash upon the granting of the loan by said land bank. Such capital stock shall stock rctaineri as coi- 11 1 11 1 lateral security, but be held by said land bank as collateral secur- ciividends thereon to •^ , , f'c paid association as ity for the payment of said loan, but said declared, association shall be paid any dividends ac- cruing and payable on said capital stock while it is outstanding. Such stock may, in the dis- s,ock tn;.y i>c paid . • r . t 1 • . 1 • i 1 J 1 1 off at par. and must be cretion of the directors, and with the approval when loans are paid. of the Federal Farm Loan Board, be paid ofl at par and retired, and it shall be so paid ofT and retired upon full payment of the mort- gage loan. In such case the national farm- Association must ro- loan association shall pay off at par and retire S'ondmg 'Sock*^at "par! the corresponding shares of its stock which were issued when said land-bank stock was issued. The capital stock of a Federal land Federal land -bank ■•■ stock cannot be reduced bank shall not be reduced to an amount less o'^J^tandLVbindr* °^ than five per centum of the principal of the outstanding farm-loan bonds issued by it. CAPITAL STOCK OF NATIONAL FARM-LOAN ASSOCIATIONS Sec. 8. That the shares in national farm- Par value of shares loan associations shall be of the par value of $5 each. Every shareholder shall be entitled to one Each .share i vote. .. riiiiii 1' J. hut one shareholder vote on each share 01 stock held by mm at limited to 20 votes. all elections of directors and in deciding all questions at meetings of shareholders: Pro- vided, That the maximum number of votes which may be cast by any one shareholder shall be twenty. 134 THE FEDERAL FARM-LOAN Members and share- No pCFSons but borrowcrs Oil farm-land holders confined to bor- . 1111 1 1111 rowers. mortgagcs shall be members or snarenolders of national farm-loan associations. Any per- son desiring to borrow on farm-land mortgage through a national farm-loan association shall make application for membership and shall subscribe for shares of stock in such farm- loan^'^must^^'appiy* for loan association to an amount equal to five membership and sub- rji r rji i-ii scribe to stock m asso- per ccntum of the lace oi the desired loan, ciation to extent of 5. ,.. , •1* per cent of desired loan, said subscHptiou to bc paid in cash upon the granting of the loan. If the application for membership is accepted and the loan is Loan granted and granted, thc applicant shall, upon full pay- clnl'^ becomes°'^inember mcnt thcrcf or, bccomc the owner of one share and shareholder. . • , i . -t • -11 •■• r of capital stock m said loan association lor each $100 of the face of his loan, or any major Stock retired when fractional part thereof. Said capital stock loan IS paid off; in ^ ^ Toii^^^llelnrttfXof. sliall be paid off at par and retired upon full dends dedaredTherl'on' payment of Said loan. Said capital stock shall be held by said association as collateral security for the payment of said loan, but said borrower shall be paid any dividends accruing and payable on said capital stock while it is outstanding. Capital stock to be Evcry national farm - loan association tiorafioanfare^'madc! formcd undcr this Act shall by its articles of association provide for an increase of its capital stock from time to time for the pur- pose of securing additional loans for its mem- bers and providing for the issue of shares to 6ta\e"T\uart"riy r'^^ borrowcrs in accordance with the provisions ports to board. q£ ^j^-g ^^|._ g^^j^ incrcascs shall be included SYSTEM IN OPERATION 135 In the quarterly reports to the Federal Farm Loan Board. NATIONAL FARM-LOAN ASSOCIATIONS. — SPECIAL PROVISIONS Sec. 9. That any person whose application Every member en- for membership Is accepted by a national fundt are available'!' un° f. 1 .,• 1111 j^'jIij^i less land bank or Farm farm-loan association shall be entitled to bor- Loan Board otherwise . , , , y%,. determine. row money on farm-land mortgage upon nlmg his application In accordance with section eight and otherwise complying with the terms of this Act whenever the Federal land bank of the district has funds available for that purpose, unless said land bank or the Federal Farm Loan Board shall, In its discretion, otherwise determine. Anv person desiring to secure a loan , Borrower may pay J i- o for stock irom proceeds through a national farm-loan association un- °|J^an %^''^''^^°^^, der the provisions of this Act may, at his *'°"~ option, borrow from the Federal land bank through such association the sum necessary to pay for shares of stock subscribed for by him in the national farm-loan association, such sum to be made a part of the face of the loan and paid off In amortization payments: Provided y however, That such addition to the Provided amount of . 111 ,1 • , , ^ 1 • 'J loan does not exceed loan shall not be permitted to increase said maximum limit. loan above the limitation Imposed In sub- section fifth of section twelve. Subject to rules and regulations prescribed tain^'f^om TnTerTs^cot . ,iT-\iiT-\ T T-i 1 lected commission not by the federal l^arm Loan Board, any exceeding one eighth of . 1 • .• 1 11 1 i.-i.i Ax. I per cent semiannu- farm-loan association shall be entitled to re- aiiy. 136 THE FEDERAL FARM-LOAN tain as a commission from each interest pay- ment on any loan indorsed by it an amount to be determined by said board not to exceed one eighth of one per centum semiannually upon the unpaid principal of said loan, any amounts so retained as commissions to be tur^SendsoTsto^k dcductcd from dividends payable to such l!fk:'may''wolfnrn'! farm-loan association by the Federal land frnhrfStforcf.ngs' bank, and to malce application to the land bank of the district for loans not exceeding in the aggregate one fourth of its total stock holdings in said land bank. The Federal land banks shall have power to make such loans to associations applying therefor and to charge interest at a rate not exceeding six per centum per annum. Shareholders of asso- Shareholders of every national farm-loan ciations personally li- ^ . , ,, , ^ , ^ . h. . . ,, able for its debts to ex- association shall be held mdividually respon- tent of stock severally held- sible, equally and ratably, and not for an- other, for all contracts, debts, and engage- ments of such association to the extent of the amount of stock owned by them at the par value thereof, in addition to the amount paid in and represented by their shares. Any natural person After a chartcr has been granted to a owning or about to own ■>■ ^ o comf'^mimber^uin national farm-loan association, any natural tXtotow onTort! person who is the owner, or about to become f^stocTto eS'of"! the owner, of farm land qualified under sec- per cento esire can. ^j^j^ ^^g|yg ^f ^j^jg ^^t as the basis of a mort- gage loan, and who desires to borrow on a mortgage of such farm land, may become a member of the association by a two-thirds SYSTEM IN OPERATION 137 vote of the directors upon subscribing for one share of the capital stock of such association for each $100 of the face of his proposed loan or any major fractional part thereof. He shall at the same time file with the secretary- treasurer his application for a mortgage loan, giving the particulars required by section twelve of this Act. APPRAISAL Sec. 10. That whenever an application for Application for loans •^ ^ _ must be referred to loan a mortgage loan is made through a national committee. farm-loan association, the loan committee lo^^ committee, or provided for in section seven of this Act, w^i^'mTst'^xlime shall forthwith make, or cause to be made, and w^t^n report!'*** such investigation as it may deem necessary as to the character and solvency of the appli- cant, and the sufficiency of the security offered, and cause written report to be made of the result of such investigation, and shall, if it concurs in such report, approve the same in writing. No loan shall be made unless the approve'' *?o"n''''un"e°3 report is favorable, and the loan committee favorabi^^ '^^^^ '^ is unanimous in its approval thereof. The written report reciuircd in the pre- .uteedro'iaTlS ceding paragraph shall be submitted to the '^"■^^"• Federal land bank, together with the appli- cation for the loan, and the directors of said land bank shall examine said written report when they pass on the loan application which it accompanies, but they shall not be bound by said appraisal. 138 THE FEDERAL FARM-LOAN Land bank must refer Bcforc aiiy mortgage loan is made by any ?o^ebrnrapp7i,ser Federal land bank, or joint-stock land bank, report"^which''must''be it shall refer the application and written re- fa vorabie if loan is . - - • , , , r made. port oi thc loan committee to one or more 01 the land-bank appraisers appointed under the authority of section three of this Act, and such appraiser or appraisers shall investigate and make a written report upon the land offered as security for said loan. No such loan shall be made by said land bank unless said written report is favorable. cribed"*b^^Vam^U)a^n Forms for appraisal reports for farm-loan so^'^'i- associations and land banks shall be pre- scribed by the Federal Farm Loan Board. Farm Loan Board to Laud-bauk appraisers shall make such ex- direct land-bank ap- • , • i • i i i i. l. praisers as to investiga- ammatious and appraisals ana conduct such tion and examination. ... . . , , ^ mvestigations, concernmg farm-loan bonds and first mortgages, as the Federal Farm Loan Board shall direct. Borrower not eligible No borrowcr undcr this Act shall be eli- Smember'^ofioanc'Sm- glblc as an appraiser under this section, but t^res1,edr ^'^^ '^'^ '" borrowers may act as members of a loan committee in any case where they are not personally interested in the loan under con- sideration. When any member of a loan com- mittee or of a board of directors is interested, directly or indirectly, in a loan, a majority of the board of directors of any national farm- loan association shall appoint a substitute Substitute on loan to act Ih his placc in passing upon such committee may be ap- •*• * «_» j. pointed by directors. loan. SYSTEM IN OPERATION 139 POWERS OF NATIONAL FARM-LOAN ASSOCIATIONS Sec. II. That every national farm - loan ^j^^tl" " ^°^" associa- association shall have power: First. To indorse, and thereby become ^i^y indorse mort- liable for the payment of, mortgages taken ^'^^^^' from its shareholders by the Federal land banl-c of its district. Second. To receive from the Federal land , Receive funds from land bank. bank of its district funds advanced by said bo^;^^^^^,^'^'' ^"""^^ *° land bank, and to deliver said funds to its shareholders on receipt of first mortgages qualified under section twelve of this Act. Third. To fix reasonable initial charges to Fix charges by farm- loan association; own be made against applicants for loans and to property re luired for its ° '^ ^ business. borrowers in order to meet the necessary ex- penses of the association: Provided, That such charges shall not exceed amounts to be fixed by the Farm Loan Board, and shall in no case exceed one per centum of the amount of the loan applied for ; to acquire and dispose of property, real and personal, that may be necessary or convenient for the transaction of its business. Fourth. To issue certificates against depos- May issue certificates . . . bearing interest con- its of current funds beanng interest tor not vcrtibie into farm-ioan longer than one year at not to exceed four per centum per annum after six days from date, convertible into farm-loan bonds when presented at the Federal land bank of the district in the amount of $2~) or any multiple 10 bonds. 140 THE FEDERAL FARM-LOAN thereof. Such deposits, when received, shall be forthwith transmitted to said land bank, Funds thus arising and be invested by it in the purchase of farm- to be invested in niort- . , ■r\i 11J1_1 pages or farm-loan loan bonds issucd bv SL I" cdcral land bank or bonds by Federal land ^ i o i i ^i • a i. baiik. m first mortgages as denned by this Act. RESTRICTIONS ON LOANS BASED ON FIRST MORTGAGES Sec. 12. That no Federal land bank or- ganized under this Act shall make loans ex- cept upon the following terms and conditions : Loans must be se- First. Said loans shall be secured by duly cured by first mort- •' wHhfn "distn™ 'fomt Tccorded first mortgages on farm land within stock banks exempted. ^^^ land-bank district in which the bank is situated. Mortgages must con- Sccond. EvcFy such mortgage shall con- tain provision for re- . • i- r .t payment or amortiza- tain an agreement providing tor the repay- tion plan. ^ , , . • . • 1 u ment of the loan on an amortization plan by means of a fixed number of annual or semi- interest ,ate on mort- annual installments sufficient to cover, first, SThLTi'peTint a charge on the loan at a rate not exceeding ^"S^lnu^^H^"^ the interest rate in the last series of farm-loan bonds issued by the land bank making the loan; second, a charge for administration and profits at a rate not exceeding one per centum per annum on the unpaid principal, said two rates combined constituting the in- instaiiment to in- tercst rate on the mortgage; and, third, such elude sufficient amount , fi ii -'i "11 to extinguish debt after amounts to be applied on the pnncipal as will expiration of 5 years. . .,, ■, ■, . -.i- 1 -j but within 40 years, at extmguish the debt withm an agreed penod, option of borrower. " i r i not less than five years nor more than torty years: Provided, That after five years from SYSTEM IN OPERATION 141 the date upon which a loan is made the mortgagor may, upon any regular installment date, make, in advance, any number of pay- Principal may he paid as fiesired nftc-r s ments or any portion thereof on account of y^--^" ^'•'-h any '"^taii- •' ^ ment. the principal of his loan as provided by his contract or pay the entire principal of such loan, under the rules and regulations of the Federal Farm Loan Board: And provided interest rate on mort- further, That before the first issues of farm- 8ue%"fam-fo"n'^ bonds . determined by land loan bonds by any land bank the mterest bank. rate on mortgages may be determined in the discretion of said land bank, subject to the provisions and limitations of this Act. Third. No loan on mortgage shall be made interest charged on , ...... , /••, , T mortgages must not ex- under this Act at a rate of interest exceeding cced 6 per cent per . r annum. Six per centum per annum, exclusive of amor- tization payments. Fourth. Such loans may be made for the 6trrctX'^'jCmt''''Tt«ik following purposes and for no other. ^^' exempted. (a) To provide for the purchase of land ^J^^il^f^"'"'^'^^''^- for agricultural uses. (b) To provide for the purchase of equip- Buy equipment, fer- ^ ' -^ ^ ^ -^ tihzers, live stock. ment, fertilizers, and live stock necessary for the proper and reasonable operation of the mortgaged farm; the term "equipment" to be defined by the Federal Farm Lx)an Board. (c) To provide buildings and for the im- Provide buildings and provement of farm lands; the term "im- provement" to be defined by the Federal Farm LxDan Board. (d) To liquidate indebtedness of the owner neS'Srred'for^^Sl of the land mortgaged incurred for agri- <="iturai purposes. 142 THE FEDERAL FARM-LOAN cultural purposes, or incurred prior to the organization of the first farm-loan association established in and for the county in which the land is situated. Mortgage loans must -r,.^, -kt in lor not exceed so per cent Fifth. No such loan shall cxcccd rifty per of appraised value of •' -^ ' wmanen^ ^mprSle- ccntum of thc valuc of thc land mortgaged "e'ms'ur^ed."'"' ''''"" ^° ^nd twcnty per centum of the value of the permanent, insured improvements thereon, by agdculturaf^'alue Said valuc to bc asccrtaincd by appraisal, as fa"nd3?''™'"^ ° " provided in section ten of this Act. In making said appraisal the value of the land for agri- cultural purposes shall be the basis of ap- praisal and the earning power of said land shall be a principal factor. Reappraisal. ^ reappraisal may be permitted at any time in the discretion of the Federal land bank, and such additional loan may be , , , granted as such reappraisal will warrant un- Loans granted for cs ax aSe'dfrwHhout'new dcr thc provisions of this paragraph. When- appraisai. ^^gj. ^j-^^ amount of thc loan applied for ex- ceeds the amount that may be loaned under the appraisal as herein limited, such loan may be granted to the amount permitted under the terms of this paragraph without requiring a Borrowers must en- "cw application Or appraisal. iTndmort'g^iged!''"" °^ Sixth. No such loau shall be made to any Joint stock banks ex- pcrson who is not at the time, or shortly to empted. become, engaged in the cultivation of the farm mortgaged. In case of the sale of the mortgaged land, the Federal land bank may Mortgages assumed permit Said mortgage and the stock interests by a purchaser. " & o of the vendor to be assumed by the purchaser. SYSTEM IN OPERATION 143 In case of the death of the mortgagor, his in case of death icgui , . 1 . . . f . ... representatives of Lor- heir or heirs, or his legal representative or rower may assume his representatives, shall have the option, within sixty days of such death, to assume the mortgage and stock interests of the deceased. Seventh. The amount of loans to any one and j'rminTmum'oc:!: borrower shall in no case exceed a maximum ^° '"""^ borrower. of $10,000, nor shall any loan be for a less cxemptcd.^*°''^ sum than $100. Eighth. Every applicant for a loan under Applicant must state <-> ^ X X Qj, prescribed forms the terms of this Act shall make application p^'^'^^f ioan'^arf to "be on a form to be prescribed for that purpose "'^'^• by the- Federal Farm Loan Board, and such applicant shall state the objects to which the proceeds of said loan are to be applied, and shall afford such other information as may be required. Ninth. Every borrower shall pay simple car^y^l"pl? centTnTer- interest on defaulted payments at the rate of ^"Borrower must un- . 1 , , J t- _ „ dertake to pav all taxes eight per centum per annum, and by express and other iiens. covenant in his mortgage deed shall under- take to pay when due all taxes, liens, judg- ments, or assessments which may be lawfully assessed against the land mortgaged. Taxes, liens, judgments, or assessments not paid pj( oTmong^se'd^l when due, and paid by the mortgagee, shall Zl.^^ ' '" ""' "' become a part of the mortgage debt and shall bear simple interest at the rate of eight per centum per annum. Every borrower shall ^g^^^jJJ"^^^^^^ '""^'^ ^^ undertake to keep insured to the satisfaction of the Federal Farm Loan Board all buildings the value of which was a factor in determining 144 THE FEDERAL FARM-LOAN Losses payable to thc amouiit of the loaii. Insurance shall be ^gor^Tay requirTTn- Hiadc payable to the mortgagee as its interest surance money used for , , . /. , i , . i rebuilding. may appear at time oi loss, and, at the option of the mortgagor and subject to general regu- lations of the Federal Farm Loan Board, sums so received may be used to pay for recon- struction of the buildings destroyed. If proceeds of loan Tenth. Evcry borrower who shall be expended otherwise j -i * i ji • • r i • than agreed (joint-stock granted a loan under the provisions of this banks being exempted). ,■,■,, . • r Act shall enter into an agreement, m form and under conditions to be prescribed by the Federal Farm Loan Board, that if the whole or any portion of his loan shall be expended If borrower be in de- for purposcs othcr than those specified in his original application, or if the borrower shall be in default in respect to any condition or covenant of the mortgage, the whole of said loan shall, at the option of the mortgagee, lec^d."' ""^^ ^^ ''°^' become due and payable forthwith: Provided, That the borrower may use part of said loan Part proceeds may be to pay for his stock in the farm-loan associa- used to purchase stock . 111 -11 1 1 1 -<• 1 required for member- tion, and thc land bank holding such mort- ship. . . gage may permit said loan to be used for any purpose specified in subsection fourth of this section, i^ed' poifer°^by"Tndo; Elcvcnth. That no loan or the mortgage cannot impair validity • ,< iiii* ' 1 of mortgage. sccurmg thc samc shall be impaired or in- validated by reason of the exercise of any power by any Federal land bank or national farm-loan association in excess of powers herein granted or any limitations thereon. ' Funds transmiitted to farm-loan associa- SYSTEM IN OPERATION 145 tions by Federal land banks to be loaned to its members shall be In current funds, or to"rc"uve''pSd8''^f farm -loan bonds, at the option of the ''"" '""''""''"'" borrower. POWERS OF FEDERAL LAND BANKS", Sec. 13. That every Federal land bank pe^erai land banks; shall have power, subject to the limitations p^'^''"" and requirements of this Act — First. To issue, subject to the approval of May issue and buy the Federal Farm Loan Board, and to sell bonds; prepay eame. farm-loan bonds of the kinds authorized in this Act, to buy the same for its own account, and to retire the same at or before maturity. Second. To invest such funds as may be May invest in mort- • •, ••j_i 1 <• i.r>i gages on farm lands sit- m its possession m the purchase of qualified uated in district. first mortgages on farm lands situated within the Federal land-bank district within which it is organized or for which it is acting. Third. To receive and to deposit in trust May hypothecate with the farm-loan registrar for the district, "ar'^^rs^unt/X to be by him held as collateral security for ^''"'^"'"^• farm-loan bonds, first mortgages upon farm land qualified under section twelve of this Act, and to empower national farm-loan asso- , ^^^ ""^/'^ associa- ' ^ .^^vj^ tions and agents to ciations, or duly authorized agents, to collect mems\her^eon.'"'^ ^''^' and immediately pay over to said land banks the dues, interest, amortization installments, and other sums payable under the terms, con- ditions, and covenants of the mortgages and of the bonds secured thereby. Fourth. To acquire and dispose of — 146 THE FEDERAL FARM-LOAN May buy. sell, or (a) Such property, real or personal, as may fof fts^busfness.""^""^^'^ bc iiecessary or convenient for the transaction of its business, which, however, may be in part leased to others for revenue purposes. No real estate ac- (b) Parccls of land acQuired in satisfaction quired in satisfaction ^ ' ^ debtrcanb^eYeTcfronger o^ ^cbts or purchascd at sales under judg- Sa1"L'thority''f'om mcnts, dccrccs, or mortgages held by it. But Farm Loan Board. ^^ ^^^^ ^^^^^ ^^^^^ j^^j^ ^-^^^ ^^^ pOSSCSsion of any real estate purchased or acquired to secure any debt due to it, for a longer period than five years, except with the special ap- proval of the Federal Farm Loan Board in writing. May deposit with Fifth. To dcposit its securities, and its recawTterestthere^o"n. currcnt funds subjcct to chcclc, with any member bank of the Federal Reserve System, and to receive interest on the same as may be agreed. May accept deposits Sixth. To aCCCpt dcpOSitS of SCCUritieS Of (lolTs/''™''"''" ''''°"'" of current funds from national farm-loan associations holding its shares, but to pay no interest on such deposits. Seventh. To borrow money, to give secur- May borrow money. ity therefor, and to pay mterest thereon. May deal in United Eighth. To buy and scll United States States bonds. VlOnH'^ May charge appii- Ninth. To chargc applicants for loans and expenses'^ incC?re'd'"in borrowcrs, undcr rulcs and regulations pro- praisai and determina- mulgatcd by thc Fcdcral Farm Loan Board, tion of title. , , r i • i . 1 ^ reasonable fees not exceeding the actual cost of appraisal and determination of title. Legal fees and recording charges imposed by law in SYSTEM IN OPERATION i47 the States where the land to be mortgaged is loeated may also be included in the prelimi- •^ Borrower may re- nary costs of negotiating mortgage loans. 1 he quire^such^expc-nses to borrower may pay such fees and charges or he l;;^;;,^"^^^;^;;^''^ ""^ ^^ may arrange with the Federal land bank mak- ing the loan to advance the same, in which case said expenses shall be made a part of the face of the loan and paid off in amortization pay- ments. Such addition to the loan shall not be permitted to increase said loan above the limitations provided in section twelve. RESTRICTIONS ON FEDERAL LAND BANKS Sec. 14. That no Federal land bank shall have power — First. To accept deposits of current funds cannot accept de- ^ ^ posits except trom payable upon demand except from its own ^',';'=^\'°l;i^"JL °not''''e.x: stockholders, or to transact any banking or p^'^^^'y authorized. other business not expressly authorized by the provisions of this Act. Second. To loan on first mortgage except Loans made exciu- . sively through associa- through national farm-loan associations as tions or atjents. provided in section seven and section eight of this Act, or through agents as provided in section fifteen. Third. To accept any mortgages on real oniy first mortgages J -U • J. accepted, unless e.xist- estate except first mortgages created subject ing loans require addi- ^ o cj tional security. to all limitations imposed by section twelve of this Act, and those taken as additional security for existing loans. Fourth. To issue or obligate itself for out- ; J'-'T^'twentT'^S; standing farm-loan bonds in excess of twenty '=^^'*^' "'»'' ""■■''•"'• 148 THE FEDERAL FARM-LOAN from^iarmL'^n'^S timcs tlic amouiit of its capital and surplu^;, twenty "timo^its^hoid° OF to receivc from any national faiTn-loan mRso sloe . association additional mortgages when the principal remaining unpaid upon mortgages already received from such association shall exceed twenty times the amount of its capital stock owned by such association. No commission or Fifth. To demand or receive, under any aUyluthoS.^''^*^'^*'' form or pretense, any commission or charge not specifically authorized in this Act. AGENTS OF FEDERAL LAND BANKS Agents of land banks Sec. 1 5. That whcncvcr, after this Act ^r^on^/ean"''^"^ ''^' shall havc bccn in effect one year, it shall appear to the Federal Farm Loan Board that national farm-loan associations have not been formed, and are not likely to be formed, in any locality, because of peculiar local condi- tions, said board may, in its discretion, au- thorize Federal land banks to make loans on farm lands through agents approved by said board. Loans through acents Such loans shall bc subject to the same subject to same condi- , , . •/• , 1 tions as to associations conditious aud rcstnctions as it the same were Borrowers through agencies must purchase j^af^e through uational farm-loan associa- stock m hederal land <-> cent^'onoan "' °^ ^ ^^^ tions, and each borrower shall contribute five per centum of the amount of his loan to the capital of the Federal land bank, and shall become the owner of as much capital stock of the land bank as such contribution shall war- rant. No agent other than a duly incorporated SYSTEM IN OPERATION 149 bank, trust company, mortgage company, bank^ng"'corporaUons ,-, .. 1 . 11 ,1 chartered by State. or savings mstitution, cnartercd by the State in which it has its principal office, shall be employed under the provisions of this section. Federal land banks may pay to such agents Expenses connected the actual expense of appraising the land be^r/Ken^ls? afso ^-1 • , r 1 • • J commission, which onered as secunty tor a loan, exammmg and must be deducted from ... , . , 1 . - 1 . borrower's future divi- certifymg the title thereof, and making, exe- dends. cuting, and recording the mortgage papers; and in addition may allow said agents not to exceed one-half of one per centum per annum upon the unpaid principal of said loan, such commission to be deducted from dividends payable to the borrower on his stock in the Federal land bank. Actual expenses paid to agents under the become" pai?^ of Tan^ provisions of this section shall be added to r^^^. °^ ^^ amortiza^ the face of the loan and paid off in amortiza- tion payments subject to the limitations pro- vided in subsection ninth of section thirteen of this Act. Said agents, when required by the Federal Agents m«st collect o ' 1 J and remit payments on land banks, shall collect and forward to such wrthoutThTrge"'''*'''"''^' banks without charge all interest and amorti- zation payments on loans indorsed by them. Any agent negotiating any such loan shall Agents must indorse ^ , ., i'-Lli"j_l and become liable upon indorse the same and become hable tor the mortgages received from them, such mort- payment thereof, and for any default by the gages not to exceed ten ^ •' J J times agents capital mortgagor, on the same terms and under the and surplus. same penalties as if the loan had been orig- inally made by said agent as principal and ISO THE FEDERAL FARM-LOAN sold by said agent to said land bank, but the aggregate of the unpaid principal of mortgage loans received from any such agent shall not exceed ten times its capital and surplus. Agencies in any (lis- jf ^-j^ Q^y tiTjiQ the district represented by tnct may be discon- -' t^ j unued^ by Farm Loan ^^ij agcnt tuider the provisions of this sec- tion shall, in the judgment of the Federal Farm Loan Board, be adequately served by national farm-loan associations, no further loans shall be negotiated therein by agents under this section. JOINT-STOCK LAND BANKS joint-stock land Sec. i6. That corporations, to be known banks formed by lo or • • i j 1 i 11 1 e • ii more persons under as jomt-stocK land banks, tor carrying on the Federal land-bank or- . • , -. . ganization require- Dusmcss oi lending on lami-mortgagG secur- ity and issuing farm-loan bonds, may be formed by any number of natural persons not less than ten. They shall be organized sub- ject to the requirements and under the con- ditions set forth in section four of this Act, so far as the same may be applicable: Pro- vided, That the board of directors of every Minimum number of joint-stock land bank shall consist of not less directors five. •" than five members. aii?*ifa'^bKe«onafry for Sharcholdcrs of cvcry joint-stock land bank extenrof'^^btock'^hoid^ Organized under this Act shall be held indi- *"^'" vidually responsible, equally and ratably, and not one for another, for all contracts, debts, and engagements of such bank to the extent of the amount of stock owned by them at the par value thereof, in addition to the SYSTEM IN OPERATION 151 amount paid in and represented by their shares. Except as otherwise provided, joint-stock Except otherwise , provirlerl, to have same land banks shall have the powers of, and be vowcru and limitations '■ as Federal land banks. subject to all the restrictions and conditions imposed on, Federal land banks by this Act, so far as such restrictions and conditions arc T 11 7-, "J J 7 mi. J. J.1 r~^ United States cannot applicable : rrovidcd, however, 1 hat the Gov- subscribe to capital ernment of the United States shall not pur- chase or subscribe for any of the capital stock of any such bank ; and each shareholder „. ... . -' ' Shareholders have of any such bank shall have the same voting °"stock! ^""^ ^''''^ ^^^"^^ privileges as holders of shares in national banking associations. No joint-stock land bank shall have power Bani:s cannot issue 11. , ., 1^^ ,, ... r bonds aRgregating more to issue or obligate itself for outstandmg larm- than is times capital and surplus, nor receive loan bonds in excess of fifteen times the deposits nor transact busniess not expressly amount of its capital and surplus, or to re- authorized. ceive deposits or to transact any banking or other business not expressly authorized by the provisions of this Act. No joint-stock land bank shall be author- Minimum capital, . . . , J2SO.000, one half paid ized to do business until capital stock to the >" '^ash, balance subject ^ to call. amount of at least $250,000 has been sub- scribed, one half thereof paid in cash and the balance subject to call by the board of direct- ors, and a charter has been issued to it by the Federal Farm Loan Board. No joint-stock land bank shall issue any stock must be paid ■' -^ up before issuance of bonds until after the capital stock is entirely *^°n'i^- paid up. Farm-loan bonds issued by joint-stock land 152 THE FEDERAL FARM-LOAN Ponds muirt be differ- banks shall be so engraved as to be readily frnVFeaJraiiand-bank distinguished in form and color from farm- loan bonds issued by Federal land banks, and shall otherwise bear sueh distinguishing marks as the Federal Farm Loan Board shall direct. Exempt from certain Joint-stock land banks shall not be subject FeTcra?"L'd banks." '" to thc provisions of subsection (b) of section seventeen of this Act as to interest rates on mortgage loans or farm-loan bonds, nor to the provisions of subsections first, fourth, sixth, seventh, and tenth of section twelve as to Loan, confined to rcstrictions on mortgagc loans: Provided, Ss'^wteTin^sam"^ howcveT, That no loans shall be made which orln^ne'statXonS arc not sccurcd by first mortgages on farm °"^' lands within the State in which such joint- stock land bank has its principal ofhce, or within some one State contiguous to such State. Such joint-stock land banks shall be subject to all other restrictions on mortgage loans imposed on Federal land banks in sec- tion twelve of this Act. Interest charge on Joint-stock land banks shall in no case farm loans limited to i r i 1 per cent over rate paid chargc a ratc of mtcrcst on farm loans exceed- on bonds. ^ ing by more than one per centum the rate of interest established for the last series of farm- loan bonds issued by them. No commission or Joint-stock land banks shall in no case de- ■:harge not sijecifically i • i r i. iuthorized. mand or receive, under any form or pretense, any commission or charge not specifically authorized in this Act. against ' "y]^o^thlcared ^ach joiut-stock land bank organized un- raortgages. ^^j. ^j^-g j^^^ gj^^jj hsive authority so issue SYSTEM IN OPERATION 153 bonds based upon mortgages taken by it in accordance with the terms of this Act. Such bonds shall be in form prescribed by the Federal Farm Loan Board, and it shall be , under prescribed ' forms, stating therein stated in such bonds that such bank is organ- u'^nde/thTauthon'Ty!'^'' ized under section sixteen of this Act, is under Federal supervision, and operates un- der the provisions of this Act. Anv ioint-stock land bank organized and voluntary liquidation •' ■^ . , . of joint - stock land doing business under the provisions of this i^^mka. Act may go into voluntary liquidation by making provision, to be approved by the Federal Farm Loan Board, for the payment of its liabilities : Provided, That such method of liquidation shall have been duly authorized by a vote of at least two thirds of the share- holders of such joint-stock land bank at a regular meeting, or at a special meeting called for that purpose, of which at least ten days' notice in writing shall have been given to stockholders. For the purpose of assisting in any such liquidation duly authorized as in the preced- ing paragraph provided, any Federal land bank may, with the approval of the Federal Farm Loan Board, acquire the assets and assume the liabilities of any joint-stock land bank, and in such transaction may waive the provisions of this Act requiring such land bank to acquire its loans only through na- tional farm-loan associations, or agents, and those relating to status of borrower, purposes IS4 THE FEDERAL FARM-LOAN of loan, and also the limitation as to the amount of individual loans. No Federal land bank shall assume the obligations of any joint-stock land bank, in such manner as to make its outstanding obli- gations more than twenty times its capital stock, except by the creation of a special reserve equal to one twentieth of the amount of such additional obligations assumed, POWERS OF FEDERAL FARM LOAN BOARD powe^^"'"*" ^°^"^' Sec- 17- That the Federal Farm Loan Board shall have power — • Charter Federal land (a) To organizc and chartcr Federal land banks, joint-stock land 11 ijIj j • ir 1 banks, and farm-loan oanKS, and to chartcr national larm-loan as- sociations and joint-stock land banks subject to the provisions of this Act, and in its dis- cretion to authorize them to increase their capital stock. Fix interest charrcs (b) To rcvicw and altcr at its discretion by Federal land lianks; .-i . r • , j.j.l_ 1 11 T> 1 1 joint-stock banks ex- thc ratc oi intcrcst to be charged by l^ederal land banks for loans made by them under the provisions of this Act, said rates to be uniform so far as practicable. Refuse authority to (c) To grant or rcfusc to Federal land make^ specific issue of ^^nks, or joint-stock land banks, authority to make any specific issue of farm-loan bonds. Regulate charges to (d) To malvC Fulcs and rcgulations respect- ing the charges made to borrowers on loans under this Act for expenses in appraisal, de- termination of title, and recording. Require reports and / \ rr\ • , iij j r make examinations. (c) io Tcquire rcjDorts and statements oi SYSTEM IN OPERATION iS5 condition and to make examinations of all banks or associations doing business under the provisions of this Act. (f) To prescribe the form and terms of ^Jj^f^l'l^^J^^"^ *"^ farm-loan bonds, and the form, tenns, and penal sums of all surety bonds required under this Act and of such other surety bonds as they shall deem necessary, such surety bonds to cover financial loss as well as faithful per- formance of duty. (g) To require Federal land banks to pay ,,,||k't" Jaf "r^! rLT=! forthwith to any Federal land bank their ^^k to'pa7 coupons of equitable proportion of any sums advanced """^^"''■• by said land bank to pay the coupons of any other land bank, basing said required pay- ments on the amount of farm-loan bonds issued by each land bank and actually out- standing at the time of such requirement. (h) To suspend or to remove for cause any certair^s^peufiedTTni! district director or any registrar, appraiser, "^'°' examiner, or other official appointed by said board under authority of section three of cause of removal •' to be comniunicated in this Act, the cause of such suspension or re- writing to official. moval to be communicated forthwith in writing by the Federal Farm Loan Board to the person suspended or removed, and in case of a district director to the proper Federal land bank. (i) To exercise general supervisory author- ^J--;- f^^^^/if^ ity over the Federal land banks, the national ^j^J^^^g^"^" ^"^ ^''°' farm-loan associations, and the joint-stock land banks herein provided for. 11 156 THE FEDERAL FARM-LOAN Exercise requisite in- (j) To exercisG such incidental powers as cidentai powers. shall bc necessary or requisite to fulfill its duties and carry out the purposes of this Act. APPLICATIONS FOR FARM-LOAN BONDS Written application Sec. 1 8. That any Federal land bank, or bondT'mlde 'through jolnt-stock bank, which shall have voted to registrar. issuc fami-loan bonds under this Act, shall make written application to the Federal Farm Loan Board, through the farm-loan registrar of the district, for approval of such With application, igsuc. With saicl application said land bank quahfica mortgages or rjr ^u^t\c^^tendJ^rtl shall tender to said farm-loan registrar as g?cgS notteVtha^n collatcral security first mortgages on farm sum of bonds propose . j^^j^^g qualified uttdcr the provisions of section twelve, section fifteen, or section sixteen of this Act, or United States Government bonds, not less in aggregate amount than the sum of the bonds proposed to be issued. Said bank seclntytende^d.^''^"^ shall fuHiish with such mortgages a schedule containing a description thereof and such further information as may be prescribed by the Federal Farm Loan Board. Registrar must trans- Upon rcccipt of such application said farm- mit application and ^ ^ ^ ■"■ bS'*" '° ^""^ ^°^" ^'^^^ registrar shall verify said schedule and shall transmit said application and said schedule to the Federal Farm Loan Board, giving such further information pertaining Farm Loan Board thcrcto as hc may posscss. The Federal Farm may grant or refuse , . ^ authority for issuance Loan Board shall forthwith cause to be made after investigation. such investigation and appraisement of the securities tendered as it shall deem wise, and SYSTEM IN OPERATION 157 it shall grant in whole or in part, or reject entirely, such application. The Federal Farm Loan Board shall . noard must advise Its decision to registrar promptly transmit its decision as to any issue ''"-i applicant bank. of farm-loan bonds to the land bank applying for the same and to the farm-loan registrar of the district. Said registrar shall furnish, desired' inf"omat1on"'by in writing, such information regarding any issue of farm-loan bonds as the Federal Farm Loan Board may at any time require. No issue of farm-loan bonds shall be author- ^no ;«.^^e^^f ,^^onj!| ized unless the Federal Farm Loan Board approval m writing. shall approve such issue in writing. ISSUE OF FARM-LOAN BONDS Sec. 10. That whenever any farm - loan Registrar upon notice ^ of approval must take registrar shall receive from the Federal Farm ^^,^|prompi'deiive'^'Sf Loan Board notice that it has approved any {^°;^f ^o applicant issue of farm-loan bonds under the provisions of section eighteen he shall forthwith take such steps as may be necessary, in accordance with the provisions of this Act, to insure the prompt execution of said bonds and the de- livery of the same to the land bank applying therefor. Whenever the Federal Farm Loan Board aJt"ho'rfty' toTslul -,, ., ,'1 I'i.' r bonds, collateral se- shall reject entirely any application tor an cunty tendered must be . ^ - , ^ , 1 r- . i returned forthwith. issue of farm-loan bonds, the first mortgages and bonds tendered to the farm-loan registrar as collateral security therefor shall be forth- with returned to said land bank by him. Whenever the Federal Farm Loan Board iS8 THE FEDERAL FARM-LOAN p.oRistrar to retain shall appfovG ail issuc of faiTQ-loan bonds, SS as°^secunty""J tlic farm-loaii registrar having the custody of turn any oUier^'coiiat- thc first mortgagcs and bonds tendered as cral tendered. •,■, . t 'j r 1 • r i- j collateral security for such issue or bonds shall retain in his custody those first mort- gages and bonds which are to be held as collateral security, and shall return to the bank owning the same any of said mort- gages and bonds Vv^hich are not to be held by him as collateral security. The land bank which is to issue said farm-loan bonds shall transfer to said registrar, by assignment, in Mortgattes and bonds trust, all first mortgagcs and bonds which are tru'.ir'p'ovidrnfrigh'to" to bc hcld by said registrar as collateral stS.f " '"' "'" security, said assignment providing for the right of redemption at any time by payment as provided in this Act and reserving the right of substitution of other mortgages quali- fied under sections twelve, fifteen, and sixteen of this Act. Said mortgages and bonds shall be deposited in such deposit vault or bank Collateral deposited as thc Federal Farm Loan Board shall ap- as I'^arm Loan Board i . , , .1 ^ 1 r 'J may approve under provc, subjcct to the control oi saiQ reg- control of registrar as ^ , . , . j_.ri.-U trustee. istrar and m his name as trustee tor tne bank issuing the farm-loan bonds and for the prospective holders of said farm-loan bonds. No mortgage ac- No mortgagc shall be accepted by a farm- ce^'pt qualified Hrst loan registrar from a land bank as part of an offering to secure an issue of farm-loan bonds, either originally or by substitution, except first mortgages made subject to the conditions SYSTEM IN OPER^\TION 159. prescribed in said sections twelve, fifteen, and sixteen. ' It shall be the duty of each farm-loan regis- Retjistrar to see ont- •^ standing bonds fully trar to see that the farm-loan bonds delivered covered by collateral. by him and outstanding do not exceed the amount of collateral security pledged there- for. Such registrar may, in his discretion, temporarily accept, in place of mortgages May temporarily ac- - , ccpt in substitution withdrawn, United States Government bonds united states bonds or cash. or cash. The Federal Farm Loan Board may, at p^^^ Loan Bo.ird any time, call upon any land bank for Tec^nTy^"" '^^'"""' additional security to protect the bonds issued by it. FORM OF FARM-LOAN BONDS Sec. 20. That bonds provided for in this ..f-'SmilraS; Act shall be issued in denominations of $40, 'rr'dn^Z^a'lTZdl, sub'- $100, $500, $1,000, and such larger denomi- 1^4*;,°:^^^'"^''"""'''' nations as the Federal Farm Loan Board may authorize; they shall run for specified mini- mum and maximum periods, subject to pay- ment and retirement, at the option of the land bank, at any time after five years from the date of their issue. They shall have . . , J 1 1 1 11 • Interest paid semi- interest coupons attached, payable semi- annually not excce.iinn . . . . 5 per cent per annum; annually, and shall be issued m series 01 not bonds issued m sencs •^ not less than 150,000. less than $50,000, the amount and terms to be fixed by the Federal Farm Loan Board. They shall bear a rate of interest not to ex- ceed 5 per centum per annum. The Federal Farm Loan Board shall pre- i6o THE FEDERAL FARM-LOAN Rules to be pre- scHbc Tulcs aiid rcgulatioiis concerning the bonds may be retir'^dl'' circumstanccs and manner in which farm-loan bonds shall be paid and retired under the provisions of this Act. Farm-loan bonds shall be delivered through the registrar of the district to the bank ap- plying for the same. Bonds delivered In ordcr to fumish farm-loan bonds for suing bank^"'''^*'^ *° '^' dclivcry at the Federal land banks and joint- stock land banks, the Secretary of the Secretary of Treasury to prepare bonds in TrcasuFV is hcrcby authorized to prepare form approved by r arm j j ax 1;;° Tre^asury' s^ubfecrto suitablc bonds in such form, subject to the their order. provisions of this Act, as the Federal Farm Loan Board may approve, such bonds when prepared to be held in the Treasury subject to delivery upon order of the Federal Farm Loan Board. The engraved plates, dies, bed- pieces, and so forth, executed in connection therewith shall remain in the custody of the Secretary must retain Sccrctary of thc Trcasury. Any expenses in- expenses^c^dnnectcd curTcd in thc preparation, custody, and de- with issuance of bonds; ,. . ic i i 11111 -1 reimbursed by Farm livcry of such fami-loan bonds shall be paid Loan Board through , , „ , r , 1 /t-i r proportional assessment bv thc Sccrctarv of thc i reasuFv irom any against banks. j j funds in the Treasury not otherwise appro- priated: Provided, however, That the Secre- tary shall be reimbursed for such expenditures by the Federal Farm Loan Board through assessment upon the farm-land banks in pro- portion to the work executed. They may be „ , , , . exchanged into registered bonds of any Bonds exchanged m- '^ *-" _ to registered bonds and amount, and rc-cxchanged into coupon bonds, re-excnanged into cou- ' <-> ^ op"ion?"'^' ^^ holders ^^ ^j^g option of thc holdcr, under rules and SYSTEM IN OPERATION i6i regulations to be prescribed by the Federal Farm Loan Board. SPECIAL PROVISIONS OF FARM-LOAN BONDS Sec. 21. That each land bank shall be in issuance of bonds. Land bank is bound bound in all respects by the acts of its officers hJ'is^suance of^on^s.""" in signing and issuing farm-loan bonds, and by the acts of the Federal Farm Loan Board in authorizing their issue. Every Federal land bank issuing farm-loan pe^j^rai innd bank bonds shall be primarily liable therefor, and c^wlT^'isiL; ''"'ilabie' /o? shall also be liable, upon presentation of farm- issur^of'^'otTK-r" "Ink" - , « r ' . . , 1 ^"'^ f'T principal (if loan bond coupons, lor interest payments due farm-ioan bonds i:.sued by any other Ferleral upon any farm-loan bonds issued by other ^''*"'' ^i^'^^y ^jt-^r assets ir J J are exhausted. Federal land banks and remaining unpaid in consequence of the default of such other land banks ; and every such bank shall likewise be liable for such portion of the principal of farm- loan bonds so issued as shall not be paid after the assets of any such other land banks shall have been liquidated and distributed: Provided, That such losses, if any, either of Losses, if any as ' ' J J guarantors assessed pro interest or of principal, shall be assessed by [^ble!'^'""^^ "" ^'^""^^ the Federal Farm Loan Board against sol- vent land banks liable therefor in proportion to the amount of farm-loan bonds which each may have outstanding at the time of such assessment. Every Federal land bank shall by appro- Minutes of Federal . r 1' land bank must show priate action of its board of directors, duly liability as guarantor. recorded in its minutes, obligate itself to i62 THE FEDERAL FARM-LOAN become liable on farm-loan bonds as provided in this section. Each farm-loan bond Evcry faim-loan l)ond issued by a Federal prebidcnt or vice i-resi- land bank shall be signed by its president or dent and Kecrctary or o ^ x asBistant Eccretary of yj^g prcsidcnt and attcstcd by its secretary l^KUing I'cderal land i •' -' certificatr"/rom''"l''-J^m ^r assistant sccrctary. For the purpose of ^p°cifyinnertaiir"ro- signing such bonds the board of directors of visions. any Federal land bank is authorized to select a vice president who need not be a member of the board of directors; such bonds shall also contain in the face thereof a certificate signed by the Farm Loan Commissioner to the effect that it is issued under the authority of the Federal Farm Loan Act, has the ap- proval in form and issue of the Federal Farni Loan Board, and is legal and regular in all respects; that it is not taxable by National, State, municipal, or local authority; that it is issued against collateral security of United States Government bonds, or indorsed first mortgages on farm lands, at least equal in amount to the bonds issued; and that all Federal land banks are liable for the payment of each bond. APPLICATION OF AMORTIZATION AND INTEREST PAYMENTS Registrar notified cf Sec. 2 2. That whcnevcr any Federal land collections mad'f on .. 11 -.11 in pledged inortijaBes. banlc, Or jomt-stock land bank, shall receive any interest, amortization, or other payments upon any first mortgage or bond pledged as collateral security for the issue of farm-loan SYSTEM IN OPERATION 163 bonds, it shall forthwith notify the farm- loan retristrar of the items so received. Said RcRistrar must see o sue 11 i);ivrnenls pniji- registrar shall forthwith cause such payment ;;;;'/,^,';;r'^'j;|;,;;;;;\;;,::;; to be duly credited upon the mortgage en- [:;''>i,,V:r'\,i''''win:'h titled to such credit. Whenever any such Sd.'"''"'"' "'" "^ mortgage is paid in full, said registrar shall cause the same to be canceled and delivered to the proper land bank, which shall promptly satisfy and discharge the lien of record and transmit such canceled mortgage to the orig- inal maker thereof, or his heirs, administra- tors, executors, or assigns. Upon written application by any Federal collateral bonds and .. 11-11IJ. il, incirtgayes may be sul.- land bank, or lomt-stock land bank, to tne stituted by simiiir •' . ^ . mortgages or Unilud farm-loan registrar, it may be permitted, m sutes^bonds of smnUr the discretion of said registrar, to withdraw any mortgages or bonds pledged as collateral security under this Act, and to substitute therefor other similar mortgages or United States Government bonds not less in amount than the mortgages or bonds desired to be withdrawn. Whenever any farm-loan bonds, or cou- Matured bonds and pons or interest payments of such bonds, are Z^.tl ^A^sLFnT'''" due under their terms, they shall be payable at the land bank by which they were issued, in gold or lawful money, and upon payment shall be duly canceled by said bank. At the discretion of the Federal Farm Loan Board, p,fj%^i3j^,\erf afdfs' payment of any farm-loan bond or coupon or ^^^^"^ "^ ^^^^"^ ^°^" interest payment may, however, be author- ized to be made at any Federal land bank, any 1 64 THE FEDERAL FARM-LOAN joint-stock land bank, or any other bank, under rules and regulations to be prescribed by the Federal Farm Loan Board. Land banks may When any land bank shall surrender to the withdrawpleclged •' rf'^'^l*'' u*k? ''imoiIS"'^of proper farm-loan registrar any farm-loan scries!"^"^ '^''"'^^ °^ """^ bonds of any series, canceled or uncanceled, said land bank shall be entitled to withdraw first mortgages and bonds pledged as col- lateral security for any of said series of farm- loan bonds to an amount equal to the farm- loan bonds so surrendered, and it shall be the duty of said registrar to permit and direct the delivery of such mortgages and bonds to such land bank. Interest collected on Intcrcst paymcuts OH hypothecated first available to land bank mortgagcs shall bc at thc disposal of the land for payment of interest . oil bonds. bank pledging the same, and shall be avail- able for the payment of coupons and the interest of farm-loan bonds as they become due. Full amount of inter- Wlicnevcr Euy boud matures, or the inter- est must be paid when , , , ^ . - , due. on presentation of cst ou any rcgistcrcd boud IS due, or the coupons where made payable. coupon or any coupon bond matures, and the same shall be presented for payment as pro- vided in this Act, the full face value thereof shall be paid to the holder. paym.nts collected Amortizatiou and other payments on the on pledgi-d mortgages ..,-- . ^ ^ . ~ held m trust. pnucipal oi fust mortgagcs held by a larm- loan registrar as collateral security for the issue of farm-loan bonds shall constitute a trust fund in the hands of the Federal land bank or joint-stock land bank receiving the SYSTEM IN OPERATION 165 same, and shall be applied or employed as follows : In the case of a Federal land bank — ■ ^ Must bo applied by a Fcaeral land bank — (a) To pay off farm-loan bonds issued by ^^^'^ '^^"cei its own said bank as they mature. (b) To purchase at or below par farm-loan bonds issued by said bank or by any other farm-ioan'^bonds.^'''''' Federal land bank. (e) To loan on first mortga;^es on farm to lend on farm ^ ' 00 j^^jjg Within district lands within the land-bank district, qualified "pon fi«t mortgages. under this Act as collateral security for an issue of farm-loan bonds. (d) To purchase United States Govern- ^J^^buyUmted states ment bonds. In the case of a joint-stock land bank — ■ joint-stock land , banks must apply such (a) To pay off farm-loan bonds issued by collections— ^ ' IT J •' lo cancel its own said bank as they mature. ^°"'^^- (b) To purchase at or below par farm-loan loal^bond?""'" ^^""' bonds. (c) To loan on first mortgages qualified lands within °state'"^J^ ^ . . r i 1 • A J o"^ other State, upon under section sixteen 01 this Act. qualified first mort- (d) To purchase United States Govern- ^jo^buy united states ment bonds. The farm-loan bonds, first mortgages, .ent^ngS^fund^st- United States Government bonds, or cash f3t,lr"as "^J^^ed constituting the trust fund aforesaid, shall be *=°"^*®'''*^- forthwith deposited with the farm-loan regis- trar as substituted collateral security in place of the sums paid on the principal of indorsed mortgages held by him in trust. Registrar must be no- Every Federal land bank, or joint-stock ^„f ^.^^e^nts^'cXTed land bank, shall notify the farm-loan regis- o^ pnndpai of pledged. 1 66 THE FEDERAL FARM-LOAN mortgaRes: may take trar of tlic disposition of all payments made fuudls'tmsrei. °^ '''" OH the principal of mortgages held as col- lateral security for an issue of farm-loan bonds, and said registrar is authorized, at his discretion, to order any of such payments, or the proceeds thereof, wherever deposited or however invested, to be immediately trans- ferred to his account as trustee aforesaid. RESERVES AND DIVIDENDS OF LAND BANKS TTrrntv-five per cent Sec. 2^. That cvcry Fcdcral land bank, of net camitiRS of land ^ ^ ^ i i 1 1 i 1 11 bank srnHcmnuaiiy re- q^^ evcrv lomt'StocK land bank, shall semi- tuitied .IS reserve fund -^ •> 7n^'\J cmT o{^c^W°\ annually carry to reserve account twenty- Mock .s accumulated, ^^g p^j. (.gnt^ni of its net earnings until said reserve account shall show a credit balance ^ equal to twenty per centum of the outstanding If reser^'c is impaired, capital stock of Said laud bank. Whenever must be restored before f , ,1 , 1 • • j • j dividends are paid. gaid rcscrvc shall have been impaired, said balance of twenty per centum shall be fully After 20 per cent re- rcstorcd bcforc any dividends are paid. After p'cTcentrf'nTannua'i Said rcscrvc has rcachcd the sum of twenty earnmgs added. ^^^ centum of thc Outstanding capital stock, five per centum of the net earnings shall be , . annually added thereto. For the period of If mortcafror and m- -' -1 r 1 ,_ dorser default, amount ^^q years from thc datc whcn any default defaulted carried m J -' twTyears iXre'Ving occurs in thc payment of the interest, amorti- debited to reserve. z^tion installments, or principal on any first mortgage, by both mortgagor and indorser, the amount so defaulted shall be carried to a suspense account, and at the end of the two- year period specified, unless collected, shall be debited to reserve account. SYSTEM IN OPERATION 167 After deducting the twenty-five per centum Dividends may be ■.•If 1 • i 1 dc^clared Irum net earu- or the five per centum herein Ijel ore directecl in^s after reserve re- '■ quircmenla are met. to be deducted for credit to reserve account, any Federal land bank or joint-stock land bank may declare a dividend to shareholders of the whole or any part of the balance of its net earnings. The reserves of land banks shall be invested in accordance with rules and ., 1 , 1 Ts 1 1 Farm Loan Board regulations to be prescribed by the l^ederal must direct investment ° i. ^ q{ reserve fund. Farm Loan Board. RESERVE AND DIVIDENDS OF NATIONAL FARM LOAN ASSOCIATIONS Sec. 24. That every national farm-loan Ten per cent of net . . . eaniinKs of farm-loan association shall, out 01 its net earnings, associations semiannu- ally retamed ab reserve semi-annually carry to reserve account a fund untu it amounts •' -' to 20 per cent oi capital sum not less than ten per centum of such stock. net earnings until said reserve account shall show a credit balance equal to twenty per centum of the outstanding capital stock of said association. Whenever said reserve shall have been im- , n impaired, restored before dividends are paired, said credit balance of twenty per paid. centum shall be fully restored before any dividends are paid. After said reserve has serve Ts IccumuSed'^^ reached said sum of twenty per centum, two eamiS added!'"'' per centum of the net earnings shall be annu- ally added thereto. After deducting the ten per centum or the f^^^ivMenji^s^. d«.i^^^^^^^^^ two per centum hereinbefore directed to be ^^«^;« requirements credited to reserve account, said association may, at its discretion, declare a dividend to i68 THE FEDERAL FARM-LOAN shareholders of the whole or any part of the balance of said net earnings. Farm Loan Board The rcscrves of fami-loan associations directs investment of. .,, reserve fund. sliall DC invcstcd HI accordancc with rules and regulations to be prescribed by the Federal Farm Loan Board. Reserve fund paid Whencvcr any farm-loan association shall bink [n casVo?voiun- bc voluntarily liquidated a sum equal to its tary liquidation . , . -11111 reserve account as herein required shall be paid to and become the property of the Fed- eral land bank in which such loan association may be a shareholder. DEFAULTED LOANS indorser on first Sec. 25. That if thcrc shall bc dcf ault undcr ufild^ol^a^'' defaults; the tcrms of any indorsed first mortgage held may be required within , -r-\iiiiii iji •• 30 days to pay same in by a T cdcral land bank under the provisions cash or in bonds oi .-- , .. holding bank. of this Act, the national farm-loan association or agent through which said mortgage was received by said Federal land bank shall be notified of said default. Said association or agent may thereupon be required, within thirty days after such notice, to make good said default, either by payment of the amoimt unpaid thereon in cash, or by the substitution of an equal amount of farm-loan bonds issued by said land bank, with all unmatured cou- pons attached. EXEMPTION FROM TAXATION -, ., , , . . Sec. 26. That every Federal land bank Capital, surplus, and -^ iSTanka^L/llrmi and cvcry national farm-loan association, in- SYSTEM IN OPERATION 169 . -,. ,1 -i 1 1 1 loan rssociations ex- cluding the capital and reserve or surplus empt from taxes, ex- , . 1,1- -i'i,i r cept on real estate. therem and the income denved therelrom, shall be exempt from Federal, State, munic- ipal, and local taxation, except taxes upon real estate held, purchased, or taken by said bank or association under the provisions of section eleven and section thirteen of this Act. First mortgages executed to Federal MortgaRes and farm- .. 11111 loan bonds instnimcn- land banks, or to lomt-stock land banks, tauties of the oovem- •' ment and er^empt from and farm-loan bonds issued under the pro- taxation, indud.ng m- •^ come tnereirom. visions of this Act, shall be deemed and held to be instrumentalities of the Government of the United States, and as such they and the income derived therefrom shall be exempt from Federal, State, municipal, and local taxation. Nothing herein shall prevent the shares in ,,^iflf^„t^t'f ',",^1' any joint-stock land bank from being in- ifjfLuonaTLX"" eluded in the valuation of the personal prop- erty of the owner or holder of such shares, in assessing taxes imposed by authority of the State within which the bank is located; but such assessment and taxation shall be in manner and subject to the conditions and limitations contained in section fifty-two hundred and nineteen of the Revised Stat- utes with reference to the shares of national banking associations. Nothing herein shall be construed to ex- ^ankf a^'nTaslc^cS.ons empt the real property of Federal and joint- ^^^^^^^^ °'^'^'" '"^* stock land banks and national farm-loan associations from either State, county, or 170 THE FEDERAL FARM-LOAN municipal taxes, to the same extent, accord- ing to its value, as other real property is taxed. INVESTMENT IN FARM-LOAN BONDS Farm -loan bonds ^^^- ^7- That farm-loan bonds issued under iMr'^truir'Sfand thc provisions of this Act by Federal land L?i!ubHcdc'posir"'^ banks or joint-stock land banks shall be a lawful investment for all fiduciary and trust funds, and may be accepted as security for all public deposits. „ . , . „ Any member bank of the Federal Reserve Member banks mav -' bond's"'^ ''" ^''"""'"'"' System may buy and sell farm-loan bonds issued under the authority of this Act. Federal Reserve Any Fcdcral rcscrvc bank may buy and Banks may buy and sell .. . , ij- j Jj.U'Aj-j- farm-ioan bonds having scll I ami-loan bonds issucd under this Act to maturity not exceeding , , , , six months. the samc extent and subject to the same limitations placed upon the purchase and sale by said banks of State, county, district, and municipal bonds under subsection (b) of sec- tion fourteen of the Federal reserve Act ap- proved December twenty- third, nineteen hundred and thirteen. Farm Loan Board EXAMINATIONS Sec. 28. That the Federal Farm Loan fand°ba"nkexamrners.''^ Board shall appoint as many land-bank ex- aminers as in its judgment may be required to make careful examinations of the banks and associations permitted to do business under this Act. Said examiners shall be subject to the same SYSTEM IN OPERATION 171 tional bank examiners. Examiners subject to Examiners' salaries fixed by Farm Loan requirements, responsibilities and penalties Land bank exam- as are applicable to national bank examiners m,u\remcnts *as ^^na- under the national bank Act, the Federal Reserve Act and other provisions of law. Whenever directed by the Federal Farm Loan Board, said examiners shall examine the con- "^'"^^'^l "^ ^'''"^ ^"" dition of any national farm-loan association and report the same to the Farm Loan Com- Reports made to tbo • rr i* j_l tt 'j_ J ciaiions deposited with collectcd to thc i rcasurcr oi the United United States Treas- r , ^ -r^ -i i urcr; receiver reports States, subject to thc ordcr OI thc 1^ cdcral proceedings to Farm Loan Board. Farm Loan Board, and also make report to said board of all his acts and proceedings. The Secretary of the Treasury shall have authority to deposit at interest any money so received. Land banks similarly Upon dcfault of any obllgatlon, Federal placed in hands of re- ^ i.- 111 11 ceiver upon default. land banks and joint-stock banks may be de- clared insolvent and placed in the hands of a receiver by the Federal Farm Loan Board, and proceedings shall thereupon be had in accordance with the provisions of this section regarding national farm-loan associations. In C3.SG of insolvency and receivership stock jf any national farm-loan association shall held by association in •' land bank canceled j-jg declarcd insolvcnt and a receiver shall be and proceeds used to FederaUand^S. *° appointed thcrcfor by the Federal Farm Loan SYSTEM IN OPERATION 173 Board, the stock held by it in the Federal land bank of its district shall be canceled without impairment of its liability and all payments on such stock, with accrued divi- dends, if any, since the date of the last divi- dend shall be first applied to all debts of the insolvent farm-loan association to the Fed- eral land bank, and the balance, if any, shall be paid to the receiver of said farm-loan as- sociation: Provided, That in estimating said Contingent liability ' '-' as endorser on defaulted debts contingent liabilities incurred by na- ^ffi.^'l'„,^fCt''d ^'''^'"e. or counterfeit, or cause or procure to be falsely made, forged, or counterfeited, or willingly aid or assist in falsely making, forg- ing, or counterfeiting any bond, coupon, or paper in imitation of, or purporting to be in imitation of, the bonds or coupons issued by any land bank or national farm-loan as- sociation, now or hereafter authorized and acting under the laws of the United States; or any person who shall pass, utter, or pub- lish, or attempt to pass, utter, or publish For uttering false or anv falsc, forgcd, or counterfeited bond, cou- forged instrument. ^ ' o ' pon, or paper purporting to be issued by any such bank or association, knowing the same SYSTEM TN OPERATION 177 to be falsely made, forged, or counterfeited; or whoever shall falsely alter, or cause or procure to be falsely altered, or shall willingly For altering same or * . . willingly aidina therein. aid or assist m lalsely altering any such bond, coupon, or paper, or shall pass, utter, or publish as true any falsely altered or spurious bond, coupon, or paper issued, or purporting to have been issued, by any such bank or association, knowing the same to be falsely altered or spurious, shall be punished by a fine of not exceeding $5,000 or by imprison- ment not exceeding five years, or both. Other than the usual salary or director's no compensation ai- fee paid to any officer, director, or employee onTemp'Jowd by hind f ,'ir 1 •.• -nii bank or association ex- 01 a national larm-loan association, a rederal ccpt usual salary or fee. land bank, or a joint-stock land bank, and other than a reasonable fee paid by such as- sociation or bank to any officer, director, attorney, or employee for services rendered, no officer, director, attorney, or employee of an association or bank organized under this Act shall be a beneficiary of or receive, directly or indirectly, any fee, commission, gift, or other consideration for or in connec- tion with any transaction or business of such soJ)|i",|fn"'' ,1'^",^' °^ak^e association or bank. No land bank or na- IpSan^'^authonzcdl tional farm-loan association organized tmder this Act shall charge or receive any fee, com- mission, bonus, gift, or other consideration not herein specifically authorized. No exam- ., , , ■i^ -' Names of borrowers iner, public or private, shall disclose the "xamL^l '^''"'""''^ ^^ names of borrowers to other than the proper [78 THE FEDERAL FARM-LOAN Penalty prescribed. officers of a national farm-loan association or land bank without first having obtained express permission in writing from the Farm Loan Commissioner or from the board of directors of such association or bank, except when ordered to do so by a court of compe- tent jurisdiction or by direction of the Con- gress of the United States, or of either House thereof, or any committee of Congress or of either House duly authorized. Any person violating any provision of this paragraph shall be punished by a fine of not exceeding $5,000 or by imprisonment not exceeding one year, or both. Punishment pre- Any pcrson conncctcd In any capacity with scribed for embezzle- . , . , . . t-\ 1 1 ment, false entry, and any national larm-loan association, jbederal other fraudulent acts. "^ land bank, or joint-stock land bank, who embezzles, abstracts, or willfully misapplies any moneys, funds, or credits thereof, or who without authority from the directors draws any order, assigns any note, bond, draft, mortgage, judgment, or decree thereof, or who makes any false entry in any book, report, or statement of such association or land bank with intent in either case to de- fraud such institution or any other company, body politic or corporate, or any individual person, or to deceive any ofificer of a national farm-loan association or land bank or any agent appointed to examine into the affairs of any such association or bank, and every person who with like intent aids or abets SYSTEM IN OPERATION 179 any officer, clerk, or agent In any violation of this section, shall be punished by a fine of not exceeding $5,000 or by Imprisonment not exceeding five years, or both. Any person who shall deceive, defraud, or seHi"d'fo''r"fai« rrjrel impose upon, or who shall attempt to deceive, ^^i^^^^^^:::^^::''-^ 1 c 1 • n sues of bondii, defraud, or impose upon, any person, firm, or corporation by making any false pretense or representation regarding the character, Issue, security, or terms of any farm-loan bond, or coupon, Issued under the terms of this Act; or by falsely pretending or representing that any farm-loan bond, or coupon, issued under the terms of this Act by one class of land banks is a farm-loan bond, or coupon, Issued by another class of banks; or by falsely pre- tending or representing that any farm-loan bond, or coupon, Issued under the terms of this Act, or anything contained In said farm- loan bond, or coupon. Is anything other than, or different from, what it purports to be on the face of said bond or coupon, shall be fined not exceeding $500 or imprisoned not exceed- ing one year, or both. The Secretary of the Treasury is hereby .^.ff f,*, Telictio''n''*ilf authorized to direct and use the Secret Serv- violation of law. ice Division of the Treasury Department to detect, arrest, and deliver into custody of the United States marshal having jurisdiction, any person or persons violating any of the provisions of this section. iSo THE FEDERAL FARM-LOAN GOVERNMENT DEPOSITS Temporary deposits Sec. 32. That thc Sccrctary of the Treasury of public money in . ...... ^ . . . , Federal land banks au- is authoozed, 111 his Qiscretion, uoon the re- thorized. 1 -r-\ t t-i quest of the Federal Farm Loan Board, to make deposits for the temporary use of any Federal land bank, out of any money in the Treasury not otherwise appropriated. Such Certificate issued Federal land bank shall issue to the Secretary of the Treasury a certificate of indebtedness for any such deposit, bearing a rate of interest not to exceed the current rate charged for given*.'^^^'^*°'^ security Q^j^gj. Govcmment dcposits, to be secured by farm-loan bonds or other collateral, to the satisfaction of the Secretary of the Treasury. Certificates paid at Any such Certificate shall be redeemed and discretion of Secretary ii-.ii 11- of Treasury. paid by such land bank at the discretion ot Aggregate deposits thc Secretary of the Treasury. The aggregate '''"'*^'^- of all sums so deposited by the Secretary of the Treasury shall not exceed the sum of $6,000,000 at any one time. The Secretary of the Treasury is further Secretary of the ..... . , Treasury authorized to authoHZcd, m his discrctioii, upou thc rcQuest purchase Federal farm- ^ ^ loan bonds; exiended Qf ^]-,g Federal Farm Loan Board, from time by Congress (Joint luyT6°%2o)u,lZl to time during the fiscal years ending June ^°' '^"' thirtieth, nineteen hundred and eighteen, and June thirtieth, nineteen hundred and nine- teen, respectively, to purchase at par and accrued interest with any funds in the Treas- ury not otherwise appropriated, from any Federal land bank, farm-loan bonds issued by such bank. SYSTEM IN OPERi\TION i8i Such purchases shall not exceed the sum of $100,000,000 in either of such fiscal years. Any Federal land bank may at any time re- purchase at par and accrued interest for the purpose of redemption or resale any bonds so purchased from it and held in the Treasuiy. The bonds of any Federal land bank so shaii be repurchased purchased by the Secretary of the Treasury, from secretary, one ■"■ , . . year after termination and held in the Treasury under the provisions of pending war. of this amendment one year after the termi- nation of the pending war, shall upon thirty days' notice from the Secretary of the Treas- ury be redeemed or repurchased by such bank at par and accrued interest. The temporary organization of any Federal Temporary orpniza- r- J a •' jjon Qf Federal land land bank as provided in section four of said banks continued. Federal Farm Loan Act shall be continued so long as any farm-loan bonds purchased from it under the provisions of this amendment shall be held by the Treasury, and until the subscriptions to stock in such bank by national farm-loan associations shall equal the amount of stock held in such bank by the Government of the United States. ORGANIZATION EXPENSES Sec. T.'l That the sum of $100,000, or so organization ex- '~^^ • 1 u penses appropriated, much thereof as may be necessary, is hereby '^^^ursed under d^r«> appropriated, out of any money in the Treas- Board. ury not otherwise appropriated, to be ex- pended under the direction of the Federal Farm Loan Board, for the purpose of carrying i82 THE FEDERAL FARM-LOAN into effect the provisions of this Act, including the rent and equipment of necessary offices. LIMITATION OF COURT DECISIONS Whole art rantiot be Sec^ -j.^ That if anv clause, sentence, declared invalid liv de- '^^ j ' oHnvaikT^ '^''" *^"^' Paragraph, or part of this Act shall for any reason be adjudged by any court of compe- tent jurisdiction to be invalid, such judgment shall not aflect, impair, or invalidate the re- mainder of this Act, but shall be confined in its operation to the clause, sentence, para- graph, or part thereof directly involved in the controversy in which such judgment shall have been rendered. REPEALING CLAUSE Sec. 35. That all Acts or parts of Acts Other inconsistent _ , , - . . actn repealed; riKht re- mCOnSlStCnt With thlS Act arC hcrcby re- served to amend, alter, -' °'" ""«=i«^'^i- pealed, and this Act shall take effect upon its passage. The right to amend, alter, or repeal this Act is hereby expressly reserved. Approved July 17, 191 6. INDEX A Agents of Federal land banks: Agencies, limited to banking corporations chartered by State may be discontinued by Federal Farm Loan Board aggregate of unpaid principal of mortgage loans received limited borrowers through agents must purchase stock in Federal land bank defaulted loans must be paid by established after one year expenses, connected with making loans, paid by Federal land banks to agents paid, become part of loan paid off by amortization loans, made through agents for Federal land banks subject to same conditions as if made through national farm-loan associations . must indorse and become liable on loans nego- tiated by them provisions for required to collect payments on loans without charge Agricultural journals: bulletins of Fann Loan Board distributed to . Agriculture: loans may be used for purchase of lands for . . value of lands for agricultural purposes basis of appraisal Agriculture Department : bulletins of Federal Farm Loan Board dis- tributed by circulars of Federal Farm Loan Board dis- tributed by Section Page 15 149 15 150 15 150 15 25 15 148 168 148 15 15 15 149 149 149 14 147 15 H7 15 15 149 149 15 149 3 116 12 141 12 142 3 116 3 117 i84 THE FEDERAL FARM-LOAN Amortization : application of payments borrowers may require fees and charges to be paid off by circulars to be issued stating advantages expenses paid to agents of Federal land banks I)aid off by installments, payments sufficient to extinguish debt within limited period under term of mortgage may be collected by national farm-loan associations minimum amount of defaulted payments caus- ing insolvency mortgages must contain agreement for repay- ment of loan payments, may be required to be collected by agents of Federal land banks without charge purposes for which they may be employed . shall be held in trust sum borrowed to pay for stock in associations paid by tables, preparation, and publication Appointment : Farm Loan Commissioner farm-loan registrars Federal Farm Loan Board, members Federal land banks, employees land-bank appraisers land-bank examiners receivers Appraisal: agents of Federal land banks paid for expenses . applicants for loans to pay expenses incurred in . charges to borrowers regulated by Federal Farm Loan Board Federal Farm Loan Board, must require prescribe forms for reports prescribe rules land-bank appraisers to report on farm lands . loan committee, appraisal of farm lands report submitted to Federal land bank . . . loans granted for smaller amounts than applied for without new appraisal Section 22 13 3 I.S 12 13 29 12 15 22 22 9 3 3 3 3 4 3 3, 28 29 15 13 17 3 10 10 10 10 10 12 Page 162-6 147 1 1 6-7 149 140, I 145 171 140 149 165 164 135 116 112 114 112 118 114 114,170 171 149 146 154 116 138 138 138 137 137 142 SYSTEM IN OPERATION 185 10 12 12 12 19 19 30 138 142 142 142 158 158 175 Aijpraisal : — Continued provisions for reappraisal permitted by Federal land bank for additional loan value of lands, as basis for amount of loan . . . . for agricultural purposes, basis of appraisal . . see also Land-bank appraisers. Appraisers. See Land-bank appraisers. Assignment: land banks must assign to farm-loan registrar collateral security held by him for bonds issued right of redemption and substitution being reserved Attorney-General of United States: examination of State laws, to aid Farm Loan Commissioner Attorneys: Federal Farm Loan Board, employment Federal land banks, employment shall receive only usual fees, penalty for violation joint-stock land banks, shall receive only usual fees, penalty for violation national farm-loan associations, shall receive only usual fees, penalty for violation . . . , special counsel may be employed for examina- tion of State laws B Banking and Currency Committee, House: Federal farm-loan bill (H. R. 6838) referred to Federal farm-loan bill (H. R. 15004) reported with amendments Federal farm-loan bill (S. 2986) as amended presented in House and referred to reported with amendments personnel Baiiking and Currency Conmiittee, Senate : Federal farm-loan bill (S. 2986) referred to . . reported with amendments personnel *For these references see official copy of act issued by the Federal Farm Loan Board, Washington, D. C. Section P-jpfi 3 115 4 118 31 177,8 31 177.8 31 177,8 30 175 i86 THE FEDERAL FARM -LOAN Banking institutions: agencies of Federal land banks limited to bank- ing corporations chartered by State land-bank examiners shall not perform service for compensation for any other members of Federal Farm Loan Board pro- hibited from association with Bonds: farm-loan bonds may be exchanged into regis- tered bonds and re-exchanged into cou- pon bonds State, county, district, and municipal, farm- loan bonds bought and sold under same restrictions Bonds, official: Federal land banks, employees temporary directors forms, terms, and penal sums of surety bonds prescribed by Farm Loan Board receivers secretary-treasurer of farm-loan associations. . Bonds, United States: amortization payments may be used to pur- chase deposited as approved by Farm Loan Board . . farm-loan registrar, may temporarily accept as security on withdrawal of mortgages shall retain in his custody bonds pledged as collateral security for issue of farm-loan bonds Federal land banks, 5 per cent of capital must be invested in may buy and sell land banks, may tender as collateral security for farm-loan bond issue must assign to farm-loan registrar bonds held by him as collateral security returned to land banks upon rejection of farm- loan bond issue substitution allowed for other collateral Branch banks. See Federal land banks. Buildings: insurance money may be applied for rebuilding by mortgagor Section 15 31 3 20 27 4 4 17 29 7 22 19 19 5 13 18 19 19 22 12 Tare 148,9 175.6 113 160, I 170 120 118 171 129 165 159 126 146 156 158 163 143,4 SYSTEM IN OPERATION 187 Buildings : — Continued insured to satisfaction of Federal Farm Loan Board loans may be used for Bulletins: Federal Farm Ix)an Board, preparation and distribution By-laws: Federal land banks, supervised by Farm Loan Board Capital stock: Federal land banks, amount of subscription giving permanent organization amount to be stated in organization cer- tificate cannot be reduced to less than 5 per cent of outstanding bonds certificate of reduction Federal Farm Loan Board may authorize increase held as collateral for loans increase of stock for issue of additional shares required liabilities of associations deducted from their canceled shares minimum amount and conditions of payment original stock retired when associations sub- scribe $750,000 reserves to equal 20 per cent of shares of insolvent associations canceled ... subscription books opened by Farm Loan Board subscription required for loan unsubscribed balance by United States sub- ject to call value of shares '. vote restricted to stock held by United States and farm-loan associations joint-stock land banks, amount necessary for business cannot be subscribed by Government of United States 13 Section 12 12 Page M3 141 116,7 120 4 121 4 119 7 29 J 33 113 17 7 154 133 4 H9 29 5 173 124 5 23 29 125,6 166 172,3 5 7 125 132,3 5 5 125 124 5 124,5 16 151 16 151 i88 THE FEDERAL FARM-LOAN Capital stock: — Conthiucd Federal Farm Loan Board may authorize increase must be fully paid before issuance of bonds . . reserves to equal 20 per cent unpaid is subject to call by directors national farm-loan associations, applicant for loan must subscribe Federal Farm Loan Board may authorize in- crease held as collateral security par and voting value payment from loans provisions for reserves to equal 20 per cent of to increase as loans are made Charter. See Corporate existence. Chronology : rural-credit movement, during Sixty-fourth Congress prior to Sixty -fourth Congress Circulars : Federal Farm Loan Board, preparation and distribution Civil service: farm-ioan registrars exempted from provisions of law Federal Farm Loan Board employees ex- empted from provisions of law land-bank appraisers exempted from provi- sions of law land-bank examiners exempted from provi- sions of law Clerks: Federal Farm Loan Board, employment Federal land banks, employment Commissions: directors, attorneys, and employees of land banks or associations shall not receive, penalty for violation Federal land banks cannot receive commission or charge unless specifically authorized . . joint-stock land banks can only demand com- mission or charge specifically authorized . *See note page 185. Section 17 154 16 151 23 166 16 151 8 134 17 154 8 134 8 133,4 9 135 8 133,4 24 167 8 134 * * * * Page 116 3 115 3 115 3 115 3 115 3 4 115 118 31 177,8 14 148 16 152 SYSTEM IN OPERATION 189 Commissions : — Continued land banks or associations may not receive un- authorized commissions, penalty for vio- lation national farm-loan associations, based on un- paid principal of loans deducted from dividends paid agents, to be deducted from borrower's future dividends Conference Committee: personnel Contracts: Federal land banks, power to make Co-operation : circulars to be issued explaining principles and methods Corporate existence: Federal Farm Lxjan Board to charter land banks and associations Federal land banks, granting of charter joint-stock land banks, granting of charter. . . national farm-loan associations, granting of charter Counterfeiting: penalty for forging or counterfeiting bonds of land banks or associations Courts: accounts of farm-loan associations, receiver may settle under order of court of record. . borrowers' names may be ordered disclosed by court of competent jurisdiction limitation of decisions Customs: receipts, not to be deposited in land banks . . . , D Debts: national farm-loan associations, contingent liabilities included settlement by receiver stock canceled to pay land bank Definitions: farm-loan bonds first mortgage ♦ See note page 185. Section 31 9 9 15 * 17 4.17 16, 17 7.17 Papa 31 29 31 34 29 29 29 177,8 135,6 136 149 * 120 116,7 154 119. 154 150,154 132,154 176 172 177,8 182 126 173 172 173 112 III I go THE FEDERAL FARM-LOAN Depositaries. Sec Government depositaries. Directors : Federal land banks, length of term must be residents of district nomination and election of local directors . . prohibited from association with other bank- infj interests removal of district directors selection and appointment of district direct- ors shall receive only usual salary and fees, penalty for violation traveling expenses, etc vacancies provided for joint-stock land banks, number required .... shall receive only usual salary and fees, penalty for violation unpaid capital stock subject to call by . . . national farm-loan associations, assessments on members levied election and term of office must be residents of district and share- holders not to approve loans unfavorably reported. number not less than five service without compensation unless ap- proved by Farm Loan Board shall receive only usual salary and fees, penalty for violation vote upon membership voting limit of shareholders Dissolution: national farm-loan associations and land banks Dividends : land banks, declared after reserve require- ments are met not paid while reserve is impaired provisions for national farm-loan associations, commissions charged, deducted by Federal land banks. declared after reserve requirements are met. not paid while reserve is impaired provisions for Section 4 123 4 123 4 121,2 4 123 17 155 4 121 31 177,8 4 123 4 123 I6 150 31 177,8 1 6 151 7 130 7 128 7 128 lO 138 7 130,1 7 128 31 177,8 q 136.7 8 133 29 Page 171,2 23 167 23 167 23 167 9 136 24 167,8 24 167,8 24 167, 8 SYSTEM IN OPERATION 191 Dividends : — Continued paid on farm-loan association stock held as security paid on land-bank stock held as security stock in Federal land banks held by United States Government not to receive E Embezzlement: penalty in relation to land banks or national farm-loan associations Employees: Federal Farm Loan Board, exemption from civil-service law may be placed in classified service salaries and fees Federal land banks, appointment, etc., by directors appointment, etc., by temporary directors. . schedule of salaries to be reported shall receive only usual salary and fees, penalty for violation joint-stock land banks, shall receive only usual salary and fees, penalty for violation national farm-loan associations, shall receive only usual salary and fees, penalty for violation Equipment : loans may be used for purchase of term to be defined by Federal Farm Loan Board Examinations : land banks and farm-loan associations laws of States, by Farm Loan Commissioner . . Commissioner may request aid of Attorney- General provisions for Examiners. See Land bank examiners. False entry: penalty for False representation: penalty for false representation in relation to farm-loan bonds Section 31 3 3 3 4 4 3 31 31 31 12 12 3, 17. 28 30 30 28 Page 134 133 124,5 178 115 115 115 120 118 115.6 177,8 177,8 177,8 141 141 116, 154, 1 70-1 174 175 170,1 31 31 176 176,7 192 THE FEDERAL FARM-LOAN Seclion Fami lands: affidavit required from organizers of associa- tions as to ownership borrowers must engage in cultivation of land mortgaged delinquent taxes on mortgaged land to be reported Federal Farm Loan Board, must prescribe rules for appraisal must require appraisals land-bank appraisers to investigate and report on land offered for security loan committee to appraise and report on land offered for security loans, may be used for buildings and improve- ment of may be used for purchase of land may be used to liquidate indebtedness of owner mortgages on, invested in by Federal land banks pledged as collateral security for bond issue . . required as security for loans penalty for overvaluation by loan committee or appraiser purchasers may assume mortgages and stock interests of vendor taxes, judgments, liens, and assessments against, borrower to pay paid by mortgagee shall become part of mortgage debt value of, basis for amount of loans for agricultural purposes, basis of appraisal . . Fann Loan associations. See National farm- loan associations. Farm Loan Board. See Federal Farm Loan Board. Farm-loan bonds: amortization payments, may be used for pay- ment of may be used for purchase of applications for issue, provisions for assignment to farm-loan registrar as collateral security for bond issue borrower maj' elect to receive proceeds of loan in 7 12 7 10 3 10 10 12 12 12 13 18 12, 16 31 12 12 12 12 12 22 22 18 19 12 Page 142 130 138 116 138 137 141 141 141 156 140,152 175 142 143 143 142 142 165 165 158 144.5 SYSTEM IN OPERATION 193 Section Farm-loan bonds : — Continued capital stock of Federal land banks cannot be reduced below 5 per cent of capital stock of joint-stock land banks must be paid before issuance of certificate in face to state authority for issue, nontaxability, etc circulars to be issued stating advantages decisions of Farm Loan Board as to issue .... defaulted loans may be paid by definition of term denominations exchange into registered bonds and re-ex- change into coupon bonds exempted from taxation expense of preparation, assessed on land banks paid by Secretary of the Treasury farm-loan registrar, can receive only qualified first mortgages to secure issue must see that collateral security covers .... shall deliver to banks applying shall promptly execute and deliver upon notice of approval of issue Federal Farm Loan Board, can grant or refuse authority to issue may authorize payment at any bank shall direct distinguishing marks of joint- stock land-bank bonds shall fix amount and terms of shall prescribe rules for payment and re- tirement shall reimburse Secretary of the Treasury for expense of preparing Federal land banks, may hypothecate mort- gages as security for may issue, buy, sell, and retire Federal reserve banks may buy and sell Federal reserve member banks may buy and sell form, prescribed by Farm Loan Board provisions for to be prepared by Secretary of the Treasury Government deposits secured by Page 7 133 16 151 21 162 3 1 16-7 18 156 25 168 2 112 20 159 20 160, 1 21, 26 162 ao 160 20 160 19 158-9 19 159 20 160 19 157 153, 17,18 156-7 22 164,5 16 151. 2 20 159 20 160 20 160 13 145 13 145 27 170 27 170 16,17,21 155.162 20 159, 160 20 160 27.32 170, 180 194 THE FEDERAL FARM-LOAN Farm-loan bonds: — Continued held in Treasury subject to delivery upon order of Farm Loan Board instrumentalities of Government of United States interest, charges on loans limited to I per cent over rate on bonds interest on pledged mortgages available for payment of rate and time of payment fixed investigations as directed by Farm Loan Board made by appraisers investment in Government funds prohibited from issue, authorized by Farm Loan Board in writing banks apply through farm-loan registrar for authority banks may be required to give additional security information furnished to Farm Loan Board by registrar limitation placed on land banks provisions for rejected by Farm Loan Board, collateral security must be returned when approved by Farm Loan Board, col- lateral security retained joint-stock land-bank bonds, may be issued against hypothecated mortgages must differ in form and color from Federal land-bank bonds shall state authority for issuance land banks bound by acts'of officers in issuing . liability of land banks for matured, full face value to be paid payable at bank of issuance mortgages, ineligible as security during con- tinuance of insufficient protection under State laws ineligible as security previous to examina- tion of State laws made before first issue of bonds, interest determined by issuing bank Section 20 160 26 169 12, l6 140,152 22 20 164 159 lO 27 6 138 170 127 i8 157 3.18 156 19 159 i8 14,16 19 156 147,151 157,8,9 19 157 19 157 16 152-3 16 16 21 21 22 22 1 51-2 153 161 161 164 163 30 174-5 30 174-5 12 141 Page SYSTEM IN OPERATION 195 Farm-loan bonds: — Continued tendered as collateral security for issue of . . national farm-loan associations may issue cer- tificates bearing interest convertible into . payment and retirement at option of land banks penalty for false representation as to penalty for forging or counterfeiting plates, dies, etc., to be retained by the Secre- tary of the Treasury special provisions of terms prescribed by Farm Loan Board trust funds may be invested in United States bonds or cash as temporary se- curity may be accepted on withdrawal of mortgages withdrawal of collateral securities on surren- der of Farm Loan Bureau. See Federal Farm Loan Bureau. Farm Loan Commissioner: certificate signed by, to be contained in bonds . decides as to contingent liabilities of insolvent associations directors of Federal land banks, notice of elec- tion to be given by Commissioner examination of laws of States, duty of Com- missioner may ask assistance of Attorney-General .... special counsel may be employed land-bank examiners, may disclose names of borrowers with permission of report semiannually to organization certificate of Federal land banks transmitted to President of United States to designate stock of United States in Federal land banks voted by Farm loan registrars: application for bond issue, etc., transmitted by appointment collateral security for bond issue, deposited subject to control of registrar as trustee . . . must be assigned by land banks to registrar. . only qualified first mortgages received Section Page 18,21 21 158.163 II 139. 140 20 159 31 177,8 31 176 20 160 21 161,2 17 155 27 170 19 159 22 164 162 29 173 4 121,2 30 174 30 175 30 175 31 177,8 28 171 4 119 3 112 5 125 18 156 3 114 19 158 19 158 19 158 196 THE FEDERAL FARM-LOAN Fiinn loan registrars: — Continued required to be tendereti to retained in his custody upon approval of bond issue returned to land banks upon rejection of bond issue United States bonds or cash temporarily accepted control, as trustee, of payments collected on pledged mortgages decisions of Farm Loan Board as to bond issue transmitted to duty to see that outstanding farm-loan bonds are covered by collateral security exemption from civil-service law farm-loan bonds, delivery to banks applying . . Federal land banks may hypothecate mort- gages with, as security for farm-loan bonds information regarding bond issues furnished to Farm Loan Board investment of sums paid on mortgages to be deposited with land banks to apply for authority to issue bonds through notified of collections made on pledged mort- gages payments credited and mortgages canceled by qualifications registrars removed by Farm Loan Board salaries and expenses Farmers: bulletins of Farm Loan Board distributed to organizations of Federal land banks, one district director re- quired to be practical farmer Federal Farm Loan Act: administration courts, limitation of decisions regarding Act . . . organization expenses under personnel of committees which considered bill . . repealing clause title Federal Farm Loan Board: administration of Federal Farm Loan Act under *See note page 1S5, Section Page 2, 18 19 19 19 22 18 19 3 19,20 13 18 22 3,18 22 22 3 17 3 I 34 33 * 35 112, 156 157 157 158 165-6 157 159 115 157, 160 145 157 165 114,156 162-3 163 114 155 ii4r5 116-7 123 III 182 181,2 * 182 III III SYSTEM IN OPERATION 197 Federal Farm Loan Board: — Continued amortization tables to be published by board . . application for bond issue, etc., transmitted to board appraisals, charges to borrowers regulated .... forms for reports prescribed must be required by board rules prescribed buildings must be insured to satisfaction of board bulletins to be prepared by board capital stock of land banks and associations, increase authorized by board charter land banks and associations circulars to be prepared by board collateral security for bond issue deposited as approved by board decisions as to bond issue transmitted to land banks and farm-loan registrar directors of associations, service without com- pensation except when approved by board employees, authorized exemption from civil-service law may be placed in classified service by Presi- dent salaries and fees "equipment" to be defined by board establishment, etc examination of land banks made and reported to board examination of laws of States reported to board farm-loan bonds, additional security may be required amount and terms fixed application for issue made through farm- loan registrar to board authority to grant or refuse issue forms and terms prescribed form approved by board held in Treasury subject to delivery by order of board issue approved issue authorized in writing payment at any bank may be authorized .... Section P.-il^e 116 18 156 13, >7 1 4^^ 1 54 10 138 ?> 116 10 138 12 143 3 1 1 6-7 17 154 17 154 3 1 16-7 19 158 18 157 7 128 3 115 3 115 3 n."? 3 115 12 141 3 112-117 116,154, ,17,28 1 70-1 30 174 19 159 20 159 18 156 17,18 154,156 17 155 20, 21 160, 162 20 160 13 145 18 157 22 163 [p8 THE FEDERAL FARM-LOAN F"ederal Farm Loan Board: — Continued rules for exchange into registered bonds, etc., prescribed rules for payment and retirement Secretary of the Treasury reimbursed by board for preparing farm-loan registrars, appointment removal shall furnish information regarding bond issues shall retain collateral security upon ap- proval of bond issue by board shall return collateral security upon rejec- tion of bond issue by board Federal land banks, agencies may be discon- tinued books of subscription to capital stock opened by board branches established with approval of board by-laws supervised by board changes in organization certificate may be ordered compensation fixed by directors approved by board compensation of employees approved by board compensation of temporary directors fixed by board conditions of payment for capital stock prescribed district directors, designation of length of term district directors, removal districts established required by board to repay pro-rata sums advanced by one bank to pay coupons of another special approval required to hold real estate acquired in satisfaction of debts three district directors appointed by board . to report reduction of stock to submit schedule of employees* salaries to board first meeting Section 20 20 1 60-1 159 20 3 17 160 114 155 18 157 19 157-8 19 157 15 150 4 4 125 118 120 4 119 4 123-4 4 118 4 118 5 124 4 17 4 122 155 117 17 Page 155 13 146 4 121 29 173 3 1 1 5-6 3 "3 SYSTEM IN OPERATION 199 Federal Farm Loan Board: — Continued Government deposits in Federal land banks on request "improvement" to be defined by board information to accompany schedule of securi- ties tendered prescribed insurance money used for rebuilding interest charges of Federal land banks fixed by board investment of farm-loan association reserves directed by board investment of land-bank reserves directed by board joint-stock land banks, charter issued by board distinguishing marks of bonds directed by board forms of bonds prescribed by board land-bank appraisers, appointment removal salaries fixed by board to make investigations directed by board . . . land-banlc examiners, appointment removal salaries fixed by board land banks and associations under supervisory authority of board liens on farm lands, approval required loans, form and conditions of agreement pre- scribed forms for applicant prescribed to members of farm-loan associations, ap- proval required losses through default to be assessed against solvent land banks by board members, oath of office prohibited from association with other banking interests qualifications, salaries, term of office, etc. . . salaries and expenses to be paid by United States mortgages, may be declared ineligible as secur- ity because of State laws rules for payment of principal made Section Page 32 180 12 141 18 156 12 143-4 17 154 24 168 23 167 16 150 16 1 51-2 16 X51-2 3 114 17 155 3 115 10 133 3,28 114 17 155 28 171 17 155 , 2 1 1 1-2 12 142-3 12 143 9 135 21 161 3 "3 3 "3 3 1 12-3 3 "5 30 174.5 12 1 40-1 200 THE FEDERAL FARM-LOAN Federal Farm Loan Board: — Continued national farm-loan associations, application for incorj3oration sent to board bond of secretary-treasurer approved charter granted by boai-d consolidation, under rules and regulations . . . increase in stock, quarterly reports to board insolvent, approval of amount of contingent liabilities to make quarterly reports organization expenses under Federal Farm Loan Act, supervision organization fund made available for bulletins . powers quarterly statements made to board receiver for farm-loan associations, appoint- ment collections subject to order of board to report to board to settle accounts under direction of board . . receiver for land banks, apjiointment report, annual, made to House of Representa- tives statement prepared at request of State execu- tive surety bonds, form, terms, and penal sums prescribed temporary employment of persons for special work vacancies filled by President of United States . . voluntary liquidation of land banks and asso- ciations, consent given vote of stock of United States in Federal land banks directed by board Federal Farm Loan Bureau: established Federal land banks: advance of funds to farm-loan associations permitted agents. See Agents of Federal land banks, amortization tables used by, to be published . . apDlication and report of loan committee re- ferred to land-bank appraisers Section Page 7 131 7 129 7 131 29 173 8 134 29 173 7 129 33 181,2 3 117 17 153-156 3 116 29 171 29 172 29 172 29 172 29 172 3 116 30 175 17 155 3 114 3 "3-4 29 174 5 125 3 112 7 130 3 160 10 138 SYSTEM IN OPERATION 20I Federal land hanks:— Co7tUnued application for authority to issue bonds made through farm-loan registrar appraisal report forms prescribed by Federal Farm Loan Board appraiser to investigate solvency, etc., of or- ganizers of farm-loan associations assessed for expense of preparing farm-loan bonds attorneys shall receive only usual salary and fees, penalty for violation banking or other business not expressly au- thorized cannot be transacted borrower, may require advancement of fees and charges through agents must purchase stock bound by acts of officers in issuing bonds .... branches established with approval of Federal Farm Loan Board capital stock, amount of subscription giving permanent organization books of subscription opened by Farm Loan Board cannot be reduced to less than 5 per cent or outstanding bonds certificate of reduction Federal Farm Loan Board may authorize increase held as collateral for loans increase for issue of shares pennitted liabilities of associations deducted from their canceled shares minimum amount and conditions of payment one-fourth of shares of farm-loan associa- tions in quick assets organizers of farm-loan associations must subscribe original stock retired when farm-loan asso- ciations subscribe $750,000 shares of insolvent farm-loan associations canceled subscription required for loan unsubscribed balance held by United States subject to call Section Pace 18 156 10 138 7 I31-2 20 160 31 177-8 14 147 13 147 15 148 21 161 4 118 4 121 5 125 7 133 29 173-4 17 154 7 133 4 119 29 173 5 I -'4 5 126 7 132 5 125-6 29 172-3 7 131 125 202 THE FEDERAL FARM-LOAN Section Federal land banks: — Continued value of shares vote restricted to stock held by United States and associations chartered by Federal Farm Loan Board collateral security for bond issue, assigned to registrar may be substituted by similar mortgages, etc may be withdrawn by surrender of equal amount of farm-loan bonds returned upon rejection of bond issue by Farm Loan Board collections for, by secretary-treasurer of loan associations must be transmitted may be required of agents without charge . . commissions, if specifically authorized can be received of agents to be deducted from borrower's future dividends paid farm-loan associations deducted from dividends contingent liabilities of insolvent farm-loan associations determined defaults under terms of mortgages held by . . . delinquent taxes on mortgaged land reported . deposits, may be accepted from farm-loan as- sociations of current funds cannot be accepted pay- able upon demand except from stock- holders directors, length of term may permit names of borrowers to be dis- closed must be residents of district nomination and election of local directors . . prohibited from association with other bank- ing interests removal of district directors selection and appointment of district direct- ors shall receive only usual salary and fees, pen alty for violation traveling expenses, etc vacancies in board provided for 13 Page 124 5 124-5 17 154 19 158 22 163 22 164 19 157 7 129 15 149 14 148 15 149 9 136 29 173 25 168 7 130 146 14 147 4 122 31 177-8 4 123 4 121-2 4 123 17 155 4 121 31 177 4 123 4 123 SYSTEM IN OPERATION 203 Federal land banks: — Continued districts, boundaries may be readjusted establishment dividends, declared after reserve requirements aro met not paid while reserve is impaired provisions for employees, appointment and compensation schedule of salaries to be reoorted shall receive only usual salary and fees, penalty for violation employment as financial agents of Govern- ment of United vStates establishment, etc examination of condition recjuired by Farm Loan Board exempted from taxation exercise of unauthorized power shall not im- pair loan or mortgage farm-loan bonds, delivered by farm-loan reg- istrar exempt from taxation issue limited lawful investment for trust funds may be issued, bought, sold, and retired by . . only qualified first mortgages as security. . . . payment and retirement at option of land banks promptly executed and delivered upon no- tice of approval of issue fama-loan registrar to be notified of pay- ments received by Federal Farm Loan Board, can grant or re- fuse authority to issue bonds may require additional security to exercise general supervisory authority over fees, commissions, etc., shall not be charged or received unless authorized, penalty for violation first mortgages only accepted except those taken for additional security funds, received by farm-loan associations transmitted to borrower may be in current funds, or in farm-loan bonds 14 Section 20 19 31 14 II 12 Page 4 117 4 118 23 167 23 167 23 167 4 118 3 1 15-6 31 177 6 1 26-7 4 117-124 116,154, 3, 17,28 171 26 168-9 12 144 20 160 26 i68-g 14 147-8 27 170 13 145 19 158 159 157 22 162-3 154, 7,18 156-7 19 159 17 155 177 147 139-140 144-5 204 THE FEDERAL FARM-LOAN Federal land banks: — Continued Government depositaries, designation security required Government deposits, authorized certificate to be issued incorporation and powers indebtedness of insolvent associations paid by canceled stock interest, charges to be fixed by Farm Loan Board on mortgages made prior to issue of farm- loan bonds determined by on pledged mortgages available joint-stock land banks, bonds must differ from bonds of organized under requirements of Sec. 4 to have same powers and Hmitations, with exceptions land-bank appraisers, salaries paid by banks. . land-bank examiners, penalty for accepting loan or gratuity liability, for their own issue, etc of all banks for payment of each bond loan committee report and appraisal sub- mitted to loans, applicants charged fees for appraisal and determination of title members of farm-loan associations entitled to must be made through their agents or farm- loan associations payment for stock in farm-loan associations from to farm-loan associations unfavorably reported not to be made location included in title losses through default to be assessed against solvent land banks minutes must show liability as guarantor .... money may be borrowed by mortgages, aj^plication of payments collected on exempt from taxation indorsed by farm-loan associations Section 6 6 32 32 4 29 17 12 22 16 16 16 3 31 21 SI 10 13 9 H 9 7,9 10 4 21 21 13 22 26 II Page 126-7 127 180 180 119-121 173 140 164 I5I-2 176 161 161-2 137 146-7 135 147 135 132, 136 138 118 161 I61-2 146 165 169 139 SYSTEM IN OPERATION 205 Federal land banks: — Continued investment in, on farm lands of district may be hypothecated as security with farm- loan registrar payments to be held in trust receipt from farm-loan associations limited . . tendered as collateral security for bond issue national farm-loan associations, articles of as- sociation sent to bank charter forwarded through banks , may coUect and pay to land banks payments due under terms of mortgage noncompliance with application by borrower reported to one established in each district organization certificate to be made by tempo- rary directors penalty, for embezzlement, false entry, etc ... for forging or counterfeiting bonds of land banks and associations powers property may be bought, sold, or leased provisions not applicable to joint-stock land banks purchasers of lands permitted to assume mort- gages and stock interests of vendors real estate, acquired in satisfaction of debts may be held limited time not exempted from taxation real property taxable as other real property . . . reappraisal permitted for additional loan receiver, appointment repayment pro rata of sums advanced by one bank to pay coupons of another reserves, amounts defaulted debited to investment directed by Farm Loan Board . . five per cent retained annually after 20-per- cent fund accumulated twenty-five per cent of net earnings semi- annually retained provisions for to equal 20 per cent of capital stock restrictions on Section 13 13 22 14 18 7 7 13 7 4 4 31 31 13 13 16 12 13 26 26 12 29 Page M5 145 164 147-8 156 131 132 145 129-130 118 1 1 8-9 178 176 145-147 146 152 142 146 169 169-170 142 172 17 155 23 166 23 167 23 166 23 166 23 166-7 23 166 14 147-8 2o6 THE FEDERAL FARM-LOAN Section Federal land banks; — Continued schedule of securities tendered furnished with mortgages securities and current funds may be deposited in Federal Reserve member banks statement of condition, rendered quarterly . . . temporary directors, employment of attor- neys, etc official bonds qualifications and compensation temporary management United States bonds may be bought and sold by voluntary liquidation with consent of Farm Loan Board see also Agents of Federal land banks. Federal Reserve banks: farm-loan bonds, permission to buy and sell qualified Federal Reserve member banks: farm-loan bonds, permission to buy and sell . . . Federal land banks may deposit securities and current funds in Fees: applicants for loans may be charged for ap- praisal and determination of title borrower may require fees and charges to be paid off in amortization payments directors, attorneys, and employees of land banks or associations to receive only usual salary and fees, penalty for violation . . . . land banks or associations may not charge or receive unauthorized fees, penalty for violation State fees and recording charges may be in- cluded in cost of negotiating mortgage loans Fertilizers: loans may be used for purchase of Forgery: penalty for forging or counterfeiting bonds of land banks or associations Fraud : penalty for fraudulent acts in relation to land bank's nr associations i8 13 3 4 4 4 4 13 29 Page 156 146 116 118 118 118 118 174 27 170 27 170 13 146 13 146-7 13 147 31 177-8 31 177-8 13 146-7 12 141 31 176 31 J 78 SYSTEM IN OPERATION 207 G Government depositaries: designation and duties of Government deposits. See Public money. Government of United States: Federal land banks, capital stock owned by Government to be allowed vote capital stock owned by Government to re- ceive no dividends capital stock shares not otherwise taken subscribed by joint-stock land banks, capital stock , cannot be subscribed by mortgages and farm-loan bonds deemed in- strxmientalities of H Homesteads : State laws on exemptions examined by Farm Loan Commissioner House of Representatives: borrowers' names may be ordered disclosed by personnel of committees which considered Federal farm-loan bills report of Federal Farm Loan Board made to . . . I Insolvency: Federal Farm Loan Board, may declare asso- ciation insolvent may declare land banks insolvent minimum amount defaulted causing Insurance : buildings must be insured to satisfaction of Federal Farm Loan Board mortgagor may require use for rebuilding .... payable to mortgagee Interest: application of payments charges of Federal land banks fixed by Farm Loan Board defaulted payments, minimum amount caus- ing insolvency *See note pnae 185. Section 30 3 Page 126-7 5 124-,-, 5 124 5 125 16 151 26 169 174 177-8 * 116 29 171 29 172 29 171 12 143 12 143-4 12 144 22 164-5 17 154 29 171 208 THE FEDERAL FARM-LOAN Section Interest : — Continued shall carry 8-per-cent interest full amount to be paid when due Government deposits to bear on first mortgages, made prior to issue of farm- loan bonds, determined by Federal land banks rate on mortgages, fixed at not more than 6 per cent limited to i per cent over rate on farm-loan bonds receiver's collections, deposits by Secretary of the Treasury time for payment and rate on farm-loan bonds . unpaid taxes, liens, judgments, and assess- ments against land mortgaged shall bear 8-per-cent interest J Joint-stock land banks: amortization tables used by, to be published . . application of payments collected on pledged mortgages attorneys shall receive only usual salary and fees, penalty for violation bound by acts of officers in issuing bonds .... business not expressly authorized cannot be transacted _ capital stock amount necessary for business . . Federal Farm Loan Board may authorize mcrease Government of United States cannot sub- scribe to must be paid before issuance of bonds unpaid subject to call by directors chartered by Federal Farm Loan Board collateral security, may be substituted by similar mortgages, etc may be withdrawn by surrender of equal amount of farm-loan bonds retained by farm-loan registrar for bond issue must be assigned to him returned upon refusal to allow bond issue by Farm Loan Board 12 22 32 12 12 12, l6 29 20 12 Pufje 143 1O4 180 140 141 140 173 159 143 3 116 22 165 31 177-8 21 161 16 151 16 151 17 154 16 151 16 151 16 151 16,17 150, 154 22 163 22 X64 19 158 19 157 SYSTEM IN OPERATION 209 Joint-stock land banks: — Continued commissions not specifically authorized not allowed directors, may permit names of borrowers to be disclosed number required shall receive only usual salary and fees, penalty for violation dividends, declared after reserve requirements are met not paid while reserve is impaired provisions for employees shall receive only usual salary and fees, penalty for violation employment as financial agents of Government of United States examination of condition required by Farm Loan Board exemptions from provisions governing Fed- eral land banks farm-loan bonds, application for authority to issue made through farm-loan registrar . . . authority to issue against hypothecated mortgages delivered by farm-loan registrar exempt from taxation expense of preparation charged to bank . . . . lawful investment for trust funds limited power to issue or obligate themselves for must differ in form and color from Federal land-bank bonds payment and retirement at option of land banks after five years promptly executed and delivered upon no- tice of approval of issue shall state authority for issuance farm-loan registrar, shall receive only qualified first mortgages from land banks to secure bond issue to be notified of payments received by bank Federal Farm Loan Board, exercise general supervisor^' authority over grant or refuse authority to issue Section 16 Page 152 31 16 177-8 31 177-8 23 23 23 167 167 166-7 31 177-8 6 3,17,28 126-7 116,154, 1 70-1 16 152 18 156 16 20 26 20 153-4 160 169 160 27 170 16 151 16 152 20 159 19 16 157 152 19 22 158 162 17 17,18 154, 15^ 2IO THE FEDERAL FARIM-LOAN Joint-stock land banks: — Continued may require additional security prescribe appraisal report forms prescribe forms for bonds shall direct distinguishing marks fees, commissions, etc., shall not be charged or received unless authorized, penalty for violation Government depositaries, designation security required interest, limited to i per cent over rate paid on farm-loan bonds on pledged mortgages available land-bank appraisers, application and report of loan committee referred to appraisers . . . salaries paid by bank land-bank examiners, penalty for accepting loan or gratuity from land banks loans, secured by first mortgages on farm lands unfavorably reported not to be made mortgages, exempt from taxation tendered by land banks as collateral security for bond issue number of persons required for formation organized under Federal land-bank require- ments payments on pledged mortgages to be held in trust penalty, embezzlement, false entry, etc forging or counterfeiting bonds of powers and limitations same as Federal land banks, with exceptions provisions and powers real property taxable as other real property . . receiver, appointment reserves, amounts defaulted debited to investment directed by Farm Loan Board . . five per cent retained annually after 20-per- cent fund accumulated twenty-five per cent of net earnings semi- annually retained provisions for shall equal 20 per cent of capital stock .... Section Page 19 10 16 16 31 6 6 16 22 10 . 3 31 16 10 26 18 16 16 22 31 31 16 16 26 29 23 23 23 23 23 23 159 138 153 152 147-8 126-7 127 152 164 138 "4-5 177-8 152 138 169 156 150 151 164 178 176 151 150-154 169-170 172 166 167 166 166 166-7 166 SYSTEM IN OPERATION 211 Joint-stock land banks: — Continued restrictions on mortgage loans same as Federal land bank, except as stated schedule of securities tendered furnished with mortgage shareholders, have same voting privileges as shareholders in national banking associa- tions liability taxable on shares as in national banks. . . . statement of condition, rendered quarterly . . . voluntary liquidation with consent of Farm Loan Board Judgments : limitation under Federal Farm Loan Act .... on mortgaged land, paid by mortgagee shall become part of mortgage debt shall be paid by borrower L Laborers : Federal Farm Loan Board, employment Federal land banks, employment Land-bank appraisers: appointment by Farm Loan Board eligibility for appointment exemption from civil-service law investigate and report upon land offered as security investigation directed by Farm Loan Board to be made investigation of solvency, etc., of organizers of farm-loan associations loan committee report referred to, by land banks loans unfavorably reported not to be made . . . penalty for overvaluation of lands offered as security qualifications of removal by Federal Farm Loan Board Land-bank examiners: appointment of borrowers' names not to be disclosed, penalty for violation Section Page 16 152 18 156 i6 i6 26 3 169 116 29 174 34 182 12 12 143 143 3 4 118 3 lO 3 114 138 lO 138 10 138 7 I3I-2 lO lo 138 138 31 3 17 175 114 3,28 114, 170 31 177-8 212 THE FEDERAL FARM-LOAN Land-bank examiners: — Continued exemption from civil-service law penalty for accepting loan or gratuity from land bank or national farm-loan associa- tion qualifications of removal by Federal Farm Loan Board reports on farm-loan associations semiannually requirements same as those of national bank examiners salaries and expenses shall not perform service for compensation for any other banking institution Land banks. See Federal land banks — Joint- stock land banks. Land titles: determination, agents of Federal land banks paid for expenses applicants for loans charged for expenses . . charges regulated by Farm Loan Board .... laws of States examined and report made Laws: States, examination and report by Farm Loan Commissioner examination, Attorney-General of United States to aid examination, special counsel employed Lawyers. See Attorneys. Liabilities: debts of insolvent farm-loan associations to include contingent liabilities receiver and Federal land Ijank determine con- tingent liabilities of association Liability : agents of Federal land banks liable for loans negotiated Federal land bank, for its own issue, primarily . . minutes of land bank must show liabiUty as guarantor national farm-loan associations, cancellation of stock not to impair shareholders, joint-stock land banks Liens: on mortgaged land, borrowers shall pay Section Page 31 175-^ 3 114 17 155 28 171 28 170-I 3,28 114,171 31 30 21 29 16 12 "5 176 15 149 13 146-7 17 154 30 174 174 30 30 175 29 173 29 173 15 21 149-150 161 I6I-2 173 150 143 SYSTEM IN OPERATION 213 Liens : — Contin ued paid by mortgagee shall become part of mortgage debt Liquidation : land banks and farm-loan associations, with consent of Farm Loan Board Live stock: loans may be used for purchase of Loan Commissioner. See Farm Loan Commis- Scction I'age sioner. Loan committee: appraise and report on land offered for security election of eligibility for membership expenses paid by farm-loan associations member interested cannot pass on loan mortgage loan, application referred to unfavorably reported, not to be approved . . . penalty for willfully overvaluing land offered as security for loans report, must accompany articles of association referred to land-bank appraisers by land banks submitted to Federal land banks Loans: additional, increase of capital stock of farm- loan associations reappraisal permitted by Federal larjd banks agents of Federal land banks, aggregate of mortgage loans received from, limited .... expenses paid become part of loan may be required to collect payments with- out charge must indorse and become liable for pay- ments on paid actual expenses connected with making subject to same conditions as farm-loan associations agricultural value of lands mortgaged basis for amount applicants, charged for expenses of appraisal, etc must be member of farm-loan association . . must state on prescribed forms purposes for which loan is to be used 12 29 12 10 7 10 7 10 ID 10 31 7 10 10 8 12 15 15 15 15 15 15 12 13 8 12 143 172 141 137 128 137 130 138 137 138 175 131 138 138 134 142 149-150 149 149 149-150 149 148 142 146-7 134 143 214 THE FEDERAL FARM-LOAN Section Loans : — Continued appraisal, new, not required for smaller amounts than applied for borrowers, limited in amount of loan may elect to receive proceeds in farm-loan bonds must engage in cultivation of land mort- gaged to receive from Federal land banks when available capital stock, Federal land banks, as collateral security Federal land banks, subscribed to obtain . . national farm-loan associations, as collateral security national farm-loan associations, subscribed to obtain defaulted exercise of unauthorized power by Federal land bank or farm-loan association does not impair expended otherwise than agreed, whole may become payable Federal land banks must make through their agents or national farm-loan associations . . increase above maximum limit by addition of loan for purchase of stock prohibited interest or principal paid through farm-loan associations investment of Government funds in mortgage loans prohibited joint-stock land banks, have same restrictions as Federal land banks, except as stated . . interest charged limited to i per cent over rate paid on farm-loan bonds . loans secured by first mortgages on farm lands laws of States examined and report made national farm-loan associations, amount limited commissions based on unpaid principal of . . defaulted, minimum amount causing insol- vency obtained from Federal land banks supervision by secretary-treasurer Page 12 12 12 12 9 7 7 8 8 25 12 12 14 9 7 6 i6 i6 142 143 144-5 142 135 133 132 134 i.M 168 144 144 147 135 129 127 152 152 16 152 30 174 7 131 9 135-6 29 171 7,9 132, 136 7 129 SYSTEM IN OPERATION 215 Section Page Loans: — Continued needs of farmers, districts apportioned relative to noncompliance with provisions to be reported . payment for stock in farm-loan associations from penalty, for acceptance of loan from land banks or national farm-loan associations by land-bank examiners for making false statement in application . . purposes for which loans may be made restrictions on secured by first mortgages on farm lands in land-bank districts State fees and recording charges may be in- cluded in cost of negotiating unfavorably reported, by land-bank apprais- ers, not to be made by loan committee, not to be approved Losses : amounts defaulted debited to reserves of land banks assessed against solvent land banks liable defaulted loan must be paid by association or agent through which made minimiun amount defaulted causing insolvency M Mortgages: amortization payments may be used for loans on first mortgages amortization plan agreement in first mortgages appraisal, etc., applicants charged for expenses of assumed by legal representatives of borrower, in case of death assumed by purchasers of land mortgaged . . . collateral sectirity for bond issue, deposited as approved by Farm Loan Board land banks shall tender , may be substituted by similar mortgages . . must be assigned to farm-loan registrar as trustee retained by registrar on approval of issue . , . 4 7 9,12 31 31 12 12 12 13 10 10 23 21 25 29 22 12 13 12 12 19 18 22 19 19 117 130 135. 144 175-6 175 1 41 -2 140-145 140 146-7 138 137 166 162 168 171 165 140 147 143 142 158 156 163 158 157-8 2l6 THE FEDERAL FARM-LOAN Mortgages : — Continued returned to land banks upon refusal of issue. . contingent liability of indorser estimated as debt deemed instrumentalities of Government of United States deiaults, borrower defaults in conditions of, whole may become payable debited to reserves of land banks must be paid by association or agent in- dorsing shall carry eight per cent interest exercise of unauthorized power by Federal land bank or national farm-loan associa- tion not to invalidate farm-loan registrar, can receive only qualified first mortgages to secure bond issue notified of collections made Federal Farm Loan Board, investigations di- rected by, made by appraisers members not to deal in rules for payment of principal to be pre- scribed by Federal land banks, agents may be required to collect payments without charge agents must indorse and become liable for payments on loans negotiated by them . . . agents paid actual expenses connected with making loans aggregate of mortgage loans received from agents limited capital stock subscribed to obtain , expenses paid agents become part of loan . . , may accept only first mortgages, except those taken for additional security may invest in mortgages on farm lands in district mortgages may be hypothecated by, as security for farm-loan bonds "first mortgage," definition of Government funds, investment prohibited . . . ineligible as security for farm-loan bonds, dur- ing continuance of defective State laws . . previous to examination of State laws Section 19 29 26 12 23 25 12 12 Page 157 i69 144 166 168 143 144 19 22 158 162-3 10 3 138 1 1 4-5 12 140 15 149 15 149-150 15 149 15 7 15 149-150 132 149 14 147 13 145 13 2 6 145 1 1 1-2 127 30 30 174 174 SYSTEM IN OPERATION 217 Mortgages : — Continued installments paid must be sufficient to extin- guish debt after five years, but before forty years interest, not to exceed by more than I per cent interest paid on farm-loan bonds on pledged mortgages, available to land banks prior to issue of farm-loan bonds, deter- mined by Federal land banks rate fixed at not more than 6 per cent joint - stock land banks, may issue bonds against hypothecated mortgages shall secure loans by first mortgages on farm lands laws of States examined and report made .... loans, application filed with secretary-treas- urer of national farm-loan associations . . application referred to loan committee. . . . of joint-stock land banks under same restric- tions as Federal land banks, with specific exceptions national farm-loan associations, indorsement by may collect and pay to land banks payments due under terms of must subscribe capital stock to obtain .... receipt from limited payments on pledged mortgages, application of held in trust purposes for which loans may be made restrictions based on loans and first mortgages schedule of securities tendered furnished with . State fees and recording charges may be in- cluded in cost of negotiating taxation, exempted from taxes, delinquent, on land, to be reported .... United States bonds or cash as temporary security on withdrawal of N NaKonal farm-loan associations: amortization tables used by, to be published . . appraisal report forms prescribed by Federal Farm Loan Board Section 19 3 10 Page 12 140 12, 16 140, 152 22 164 12 141 12 14X 16 152-3 16 152 30 174 9 137 10 137 16 152 II 139 13 145 8 134 14 143 22 164 22 164 12 141-2 12 140-145 18 156 13 146-7 26 169 7 130 159 116 138 2l8 THE FEDERAL FARM-LOAN National farm-loan associations: — Continued articles of association, accompanied by report of loan committee when made to be sent to Federal land banks attorneys shall receive only usual salary and fees, penalty for violation borrowers, stock interests assumed by legal representatives in case of death stock interests assumed by purchaser of mortgaged land capital stock, applicants for loans must sub- scribe Federal Farm Loan Board may authorize increase held as collateral security member may bon-ow to pay for par and voting value to increase in proportion as loans are made . . certificates bearing interest convertible into farm-loan bonds, to issue charter, Federal Farm Loan Board given power to grant Federal Farm Loan Board to determine granting commissions, based upon unpaid principal of loans deducted from dividends by Federal land banks condition, examination, required by Farm Loan Board statement rendered quarterly statement required consolidation permitted debts, contingent liabilities included directors, cannot pass on loan if interested . . . . election and term of office expenses may permit names of borrowers to be dis closed must be residents of district and shareholders not to approve loans unfavorably reported . , number, minimum, 5 service without compensation unless ap proved by Farm Loan Board Section 7 7 31 12 12 8 17 8 9 8 8 II 17 7 9 9 17,28 3 7 29 29 10 7 7 31 7 10 7 Pace 131 131 177-8 143 142 134 154 134 135 133-4 134 139-140 154 132 135-6 136 154-5. 1 70-1 116 129 174 173 138 128 128 177-8 128 137 128 SYSTEM IN OPERATION 219 National farm-loan associations: — Continued shall receive only usual salary and fees, pen- alty for violation vote upon membership dividends, declared after reserve requirements are met not paid while reserve is impaired provisions for embezzlement, false entry, etc., penalty for. . . . employees shall receive only usual salary and fees, penalty for violation examiners of land banks, penalty for accepting loan or gratuity from associations Federal land banks, agencies discontinued if district is adequately served by association capital stock, owned by associations not to be transferred capital stock, subscriptions reaching $100,- 000 gives permanent organization to bank capital stock, subscriptions reaching $750,- 000 retires original stock capital stock, vote allowed associations directors, nomination and election of local directors by association directors, six local directors selected by asso- ciations loans by, made only through associations or agents loans through agents subject to same condi- tions as if made through associations may accept deposits from associations may increase capital stock for issue of shares to associations twenty -five per cent of capital stock in quick assets fees, commissions, etc., shall not be charged or received unless authorized, penalty for violation forging or counterfeiting bonds of land banks, penalty for funds, advanced by, in anticipation of dividends received from Federal land banks transmitted to borrower may be in current funds or farm-loan bonds 15 Section 31 9 177-8 136-7 24 24 24 31 167-8 167 167-8 178 31 177-8 31 175-6 15 150 5 124 4 121 5 5 125-6 124-5 4 121-2 4 121 41 147 15 13 148 146 4 119 5 126 31 31 7 II 12 Page 177-8 176 130 139 144-5 220 THE FEDERAL FARM-LOAN National farm-loan associations: — Continued incorporation, application sent to Farm Loan Board insolvency, minimum amount defaulted causinj,' insolvent, Federal land banks to report reduc- tion of stock due to proceeds of canceled land - bank stock ap- plied on debts stock in Federal land banks canceled liabilities, contingent, determined by receiver and Federal land bank liquidation, voluntary, with consent of Farm Loan Board loans, amount limited defaulted, must be paid by exercise of unauthorized power shall not impair obtained from Federal land banks part may be used to pay for stock in supervision by secretary-treasurer members, assessment permitted permitted to borrow inembershiji, limited to borrowers qualifications for mortgages, application filed with secretary- treasurer of application referred to loaii committee exercise of unauthorized power shall not impair payments due may be collected and paid to land banks number of persons required for forming organization circulars to be issued Instructing farmers how to organize organizers, aflBdavit relative to ownership of land property required for business may be owned . . real estate not exempted from taxation real property taxable as other real property . . . receivers, appointment report to Farm Loan Board to settle debts and sell property to take possession of books and collect assets Section 7 29 29 29 29 29 29 7 25 12 7,9 12 7 7 9 8 9 9 10 12 13 7 7 7 II 26 26 29 29 29 Page 132 171 173 172-3 173 173 174 131 168 144 132, 136 144 129 130 135 134 136-7 137 137 144 145 130 127-133 1 16-7 131 139 169 169-170 171 172 172 171-2 SYSTEM IN OPERATION 221 National farm-loan associations: — Contitiued reserves, investment directed by Farm Loan Board Two per cent retained annually after 2o-pcr- cent fund accumulated Ten per cent of net earnings semiannually retained to equal 20 per cent of capital stock secretary-treasurer, appointment compensation fixed by directors custodian of securities, etc duties not required to be shareholder report shareholders' individual responsibility shares must be canceled on retirement of cor- responding land-bank stock special provisions supervisory authority over, by Federal Farm Loan Board taxation, exempted from Newspapers: bulletins of Federal Farm Loan Board dis- tributed to Section o Oath of ofHce: members of Federal Farm Loan Board Organization certificates : Federal land banks, made by temporary direc- tors Penalties: directors, employees, and attorneys of land banks, etc., unauthorized fees of embezzlement, false entry, etc., punishment for false representation in relation to farm-loan bonds false statement in application for loan forging or counterfeiting bonds of land banks or associations land-bank appraisers for willful overvaluation of land offered as security 24 24 24 24 7 7 7 7 7 7 9 7 9 17 26 Page 168 ir,7 167 167 128 128 128 128-9 131 129 136 133 135-137 155 169-170 1 1 6-7 113 1 1 8-9 31 31 177 178 31 31 179 175 31 176 31 175 222 THE FEDERAL FARM-LOAN Section Penalties : — Continued land-bank examiners, for accepting loan or gratuity from land bank or association . . . must not disclose names of borrowers loan committee, for willful overvaluation of land offered as security provisions for Personnel : Conference Committee House Committee on Banking and Currency . Joint Committee on Rural Credits Senate Committee on Banking and Currency . United States Commission Property : Federal land banks may buy, sell, or lease, for business national farm-loan associations may own .... real estate, acquired in satisfaction of debts may be held limited time by Federal land banks of land banks and associations not exempted from taxation real property of land banks and associations taxable as other real property receiver of insolvent association may sell .... Public money: certificate bearing interest issued for deposits . certificate of deposit redeemed at discretion of Secretary of the Treasury deposits, farm-loan bonds accepted as security for in Federal land banks authorized limit placed on aggregate provisions for Government depositaries, land banks desig- nated as investment in mortgage loans or farm-loan bonds prohibited R Real estate. See Property. Reappraisal. See Appraisal. Receivers: appointment , , *Sea note page 185, 31 31 31 31 13 II 13 26 26 29 32 32 27 32 32 32 6 6 Page 175-6 177-8 175-179 * * 146 139 146 169 169-170 172 180 180 170 180 180 180 126 127 29 171 SYSTEM IN OPERATION 223 Receivers : — Continued bond required national farm-loan associations, collections deposited with Treasurer of United States contingent lial)ility determined by report to Farm Loan Board to settle debts and sell property to take books and collect assets Redemption : assignment of mortgages and bonds to farm- loan registrar must provide for right of . . Registrars. See Farm-loan registrars. Reports : appraisal, forms prescribed by Federal Farm Loan Board Federal Farm Loan Board, annual Federal land banks, employees, schedule of salaries to be submitted land-bank appraisers, upon land ofTered for security land-bank examiners, made to Farm Loan Commissioner semiannually loan committee, on lands offered for security, national farm-loan associations increase in cajjital stock, quarterly receiver of farm-loan associations, to Farm Loan Board Reserves : land banks, amounts defaulted debited to. . . dividends not paid if impaired investment directed by Farm Loan Board . Five per cent retained annually after 20-i)er- cent fund accumulated provisions for to equal 20 per cent of capital stock to retain 25 per cent of net earnings semi- annually national farm-loan associations, dividends not paid if impaired investment directed by Farm Loan Board . . Two per cent retained annually after 20-per- cent fund accumulated provisions for to equal 20 per cent of capital stock Section 29 29 172 29 173 29 172 29 172 29 172 19 Page 171 1.^,8 10 3 138 116 3 115-6 10 138 28 171 10 ^37 8 134-5 29 172 23 23 23 166 166 167 23 23 166 166-7 166 23 167 24 24 167 168 24 24 24 167 167-8 167 224 THE FEDERAL FARM-LOAN Reserves : — Con tin tied to retain lo per cent of net earnings semi- annually Retirement: farm-loan bonds, at option of land banks after five years rules prescribed by Farm Loan Board S Secret Service Division: available to detect person or persons violating provisions of Section 31 Secretary of the Treasury: capital stock of Federal land banks, must sub- scribe for shares not otherwise taken certificate for Government deposits redeemed at discretion of direct use of Secret Service Division to detect violations of Section 31 farm-loan bonds, expenses incurred in prepa- ration of, to be paid by plates, dies, etc., to be retained by preparation in form as approved by Farm Loan Board reimbursed by Farm Loan Board for ex- pense of preparing Federal Farm Loan Board, date and place of first meeting fixed by Government depositaries, designated by required to give security member of Federal Farm Loan Board receiver's collections, deposited at interest . . . . temporary deposits of public money in Federal land banks Secretary-treasurer, national farm-loan associa- tions : aflfidavit relative to organizers of farm-loan associations appointment bond required compensation fixed by directors custodian of securities, records, etc duties Section 24 20 20 31 5 32 31 20 20 20 20 3 6 6 3 29 32 7 7 7 7 7 7 SYSTEM IN OPERATION 225 Secretary-treasurer: — Coutitiued mortgage loan apiilications filed with not required to be shareholder quarterly report required salary and expenses statements of condition of association required supervision of loans by Securities: additional, land banks required to give application for bond issue granted or refused after investigation bonds of United States or first mortgages on farm lands as collateral for farm-loan bonds capital stock, of farm-loan associations held as collateral of Federal land banks held as collateral collateral bonds and mortgages may be sub- stituted by similar mortgages, etc collateral for bonds, deposited as approved b}^ Farm Loan Board deposited with farm-loan registrar farm-loan bonds accepted for public deposits. . farm-loan registrar, can receive only qualified first mortgages to secure bond issue must return collateral security to land banks upon rejection of bond issue must see that collateral security covers out- standing farm-loan bonds shall retain in his custody collateral security on approval of bond issue Federal land banks, may accept for deposit, from national farm-loan associations may deposit in Federal Reserve member banks Government deposits, securities required temporary, securities required investments representing trust funds to be de- posited with registrar as substituted col- lateral mortgages, ineligible for farm-loan bonds dur- ing continuance of defective State laws . . . ineligible for farm-loan bonds previous to examination of State laws Section 9 1.17 7 131 7 129 7 130 7 129 7 129 19 159 18 156-7 21 Page 162 8 134 7 133 22 163 19 158 2 112 27 170 19 158 19 157 19 159 19 157-8 13 146 13 146 6 127 32 180 22 165 30 174 30 174-5 226 THE FEDERAL FARM-LOAN Securities ■.—Conliniied may be hypothecated by Federal land banks as security for farm-loan Ijonds on farm lands tendered as collateral security for bond issue schedule to accompany application for bond issue transmitted by registrar United States bonds tendered by land banks for bond issue withdrawal of collateral on surrender of farm- loan bonds Senate : borrowers' names may be ordered disclosed by Federal Farm Loan Act, chronology of bill (S. 2986) in Sixty-fourth Congress personnel of committees which considered Federal farm-loan bills, Sixty-fourth Con- gress Shareholders : joint-stock land banksj responsibility same voting privileges as shareholders in na- tional banking associations taxable on shares as in national banks national farm-loan associations.directors must be must be borrowers part of loan may be used to be pay for stock power to indorse mortgages taken by Fed- eral land banks responsibility stock interests assumed by purchaser of mortgaged land stock interests of borrower assumed by legal representatives in case of death voting limit State legislation States: agencies of Federal land banks limited to banking corporations chartered by Governor, statement prepared by Farm Loan Board on request • See note page 185. Section 13 18 18 18 18 31 Page 16 145 156 156 164 177-8 * 150 16 26 151 169 7 8 128 134 12 144 II 9 139 136 12 142 12 8 30 143 133 174-5 15 148-9 30 175 SYSTEM IN OPERATION 227 States : — Contin tied laws, examination, by Farm Loan Commis- sioner examination, commissioner may require aid of Attorney General examination, special counsel may be em- ployed Stockholders : borrowers through agents of Federal land banks must subscribe stock in Federal land bank Federal land banks cannot accept deposits ex- cept from Surety bonds. See Bonds, official. Taxation: exemption from farm-loan bonds exempted from Federal land banks exempted from joint-stock land banks, shareholders taxable on shares, as in national banks mortgages exempted from national farm-loan associations exempted from real estate held by bank or association not ex- empted real property of land banks and associations taxable as other real property Taxes: on mortgaged land, borrower shall pay , report on delinquent taxes required taxes paid by mortgagee shall become part of mortgage debt Titles. See Land titles. Treasurer of United States: receiver of fann-loan associations to pay over collections to Treasury : farm-loan bonds to be held subject to delivery by order of Farm Loan Board Treasury, Secretary of. See Secretary of the Treasury. Trust funds: investment in farm-loan bonds Section Page 30 30 15 14 26 21,26 26 26 26 26 26 26 12 7 12 29 20 148 147 168-9 162, 169 168-9 169 169 168-9 169 169 143 130 143 172 160 '■7 170 THE FEDERAL FARM-LOAIJ Section Page u United States: division into land-bank districts 4 * 117 * see also Government of United States. United States bonds. See Bonds, United States. United States Commission: members V Voluntary Liquidation. Sec liquidation. *See note page 185. APPENDIX C BIBLIOGRAPHY The following list of books, documents, and pam- phlets, while not exhaustive, is sufficiently complete for the student who seeks a comprehensive knowledge of the subject of rural credits. Brief observations are made on the general nature of the books listed, with a view to further assisting the student. The documents and pamphlets are in the nature of official reports or statements, their contents being indicated by their longer title. — The Author. BOOKS, DOCUMENTS, AND PAMPHLETS ON RURAL CREDITS AND RELATED SUBJECTS Agricultural Credit, Edna D. Bullock. This is a com- pilation of articles on rural credits in different countries, written by various authorities and edited by Edna D. Bullock (White Plains, New York, 1915)- Agricultural Credit and Co-operation in Germany, J. A. Cahill. Report to the British Board of Agriculture and Fisheries of an Inquiry into Agricultural Credit and Agricultural Co-operation in Germany (Wash- ington, 1 9 14), (Sixty- third Congress, First Session, Senate Document 17). 230 THE FEDERAL FARM-LOAN Agricultural Credit: General Theory of Co-operative Credit in France and Other Foreign Countries, Maurice Du Fourmantellc, tr. from the French by PauHne Carter Biddle (Washington, 191 2), (Sixty- second Congress, Second Session, Senate Docu- ment 572). "Agricultural Economics," H. C. Taylor, chap, xvi, in Farm Credit and the Rate oj Interest (New York, 1919). American Commission to Investigate and Study Agricultural Credit in Europe. Agricultural Co- operation and Rural Credit in Europe, Report. Part I, Observations. Part II, Minority Report, Observations and Recommendations (Washington, 1 9 14), (Sixty-third Congress, Second Session, Senate Document 261). American Commission to Investigate and Study Agricultural Credit in Europe, and United States Commission to Investigate Rural Credit, Report. Part I, Agricultural Co-operation and Rural Credit in Europe. Part II, Bibliography (Washington, 1913), (Sixty-third Congress, Second Session, Senate Document 214). Co-operative Credit in Certain European Countries and Their Relation to Agricultural Interests (1892), E. T. Peters (Washington, 191 5), (United States De- partment of Agriculture, Miscellaneous Series, Report No. 3). Co-operative Credit in the United States, H. W. Wolff. Mr. Wolff, an English authority on rural credits, has written many able treatises on the subject. In this book he has treated the subject in a different SYSTEM IN OPERATION 231 manner. While it is of value as a philosophical exposition of rural credits by one whose knowledge of the subject is considerable, it lacks the definite, as distinguished from the philosophic, method of treatment (New York, 191 7). Costs and Sources of Farm-mortgage Loans in the United States, C. W. Thompson (United States Department of Agriculture, Bulletin No. 384). Federal Farm Loan Board. First Annual Report, covering the period from the organization of the board up to November 30, 191 7 (Washington, 19 18), (Sixty-fifth Congress, Second Session, House Docu- ment 714). Federal Farm Loan Board. Second Annual Report, covering the period for the fiscal year ended Novem- ber 30, 19 18 (Washington, 1919), (Sixty-fifth Con- gress, Third Session, House Document 1624). Federal Farm Loan Board. Third Annual Report, covering the period for the fiscal year ended Novem- ber 30, 1919 (Washington, 1920), (Sixty-fifth Con- gress, Second Session, House Document 553). Federal Farm Loan Board. Fourth Annual Report, covering the period for the year ended December 31, 1920 (Washington, 1921), (Sixty-sixth Congress, Third Session, House Document 998). Federal Farm Loan Board. Circular No. i. National Farm Loan Associations — Organization, Manage- ment, Powers, and Limitations (Washington, 191 7). Federal Farm Loan Board. Circular No. 2. How Farmers May Form a National Farm Loan Asso- ciation (Washington, 191 9). Federal Farm Loan Board. Circular No. 3. (Revised.) 232 THE FEDERAL FARM-LOAN The Improved Farm Mortgage. A story illustrating the practical application of the Federal Farm Loan Act (Washington, 191 9). Federal Farm Loan Board. Circular No. 4. The Federal Farm Loan Act (Washington, 191 7). Federal Farm Loan Board. Circular No. 5. The Farm Loan Primer. Here you will find in brief form answers to the questions most frequently asked about the Federal Farm Loan Act (Washing- ton, 1919). Federal Farm Loan Board. Circular No. 7. Killing Off Mortgages. A description of the methods of Amortization and their benefits to borrowers (Wash- ington, 1919). Federal Farm Loan Board. Circular No. 10. Rulings and Regulations of the Federal Farm Loan Board, to June 30, 191 9, in matters pertaining to the Federal Farm Loan Act (Washington, 19 19). Federal Farm Loan Board. Circular No. 11. Amend- ments to the Federal Farm Loan Act (Washington, 1920). Federal Farm-loan System, The. Herbert Myrick (New York, 19 1 6). How to Use Farm Credit, T. N. Carver (Washington, 1 9 14), (United States Department of Agriculture, Farmers' Bulletin 593). International Institute of Agriculture. Adaptation of the European Credit System to Meet the Needs of the American Farmer (Washington, 191 2), (Sixty- second Congress, Second Session, Senate Document 855). International Institute of Agriculture. Outline of the SYSTEM IN OPERATION 233 European Co-operative Credit Systems (Washing- ton, 191 2), (Sixty-second Congress, Second Session, Senate Document, 574). International Institute of Agriculture. "The Way Out of the Rut." European Co-operative Rural Credit Systems (Washington, 191 2), (Sixty-second Congress, Third Session, Senate Document 966). Joint Committee on Rural Credits of the United States Congress. Report on Rural Credits, including a draft of a proposed bill to provide a system of land-mortgage credits in the United States under Federal supervision (Washington, 1916), (Sixty- fourth Congress, First Session, House Document 494)- Land Credits, Dick T. Morgan. A Plea for the Amer- ican Farmer. This book was written during the height of the discussion on rural credits, just pre- ceding the passage of the Federal Farm Loan Act. It contains many worthy and constructive sugges- tions concerning the rural-credit bills then pending, and is also of value to the student as a historical reference book (New York, 191 5). Notes on Agricultural Credit Systems Abroad, Le Roy Hodges (Sixty-second Congress, Third Session, House Document 1435)- "Outlines of Economics," R. T. Ely, in Farm Indebted- ness and Agricultural Credit, pp. 609-615 (New York, 191 9). Principles of Rural Credits, James B. Mornian. The material for this book was taken largely from Senate Document No. 214, Sixty-third Congress, which constituted the report of both the United States 234 THE FEDERAL FARM-LOAN and the American commissions. Not only does the author place the material in this immense report in readable form, but draws many valuable lessons from it (New York, 191 5). Rural Credit in Germany, H. C. Price (Ohio State Uni- versity, 1 9 13). Rural Credits, Frederic J. Haskin (Washington, 1913), (Sixty-third Congress, Second Session, Senate Docu- ment 200). Rural Credits: Land and Co-operative, M. T. Herrick and R. Ingalls. This book is the most widely read and best-known presentation of the subject. It deals largely with rural-credit systems established in foreign countries, although there are a number of chapters outlining the forms and nature of agri- cultural credit which are of exceptional value (New York, 1919). United States Commission to Investigate Agricultural Credit. Land-mortgage or Long-term Credit; Per- sonal or Short-term Credit (Washington, 19 14), (Sixty-third Congress, Second Session, Senate Docu- ment 380, Parts I-III). United States Commission to Investigate Agricultural Credit. National Farm-land Banks. Interpreta- tion of H. R. 12585. A bill to estabhsh Farm-land banks (Washington, 19 14), (Sixty- third Congress, Second Session, House Document 679). Unites States Department of Agriculture. Farmers* Bulletin 792. How the Federal Farm Loan Act Benefits the Farmer, C. W. Thompson (Washington, 1917). United States. National Monetary Commission. SYSTEM IN OPERATION 235 Canadian Banking System. Co-operative People's Banks of Canada, pp. 149-173, Alphonse Dejardins. United States. National Monetary Commission. Miscellaneous Articles on German Banking, chap. v. The Land Mortgage Associations {Landschaftcn) , Dr. J. Hermes (Washington, 19 10). United States. State Department. Information Division. Preliminary Report on Land and Agri- cultural Credit in Europe, including the letter of President William H. Taft to the Governors of States and the Recommendations of Ambassador Myron T. Herrick in connection with the proposal of President Taft to introduce Co-operative Credit in the United States (Washington, 191 2), (Sixty- second Congress, Third Session, Senate Document 967). 16 APPENDIX D SUPREME COURT OF THE UNITED STATES No. 199. — ^OcTOBER Term, 1920 Charles E. Smith J Appeal from the Dis- Appellant, I trict Court of the vs. > United States for the Kansas City Title & TrustV Western District of Company, et al., Appellees, f Missouri. [February 28, 192 1.] Mr. Justice Day delivered the opinion of the Court. A bill was filed in the United States District Court for the Western Division of the Western District of Missouri by a shareholder in the Kansas City Title & Trust Company to enjoin the Company, its offi- cers, agents and employees from investing the funds of the Company in farm-loan bonds issued by Fed- eral Land Banks or Joint Stock Land Banks under authority of the Federal Farm Loan Act of July 17, 1916, 39 Stat. 360, as amended January 18, 1918, 40 Stat. 431. The relief was sought on the ground that these Acts were beyond the constitutional power of Con- SYSTEM IN OPERATION 237 gress. The bill avers that the Board of Directors of the Company are about to invest its funds in the bonds to the amount of $10,000 in eaeh of the classes described, and will do so unless enjoined by the court in this action. The bill avers the formation of twelve Federal Land Banks, and twenty-one Joint Stock Land Banks under the provisions of the Act. As to the Federal Land Banks, it is averred that each of them has loaned upon farm lands large amounts secured by mortgage, and after depositing the same with the Farm Loan Registrar, has exe- cuted and issued collateral trust obligations called Farm Loan Bonds, secured by the depositing of an equivalent amount of farm mortgages and notes; and that each of said Federal Land Banks has sold, and is continuing to offer for sale, large amounts of said farm-loan bonds. The bill also avers that vari- ous persons in different parts of the United States have organized twenty-one Joint Stock Land Banks, the capital stock of which is subscribed for and owned by private persons; that the Joint Stock Land Banks have deposited notes and mortgages with the Farm Loan Registrar, and issued an equiva- lent amount of collateral trust obligations called Farm Loan Bonds, which have been sold and will be continued to be offered for sale to investors in large amounts in the markets of the country. A statement is given of the amount of deposits by the Secretary of the Treasury with the Federal Land Banks, for which the banks have issued their cer- tificates of indebtedness bearing interest at 2% per annum. It is averred that on September 30, 1919, 238 THE FEDERAL FARM-LOAN Federal Land Banks owned United States bonds of the par value of $4,230,805; and the Joint Stock Land Banks owned like bonds of the par value of $3,287,503 on August 31, 1 9 19; that pursuant to the provisions of the Act the Secretary of the Treas- ury has invested $8,892,130 of the public funds in the capital stock of the Federal Land Banks, and that on July i, 19 19, the Secretary of the Treasury on behalf of the United States held $8,265,809 of the capital stock of the Federal Land Banks; that pursuant to the provisions of Section 32 of the Act, as amended, the Secretary of the Treasury has pur- chased farm-loan bonds issued by the Federal Land Banks of the par value of $149,775,000; that up to September 30, 1919, bonds have been issued under the Act by the Federal Land Banks to the amoimt of $285,600,000, of which about $135,000,000 are held in the Treasury of the United States, purchased under the authority of the amendment of January 19, 1918; that up to September 30, 191 9, twenty- seven Joint Stock Land Banks have been incor- porated under the Act, having an aggregate capital of $8,000,000, all of which has been subscribed and $7,450,000 paid in; that bonds have been issued by Joint Stock Land Banks to the amount of $41,- 000,000, which are now in the hands of the public; that the Secretary of the Treasury up to the time of the filing of the bill has not designated any of the Federal Land Banks nor the Joint Stock Land Banks as depositaries of public money, nor except as stated later in the bill, has he employed them or any of them as financial agents of the Government, nor SYSTEM IN OPERATION 239 have they or any of them performed any duties as depositaries of pubHc money, nor have they or any of them accepted any deposits or engaged in any banking business. The bill avers that during the summer of 19 18 the Federal Land Banks at Wichita, St. Paul and Spokane were designated as financial agents of the Government for making seed-grain loans to farmers in drought-stricken sections, the President having at the request of the Secretary of Agriculture set aside $5,000,000 for that purpose out of the $100,000,000 war funds. The three banks mentioned made upwards of 15,000 loans of that character, aggregating a sum upwards of $4,500,000, and are now engaged in collecting these loans, all of which are secured by crop liens; that these banks act in that capacity without compensation, receiv- ing only the actual expenses incurred. Section 27 of the Act provides that farm-loan bonds issued under the provisions of the Act by Fed- eral Land Banks or Joint Stock Land Banks shall be a lavi^ul investment for all fiduciary and trust funds, and may be accepted as security for all public deposits. The bill avers that the defendant Trust Company is authorized to buy, invest in and sell Government, State and municipal and other bonds, but it cannot buy, invest in or sell any such bonds, papers, stocks or securities which are not authorized to be issued by a valid law or which are not invest- ment securities, but that nevertheless it is about to invest in farm-loan bonds ; that the Trust Company has been induced to direct its officers to make the investment by reason of its reliance upon the pro- 240 THE FEDERxYL FARM-LOAN visions of the Farm Loan Acts, especially sections 21, 26 and 27, by which the Farm Loan Bonds are declared to be instrumentalities of the Government of the United States, and as such with the income derived therefrom, are declared to be exempt from Federal, State, Municipal and local taxation, and are further declared to be lawful investments for all fiduciary and trust funds. The bill further avers that the Acts by which it is attempted to authorize the bonds are wholly illegal, void and unconstitu- tional and of no effect because unauthorized by the Constitution of the United States. The bill prays that the Acts of Congress authoriz- ing the creation of the banks, especially sections 26 and 27 thereof, shall be adjudged and decreed to be unconstitutional, void and of no effect, and that the issuance of the farm-loan bonds, and the taxation exemption feature thereof, shall be adjudged and decreed to be invalid. The First Joint Stock Land Bank of Chicago and the Federal Land Bank of Wichita, Kansas, were allowed to intervene and became parties defendant to the suit. The Kansas City Title & Trust Com- pany filed a motion to dismiss in the nature of a general demurrer, and upon hearing the District Court entered a decree dismissing the bill, from this decree appeal was taken to this court. No objection is made to the Federal jurisdiction, either original or appellate, by the parties to this suit, but that question will be first examined. The Company is authorized to invest its funds in legal securities only. The attack upon the proposed in- SYSTEM IN OPERATION 241 vestment in the bonds described is because of the alleged unconstitutionality of the Acts of Congress undertaking to organize the banks and authorize the issue of the bonds. No other reason is set forth in the bill as a ground of objection to the proposed investment by the Board of Directors acting in the Company's behalf. As diversity of citizenship is lacking, the jurisdiction of the District Court de- pends upon whether the cause of action set forth arises under the Constitution or laws of the United States. Judicial Code, Sec. 24. The general rule is that where it appears from the bill or statement of the plaintiff that the right to relief depends upon the construction or application of the Constitution or laws of the United States, and that such Federal claim is not merely colorable, and rests upon a reasonable foundation, the District Court has jurisdiction under this provision. At an early date, considering the grant of constitu- tional power to confer jurisdiction upon the Federal Courts, Chief -Justice Marshall said : "A case in law or equity consists of the right of the one party, as well as of the other, and may truly be said to arise under the Constitution or a law of the United States whene\'er its coiTcct decision depends upon the construction of either," Cohens v. Vir- ginia, 6 Wheat. 264, 379; and again, when "the right or title set up by the party may be defeated by one construction of the Con- stitution or law of the United States, and sustained by the op- posite construction," Osbom v. Bank of the United States, g Wheat. 738, 822. These definitions were quoted and approved in Patton v. Brady, 184 U. S. 608, 611, citing Gold Washing Co. V. Keyes, 06 U. S. iqq, 201; Tennessee v. Davis, 100 U. S. 257; White V. Greenhow, 114 U. S. 307; Railroad Company v. Missis- sippi, 102 U. S. 13s, 139. 242 THE FEDERAL FARM-LOAN This characterization of a suit arising under the Constitution or laws of the United States has been followed in many decisions of this and other Federal courts. See Macon Grocery Company v. Atlantic Coast Line, 215 U. S. 501, 506, 507; Shulthis v. McDougal, 225 U. S. 569, §3. The principle was applied in Brushaber v. Union Pacific Co., 240 U. S. I, in which a shareholder filed a bill to enjoin the defendant corporation from complying with the in- come tax provisions of the Tariff Act of October 3, 19 13. In that case while there was diversity of citi- zenship, a direct appeal to this court was sustained because of the constitutional questions raised in the bill, which had been dismissed by the court below. The repugnancy of the statute to the Constitution of the United States, as well as grounds of equitable jurisdiction, were set forth in the bill, and the right to come here on direct appeal was sustained because of the averments based upon constitutional objec- tions to the Act. Reference was made to Pollock v. Farmers' Loan & Triist Company, 157 U. S. 429, where a similar shareholder's right to sue was main- tained, and a direct appeal to this court from a decree of the Circuit Court was held to be authorized. In the Brushaber case the Chief Justice, speaking for the Court said: The right to prevent the corporation from returning and pay- ing the tax was based upon many averments as to the repugnancy of the statute to the Constitution of the "United States, of the pecuHar relation of the corporation to the stockholders and their particular interests resulting from many of the administrative provisions of the assailed act, of the confusion, wrong and multi- pUcity of suits and the absence of all means of redress which SYSTEM IN OPERATION 243 would result if the corporation paid the tax and complied with the act in other respects without protest, as it was alleged it was its intention to do. To put out of the way a ciucstion of juris- diction, we at once say that in view of these averments and the ruling in Pollock v. Farmers' Loan & Trust Company, 157 U. S. 429, sustaining the right of a stockholder to sue to restrain a cor- poration under proper averments from voluntarily paying a tax charged to be unconstitutional on the ground that to permit such a suit did not violate the prohibitions of Section 3224, Rev. Stat., against enjoining the enforcement of taxes, we are of opinion that the contention here made that there was no juris- diction of the cause since to entertain it would violate the provi- sions of the Revised Statutes referred to is without merit. , . . Aside from averments as to citizenship and residence, recitals as to the provisions of the statute and statements as to the busi- ness of the corporation contained in the first ten paragraphs of the bill advanced to sustain jurisdiction, the bill alleged twenty- one constitutional objections specified in that nvimber of para- graphs or stibdivisions. As all the grounds assert a violation of the Constitution, it follows that in a wide sense they all charge a repugnancy of the statute to the Sixteenth Amendment under the more immediate sanction of which the statute was adopted. The jurisdiction of this court is to be determined upon the principles laid down in the cases referred to. In the instant case the averments of the bill show that the directors were proceeding to make the in- vestments in view of the Act authorizing the bonds about to be purchased, maintaining that the Act authorizing them was constitutional and the bonds valid and desirable investments. The objecting shareholder avers in the bill that the securities were issued under an unconstitutional law, and hence of no validity. It is, therefore, apparent that the con- troversy concerns the constitutional validity of an Act of Congress which is directly drawn in question. The decision depends upon the determination of this issue. 244 THE FEDERAL FARM-LOAN The general allegations as to the interest of the shareholder, and his right to have an injunction to prevent the purchase of the alleged unconstitutional securities by misapplication of the funds of the cor- poration, gives jurisdiction under the principles set- tled in Pollock V. Trust Company, and Brushabcr v. Union Pacific Cofnpany, supra. We are, therefore, of the opinion that the District Court had jurisdic- tion under the averments of the bill, and that a direct appeal to this court upon constitutional grounds is authorized. We come to examine the questions presented by the attack upon the constitutionality of the legisla- tion in question. The Federal Farm Loan Act is too lengthy to set out in full. It is entitled : An act to provide capital for agricultural development, to create standard forms of investment based upon fann mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create government depositaries and financial agents for the United States, and for other piuposes. The administration of the Act is placed under the direction and control of a Federal Farm Loan Bureau established at the seat of Government in the Treas- ury Department, under the general supervision of the Federal Loan Board consisting of the Secretary of the Treasury and four members appointed by the President, by and with the advice and consent of the Senate. The United States is divided into twelve districts for the purpose of establishing Federal Land Banks. Each of the banks must have a subscribed capital of not less than $750,000, divided into shares of $5.00 each, which may be subscribed for by any SYSTEM IN OPERATION 245 individual, firm or corporation, or by the govern- ment of any State, or of the United States. No dividends shall be paid on the stock owned by the United States, but all other stock shall share in divi- dend distributions without preference. The Federal Farm Loan Board is to designate five directors who shall temporarily manage the affairs of each Federal Land Bank, and who shall prepare an organization certificate which, when approved by the Federal Farm Loan Board and filed with the Farm Loan Commissioner, shall operate to create the bank a body corjjorate. The Federal Farm Loan Board is required to open books of subscription for the capital stock of each Federal Land Bank, and if within thirty days thereafter any part of the minimum capitalization of $750,000 of any such bank shall remain unsubscribed, it is made the duty of the Secretary of the Treasury to subscribe the balance on behalf of the United States. The Amendment of January 18, 191 8, authorizes the Secretary of the Treasury to purchase bonds issued by Federal Land Banks, and provides that the temporary organization of any such bank shall be continued so long as any farm-loan bonds shall be held by the Treasury, and until the subscription to stock in such bank by National Farm Loan As- sociations shall equal the amount of the stock held by the United States Government. When these conditions are complied with a permanent organi- zation is to take over the management of the bank, consisting of a Board of Directors composed of nine members, three of whom shall be known as district 246 THE FEDERAL FARM-LOAN directors and shall be appointed by the Farm Loan Board, who shall represent the public interest, six of whom to be known as local directors shall be chosen by and be representative of national farm- loan associations. Federal Land Banks are empowered to invest their funds in the purchase of qualified first mortgages on farm lands situated within the Federal Land Bank District within which they are organized or acting. Loans on farm mortgages are to be made to co- operative borrowers through the organization of corporations known as National Farm Loan Asso- ciations, by persons desiring to borrow money on farm-mortgage security under the terms of the Act. Ten or more natural persons who are the owners of or are about to become the owners of farm land qualified as security for mortgage loans, and who desire to borrow money on farm-mortgage security, may unite to form a National Farm Loan Association. The manner of forming these associations, and the qualifications for membership, are set out in the Act. A loan desired by each such person must be for not more than $10,000 nor less than $100, and the aggregate of the desired loans not less than $20,000. The application for loan must be accompanied by subscriptions to stock of a Federal Land Bank equal to 5% of the aggregate sum desired on the mort- gage loan. Provision is made for appraisal of the land, and report to the Federal Farm Loan Board. No persons but borrowers on farm-loan mortgages shall be members or shareholders of National Farm Loan Associations. SYSTEM IN OPERATION 247 Shareholders in Farm Loan Associations are made individually responsible for the debts of the Asso- ciation to the extent of the amomit of the stock owned by them respectively, in addition to the amount paid in and represented by their shares. When any National Farm Loan Association shall desire to secure for any member a loan on first mortgage from the Federal Land Bank in its district, it must subscribe to the capital stock of the Federal Land Bank to an amount of 5% of such loan, which capital stock shall be held by the Federal Land Bank as collateral security for the payment of the loan, the Association shall be paid any dividends accruing and payable on the capital stock while it is outstanding. Such stock may, in the discretion of the directors and with the approval of the Federal Farm Loan Board, be paid off at par and retired, and shall be so retired upon the full payment of the mortgage loan. In such event, the National Farm Loan Association must pay off at par and retire the corresponding shares of its stock which were issued when the Land Bank stock so retired was issued; but it is further provided that the capital stock of the Land Bank shall not be reduced to less than 5% of the principal of the outstanding farm- loan bonds issued by it. The shares in National Farm Loan Associations shall be of the par value of $5.00 each. At least 25% of that part of the capital of any Federal Land Bank for which stock is outstanding in the name of National Farm Loan Associations must be held in quick assets. Not less than 5% of 248 THE FEDERAL FARM-LOAN such capital must be invested in United States Gov- ernment Bonds. The loans which Federal Land Banks may make upon first mortgages on farm lands are provided for in Section 12 of the Act. By vSection 13 these banks are empowered, subject to the provisions of the Act, to issue and sell farm-loan bonds of the kind de- scribed in the Act, and to invest funds in their pos- session in qualified first mortgages on farm lands, to receive and to deposit in trust with the Farm Loan Registrar, to be held by him as collateral security for farm-loan bonds, first mortgages upon farm lands, and, with the approval of the Farm Loan Board, to issue and to sell their bonds secured by the deposit of first mortgages on qualified farm lands as collateral, in conformity with the provisions of Section 18 of the Act. By the Amendment of January 18, 19 18, the Secretary of the Treasury was empowered during the years 19 18 and 1919 to pur- chase farm-loan bonds issued by Federal Land Banlcs to an amount not exceeding $100,000,000 each year, and any Federal Land Bank was authorized at any time to repurchase at par and accrued interest, for the purpose of redemption or resale, any of the bonds so purchased from it and held in the United States Treasury. It is also provided that the bonds of any Federal Land Bank so purchased and held in the Treasury- one year after the termination of the pending war shall, upon thirty days* notice from the Secretary of the Treasury, be redeemed and repurchased by such bank at par and accrued interest. By Section SYSTEM IN OPERATION 249 15 it is provided that whenever, after the Act shall have been in effect for one year, it shall appear to the Federal Farm Loan Board that national farm- loan associations have not been formed and are not likely to be fonned, in any locality, because of pecul- iar local conditions, the Board may in its discretion authorize Federal Land Banks to make loans on farm lands through agents approved by the Board, on the terms and conditions and subject to the restrictions prescribed in that section. The Act also authorizes the incorporation of Joint Stock Land Banks, with capital provided by private subscription. They are organized by not less than ten natural persons, and are subject to the require- ments of the provisions of Section 4 of the Act so far as applicable. The board of directors shall con- sist of not less than five members. Each shareholder shall have the same voting privileges as the holders of shares in National Banking Associations, and shall be held individually responsible, equally and ratably, and not one for another, for all contracts, debts, and engagements of such bank to the extent of the amount of stock owned by them at the par value thereof, in addition to the amount paid in and repre- sented by their shares. The Joint Stock Land Bank is authorized to do business when capital stock to the amount of $250,000 has been subscribed, and one-half paid in cash, the balance remaining subject to call by the Board of Directors, the charter to be issued by the Federal Farm Loan Board. No bonds shall be issued until the capital stock is entirely paid up. Except as otherwise provided, Joint Stock Land 250 THE FEDERAL FARM-LOAN Banks shall have the powers of and be subject, to all the restrictions and conditions imposed on Fed- eral Land Banks by the Act, so far as such conditions or restrictions are applicable. Federal Land Banks may issue Farm Loan Bonds up to twenty times their capital and surplus. Joint Stock Land Banks are limited to the issue of Farm Loan Bonds not in excess of fifteen times the amount of their capital and surplus. Joint Stock Land Banks can only loan on first mortgages upon land in the State where located, or in a State contiguous thereto. No loan on mortgage may be made by any bank at a rate exceeding 6% per annum exclusive of amorti- zation payments. Joint Stock Land Banks shall in no case charge a rate of interest on farm loans which shall exceed by more than i% the rate established by the last series of Farm Loan Bonds issued by them, which rate shall not exceed 5% per annum. Provisions for the issue of farm-loan bonds secured by first mortgages on farm lands or United States bonds, as collateral, which must be deposited with the Federal Farm Loan Registrar, are made for Federal Land Banks and Joint Stock Land Banks, in each case the issue is made subject to the approval of the Federal Farm Loan Board. The farm-loan mortgages, or United States bonds, which constitute the collateral security for the bonds, must be de- posited with the Farm Loan Commissioner. Section 26 of the Act provides as follows: That every Federal land bank and every national farm-loan association, including the capital and reserve or surplus therein and the income derived therefrom, shall be exempt from Federal, SYSTEM IN OPERATION 251 State, municipal, and local taxation, except taxes upon real estate held, purchased or taken by said bank or association under the provisions of section eleven and section thirteen of this Act. First mortgages executed to Federal land banks or to joint-stock land banks and farm-loan bonds issued under the provisions of this Act shall be deemed and held to be instrumentalities of the Gov- ernment of the United States, and as such they and the income derived therefrom shall be exempt from Federal, State, munici- pal, and local taxation. Nothing herein shall prevent the shares in any joint-stock land bank from being included in the valuation of the personal property of the owner or holder of such shares in assessing taxes imposed by authority of the State within which the banl< is located, but such assessment and taxation shall be in manner and subject to the conditions and limitations contained in section fifty-two hundred and nineteen of the Revised Statutes with reference to the shares of national banking associations. Nothing herein shall be construed to exempt the real property of Federal and joint-stock land banks and national farm-loan as- sociations from either State, county or municipal taxes to the same extent according to its value as other real property is taxed. Since the decision of the great cases of McCulloch V. Maryland, 4 Wheaton 316, and Oshorn v. Bank, 9 Wheaton 738, it is no longer an open question that Congress may estabhsh banks for national purposes, only a small part of the capital of which is held by the Government, and a majority of the ownership in which is represented by shares of capital stock privately owned and held; the principal business of such banks being private banking conducted with the usual methods of such business. While the ex- press power to create a bank or incorporate one is not found in the Constitution, the court speaking by Chief -Justice Marshall, in McCulloch v. Mary- land, found authority so to do in the broad general powers conferred by the Constitution upon the Con- 17 2 52 THE FEDERAL FARM-LOAN gress to levy and collect taxes, to borrow money, to regulate commerce, to pay the public debts, to de- clare and conduct war, to raise and support armies, and to provide and maintain a navy, etc. Congress it was held had authority to use such means as were deemed appropriate to exercise the great powers of the Government by virtue of Article I, Section 8, Clause 1 8, of the Constitution granting to Congress the right to make all laws necessary and proper to make the grant effectual. In First National Bank v. Union Trust Company, 244 U. S. 416, 419, the Chief Justice, speaking for the court, after reviewing McCullough v. Maryland and Oshorn v. Bank, and considering the power given to Congress to pass laws to make the specific powers granted effectual, said: In terms it was pointed out that this broad authority was not stereotyped as of any particular time but endured, thus furnish- ing a perpetual and living sanction to the legislative authority within the limits of a just discretion enabling it to take into con- sideration the changing wants and demands of society and to adopt provisions appropriate to meet every situation which it was deemed required to be provided for. That the formation of the bank was required in the judgment of the Congress for the fiscal opera- tions of the Government, was a principal considera- tion upon which Chief -Justice Marshall rested the authority to create the bank; and for that purpose being an appropriate measure in the judgment of the Congress, it was held not to be within the authority of the court to question the conclusion reached by the legislative branch of the Government. Upon the authority of McCullough v. Maryland SYSTEM IN OPERATION 253 and Oshorn v. Bank the national banking system was established, and upon them this court has rested the constitutionality of the legislation establishing such banks. Farmers & Mechanics National Bank V. Deering, 91 U. S. 29, 33, 34. Congress has seen fit in Section 6 of the Act to make both classes of banks, when designated for that purpose by the Secretary of the Treasury, de- positaries of public money, except receipts from cus- toms, under regulations to be prescribed by the Secretary of the Treasury, and has authorized their employment as financial agents of the Government, and the banks are required to perform such reason- able duties, as depositaries of public moneys and financial agents as may be required of them. The Secretary of the Treasury shall require of the Fed- eral Land Banks and the Joint Stock Land Banks, thus designated, satisfactory security, by the deposit of United States bonds or otherwise, for the safe- keeping and prompt payment of the public money deposited with them, and for the faithful perform- ance of their duties as the financial agents of the Government. Section 6 also provides that no Government funds deposited under the provisions of the section shall be invested in mortgage loans or farm-loan bonds. It is said that the power to designate these banks as such depositaries has not been exercised by the Government, and that the Federal Land Banks have acted as Federal agents only in the case of loans of money for seed purposes made in the summer of 1918, to which we have already referred. But the 254 THE FEDERAL FARM-LOAN existence of the power under the Constitution is not determined by the extent of the exercise of the authority conferred under it. Congress declared it necessary to create these fiscal agencies, and to make them authorized depositaries of public money. Its power to do so is no longer open to question. But, it is urged, the attempt to create these Fed- eral agencies, and to make these banks fiscal agents and pubHc depositaries of the Government, is but a pretext. But nothing is better settled by the deci- sions of this court than that when Congress acts within the limits of its constitutional authority, it is not the province of the judicial branch of the Government to question its motives. Veazie Bank V. Fcnno, 8 Wall. 533, 541 ; McCray v. United States, 195 U. S. 27; Flint V. Stone-Tracy Co., 220 U. S. 107, 147, 153, 156 and cases cited. That Congress has seen fit to mal^e of these banks fiscal agencies and depositaries of public moneys, and also to grant to them banking powers of a limited character, in nowise detracts from the authority of Congress to use them for the governmental purposes named, if it sees fit to do so. A bank may be organ- ized with or without the authority to issue currency. It may be authorized to receive deposits in only a limited way. Speaking generally, a bank is a mon- eyed institution to facilitate the borrowing, lending and caring for money. But whether technically banks, or not, these organizations may serve the governmental purposes declared by Congress in their creation. Furthermore, these institutions are organ- ized to serve as a market for United States Bonds. SYSTEM IN OPERATION 255 Not less than 5% of the capital of the Federal Land Banks, for which stock is outstanding in Farm Loan Associations, is required to be invested in United States Bonds. Both kinds of banks are empowered to buy and sell United States Bonds. In First National Bank v. Trust Company, 244 U. S., supra, this court sustained the power of Con- gress to enable a national bank to transact business, which, by itself considered, might be beyond the power of Congress to authorize. In that case it was held to be within the authority of Congress to permit national banks to exercise, by permission of the Federal Reserve Board, when not in contravention of local law, the office of trustee, executor, adminis- trator or registrar of stocks or bonds. We, therefore, conclude that the creation of these banks, and the grant of authority to them to act for the Government as depositaries of public moneys and purchasers of Government bonds, brings them within the creative power of Congress although they may be intended, in connection with other privileges and duties, to facilitate the making of loans upon farm security at low rates of interest. This does not destroy the validity of these enactments any more than the general banking powers destroyed the authority of Congress to create the United States bank, or the authority given to national banks to carry on additional activities, destroyed the author- ity of Congress to create those institutions. In the brief filed upon reargument counsel for the appellant seem to admit the power of Congress to appropriate money for the direct purposes named 256 THE FEDERAL FARM-LOAN and in that brief they say: "Tax exemption is the real issue sought to be settled here." Deciding, as we do, that these institutions have been created by Congress within the exercise of its legitimate author- ity, we think the power to make the securities here involved tax exempt necessarily follows. This prin- ciple was settled in McCulloch v. Maryland, and Osborn v. Bank, supra. That the Federal Government can, if it sees fit to do so, exempt such securities from taxation, seems obvious upon the clearest principles. But, it is said to be an invasion of state authority to extend the tax exemption so as to restrain the power of the state. Of a similar contention made in McCulloch v. Mary- land, Chief -Justice Marshall uttered his often quoted statement : That the power to tax involves the power to destroy; that the power to destroy may defeat and render useless the power to create; that there is a plain repugnance, in conferring on one government a power to control the constitutional measures of another, which other, with respect to those very measures, is declared to be supreme over that which exerts the control, are propositions not to be denied. (4 Wheaton 43 1 .) The same principle has been recognized in the National Bank Cases declaring the power of the States to tax the property and franchises of national banks only to the extent authorized by the laws of Congress. Owcnshoro Nat. Bank v. Owcnshoro, 173 U. S. 664, involved the validity of a franchise tax in Kentucky on national banks. In that case this court declared (pp. 668, 669) that the States were wholly without power to levy any tax directly or SYSTEM IN OPERATION 257 indirectly upon national banks, their property, assets or franchises, except so far as the permissive legisla- tion of Congress allowed such taxation; and the court declared that the right granted to tax the real estate of such banks, and the shares in the names of the shareholders, constituted the extent of the per- mission given by Congress, and any tax beyond these was declared to be void. In Farmers' Bank v. Minnesota, 232 U. S. 516, this court held that a State may not tax bonds issued by the municipality of a territory; that to tax such bonds as property in the hands of the holder is, in the last analysis, an imposition upon the right of a municipality to issue them. The exercise of such taxing power by the States might be so used as to hamper and destroy the exer- cise of authority conferred by Congress, and this justifies the exemption. If the States can tax these bonds they may destroy the means provided for ob- taining the necessary funds for the future operation of the banks. With the wisdom and policy of this legislation we have nothing to do. Ours is only the function of ascertaining whether Congress in the creation of the banks, and in exempting these securi- ties from taxation. Federal and State, has acted within the limits of its constitutional authority. For the reasons stated, we think the contention of the Government, and of the appellees, that these banks are constitutionally organized and the securities here involved legally exempted from taxation, must be sustained. 2 58 THE FEDERAL FARM-LOAN It follows that the decree of the District Court is Affirmed. Mr. Justice Brandeis took no part in the con- sideration or decision of this case. A true copy. Test: Clerk Supreme Court, U. S. INDEX Administrator, may not take out Federal farm loan, 59. Agency system, replaced by national farm-loan associations, 12, 13. Agriculture, Federal farm-loan system a step toward solution of problems of, 100, loi. financing of, necessary to prosperity of rural community, 100. importance of, 100. Amendment, to Farm Loan Act, authorizing Secretary of Treasury to buy bonds at par, 29, 30, Amortization, advantages of, to farmer-borrower, 57, 58. definition of term, 55. all Federal farm loans carry this privilege, 55. a feature of the Federal farm-loan system, 50. increases margin of security, 82. larger payments required in "specialized farming districts," 56. necessary to the farmer, 52, 55. payments not greater than ordinary interest payments in many states, 58. safeguards holder of second mortgage, 73. Applications, for loans, 87. , accumulated by banks, 34. , appraised and passed upon, 66, 67. , not received during suit-contesting Act, 34. , rejected at four points in process of securing loan, 75. , rejected because of unsatisfactory title, 75. , submitted merely to secure appraisal, 74. , voluntarily withdrawn, 75. Appraisal, applications, submitted merely to secure, 74. of applications by national farm-loan associations, 66. charge for, fixed by farm-loan board, 85. 26o THE FEDERAL FARM-LOAN Appraisal, — Contmued correct, essential to success of system, 63. of land-bank appraiser, 67. methods of, varied, 63. peculiar difficulties in, in New England, 68. peculiar problems of various land banks in, solved by co-operation of Farm Loan Board, 68. personal element in, 63. , affects earning power of farm, 64. , determines whether loan shall be liberal or con- servative, 64. , in a national system of land-mortgage banking, 65. , less important than the real security, 65. , often sufficient ground for rejecting loan, 65. practical appraiser's standards of, 64. process of, 66, 67 provision of the Act concerning basis of, 64. ruling of Farm Loan Board concerning, 64. scientific appraiser's standards of, 63. systematic, reduces costs of inspecting and equalizes them, 53. written report on, by loan committee, 66. Appraisal value, see Value, appraisal, and Appraisal. Appraisement, see Appraisal Appraiser, land bank, 67, 87. , appointed by Farm Loan Board, 10. , may reject loan, 75. and see Appraisal. " Back-to-the-land " movement unsuccessful, 100. Bank of Prussia, stock of, 46. Banks, commercial, principal source of money supply, 20. commercial, use by land banks of their credit with, 34, 35. co-operation of, with Federal farm-loan system, 90, 9 1 . government regulation of, 39. local, effect of F^ederal farm-loan system on, 58. Schulze-Delitzsch, 3. Banker, support of Federal farm-loan system by a, 88, ^. Bankers, fear of antagonizing, bj' forming associations, 88. inability to make long-term loan, 91. local, represented at hearings 1916, 8. INDEX 261 Bankers, — Continued secretary-treasurers of 16 per cent of national farm-loan associa- tions, 90. Breeding Associations, encouraged by land banks, 96. Bonds, of Prussian Government, price of, 46, 47, 48. United States, capital of land bank invested in, 93. , a market for, to be furnished by Federal land banks, 92. and see Federal farm-loan bonds, debentures. Bond-houses, syndicate of, 28, 32, 33. , failure to renew contract, 30. Bond issues, authorized by Farm Loan Act, 25. Bond sale, impossible while suit pending in Supreme Court, 34. projects for, 31. and see Federal farm-loan bonds. Borrowers, qualifications of, 58, 59, 72. Bureau of Census, reports on population, 99. Business men, secretary-treasurers of 30 per cent of national farm-loan associa' tions, 90. California, fruit-growing sections of, "specialized" farming districts, 56. Capital, seasonal demands for, 53. supply of, 20. supply of, variation in, 53. Capital Stock, of land banks, 22, 40. Certificates, of European systems, 82. of national farm-loan associations, 82, 83. , advantage of, to tenant who wishes to buy, 83. , convertible into Federal farm-loan bonds, 82. , intended to encourage saving, 82. , interest-bearing, may be issued by national farm-loan asso- ciation, 82. , none issued as yet, 83. United States, capital of land banks invested in, 93. , security for issues of farm-loan bonds, 94. 262 THE FEDERAL FARM-LOAN Cheese Factories, encouraged by land banks, 96. Circulating capital, farmer's, uses for, 50. irrelevant to a discussion of the Federal farm-loan system, 50. Collateral trust bonds, farm-loan bonds held to be, 38 n. Commercial banks, see Banks. Commission or Moss-Fletcher Bill, 4. Commissioner of Farm Loan Board, quoted, 83, 84. Committee or Hollis-Bulkley Bill, 5 Condensing stations, encouraged by land banks, 96. Connecticut, co-operative credit association in, 2, 3. Connecticut Assembly, charter granted to New London Society by, 3. Constitutionality, of Farm Loan Act, suit to contest, 33, 34, 35, 44, and see Appendix D. Co-operation, banks and Federal farm-loan system, 90, 91. of borrowers, replaces agency system, 12, 13. , required to obtain sufficient credit, 79. , the fundamental principle of rural-credit systems here and abroad, 78. among farmers, desired by Congress, 84. of Department of Agriculture with farm-loan system, 94, 95, 97. embodied in the system, 84. of a local commercial bank with the Federal farm-loan system, 87, 88. of members of national farm-loan associations for other purposes than borrowing, 83, 84. obstacles to, merely theoretical, 84, 85. Co-operative associations, formation of, encouraged by land banks, 96. Co-operative creameries, see Co-operative associations and Creameries. Co-operative credit. New London society, 2. and see European rural-credit systems, foreign rural-credit sys- tems, etc. Corporation, may not take out a Federal farm loan, 59. national farm- loan association is a, 79. INDEX 263 Cost, of inspecting, 53. of making loan, variation in, 53. of negotiating, equalized by system, 54. Counties, number of farm-loan associations in excess of number of, 86. Creameries, co-operative, encouraged by land banks, 96. and see Co-operative associations. Credit, association for improvement of, 78, 79. Dairying, in North Dakota, required by land bank ruling, 96, 97. in Wisconsin, promoted by national farm-loan association, 98. Debentures, definition of, 37. distinguished from mortgage bonds, 37. European, 38, European, security underlying, 38, 39. advantage of, in Federal farm-loan system, 38. P'ederal farm-loan bonds are, 37. of Landschaft of Mecklenburg, prices on, 47. of Pomerania, prices on, 46. of Landschaft of Posen, prices on, 47. prices of, during Napoleonic wars, 46. of Prussian government, prices on, 46. of East Prussia, prices on, 46. of West Prussia, prices on, 46. of Silesian Landschaft, prices on, 47. Debenture Companies, of New England and North Atlantic states, 38. , compared with European, 38, 39- , defects of, 39. Department of Agriculture, co-operation with farm-loan system, 94, 95, 97. purpose of, 94. represented at hearings 1916, 8. statistics of, concerning rate of interest, 52. Department of State, quotations on German bonds secured through, 47. ^ Dividends, reloan of, for purchase of dairy cattle, 98. of land banks in year ending November 30, 1919, 71. rcblrictions upon paying of, 70, 71. 264 THE FEDERAL FARM-LOAN Double Liability, keeps up a member's interest in association, 82. familiar term in United States, 81. of members of farm-loan associations, 42, 81. compared with unlimited liability in European co-operative credit systems, 81. possibility of its operation remote, 82 Double taxation, 44. Drainage projects, difficulties in making loans on, 61. fixed annual charge for, to be considered as municipal or school district tax upon land appraised, 60, 61. Earning Power, affected by personal element, 64. net, used to determine value, 63, 64. principal factor in determining appraisal value under the Act, 65, 66. relation of, to sale value, 66 East Prussia, see Prussia. England, the debenture bond in, 38. Equipment, definition of term, 60. European rural-credit systems, commission for examination of, 4. , reports in favor of tax-exemption, 43. loans from deposits, 83. originally for benefit of limited class of borrowers, 78. principles of, followed by authors of Federal farm-loan Act, 39, 40, 78. unlimited liability of members, 81. European experience, in land-mortgage bond issues, 25, 27. European land-mortgage banks, debentures sold by, 38. Executor, may not take out a Federal farm loan, 59. Experience table, 54. Farm, definition of, 61, 62. Farmers, financial needs of, 51. represented at hearings 1916, 8. INDEX 265 Farmers, — Continued secretary-treasurers of 43 per cent of national farm-loan associa- tions, 90. significance to, of provisions concerning purposes for which loans may be made, 94. Farm land, securing loans, qualifications of, 58, 60, 61. Farm loans, costs of making, under farm-mortgage system, 53. life of, before establishment of system, 49. made without thought of redemption from earnings of the land, 49. terms of, before establishment of system, 49. and see Federal farm loans. Farm-loan associations, see National farm-loan associations. Farm-loan registrar, duties of, 10, 40. Federal Farm Loans, on amortization plan, 55. amount applied for to October 31, 1920, 74. granted to October 31, 1920, 74. annual volume of loans, 65. applications for, 34, 66, 67, 74, 75, and see Applications. average amount of loan varies with land values in the district, 76. costs of inspecting reduced and equalized with systematic ap- praising, 53. costs of making, 53. costs of negotiating equalized, 54. data on sale value of farms securing, compiled by Farm Loan Board, 67, 68. life of, 55 and n. limitation upon amount of, to one borrower, 75, 76. may be rejected at four points in process, 75. must be secured by first mortgage, 58. not government loans, 74 and n. not made on worthless security or for speculative purposes, 74. provisions of Act concerning, 64, 65, 94. purposes of, 59, 60, 94. , not to include refunding of mortgages where indebted- ness incurred for other than agricultural purposes, 62. qualifications of borrower, 58, 59, 72. qualifications of farm land securing, 58, 60, 61. reasons for difference between amount applied for and amount granted, 74. reasons for rejection of, 65, 75. rejection of, in case of unsatisfactory title, 75. restriction upon, 59, 64, 65. 266 THE FEDERAL FARM-LOAN Federal Farm Loans, — Continued standardization of, 42. statement of purposes for which employed, 62, 94. Federal Farm Loan Act, amendment to, 29, 30. broadly interpreted by members of Farm Loan Board, 92. constitutionality of, suit to contest, 33, 34. co-operation for other than borrowing j^urposcs, encouraged by, 83. provisions of, concerning amount of loan in proportion to ap- praisal value, 64. , concerning basis of appraisal, 64. , concerning capital stock of land banks, 22, 26. , concerning bond issues, limitation upon, 25. , concerning functions of land banks, 92. , concerning investment of land bank capital in United States bonds, 93. , concerning liability of land banks, 84. , concerning qualifications of borrower, 72. , concerning reserves of Federal land banks, 70, 71. of national farm-loan associations, 7 1 . , concerning security of Federal farm-loan bonds, 37. , concerning voting power of members in national farm- loan associations, 81. restrictions upon issues of bonds similar to restrictions in Euro- pean institutions, 40. validity of. United States Supreme Court decision concerning, tax-exemption feature of, 44. Federal Farm Loan Board, activities of, 7. appointment of members, 7. charge for appraisal fixed by, 85. co-operation with land banks in solving problem of appraisal, 68. composition of, 7. control of entire system by, 7. data compiled by, on sale values of farms securing Federal farm loans, 67, 68. Farm Loan Act broadly interpreted by, 92. Federal Farm Loan Bureau supervised by, 7. may reject loan, 75. objections of, to sale of bonds through syndicates, 33. proposal of, for sale of bonds through single bond-house, 33. rate of interest established by, 28. report of, on occupations of secretary-treasurers, 90. ruling of, on appraisal, 64. , on insurance, 69. INDEX 267 Federal Farm Loan Board,^ — Continued , on (jucslions arising in formation of national farm- loan associations, 85. , on requirement of Farm Loan Act that a borrower must be a cultivator, 72. statement of, concerning dividends in year ending November 30, 1919, 71. , concerning financial condition, October 31, 1920, 74. , concerning puri)Oscs for which loans used, 62. syndicate for sale of Federal farm-loan bonds, formed by, 2H. Federal Farm Loan Bonds, competition of, with other bonds, 45. constitute 7 per cent of tax-free securities outstanding, 45. convenient to investor, 41. debentures, 37. denominations of, 41. held to be collateral trust bonds, 38 n. issues of, 24, 25. , authorized by Farm Loan Act, 25. life of, 41. as long-term investments, 2C^, 27. made legal investment for trust funds, 27. prices of, 32, 33. proposals for future sale of, 35, 36. rate of interest on, to April 30, 1918, 31, and see Rate of Interest. redemption of, 41. sale of, 31, 33. , during World War, 29. , through single bank, proposed, 33. , through syndicates, objections to, 32, 33. Secretary of Treasury, purchase of bonds by, 29. security underlying, 25, 37, 38, 42, 53, 85. sale of, in advance of loans, 37. , by a syndicate, 28. stability of, prophesied, 47. tax-exempt, 43. Federal Farm Loan Bureau, 7. Federal Farm Loan System, assistance of Department of Agriculture to, 97. co-operation of, with Department of Agriculture, 94, 95. co-operation of banks with, 90, 91. and see Co-operation. cost of inspecting under, 53. cost of negotiating loans under, 54. distinctive features of, 50. , reflect foreign experience, 50. 18 268 THE FEDERAL FARM-LOAN Federal Farm Loan System,— Continued distributes risk, 54. effect on local banks, 58. personal element in api)raisal under, 63. established, i. compared with foreign rural-credit systems, 78. and the Landschaften of Germany, 78. operation of, under supervision of government, 7. safeguards provided by, 40. a step toward the solution of the problems of agriculture, 100, 1 01. Federal Land Banks, capital of, invested in United States bonds, 93. , invested in United States certificates of indebtedness, 93. capital reserves and earnings of, secure mortgages, 43. capital stock of, 22. , tax-exempt, 44. co-operative associations encouraged by, 96. co-operatively owned by national farm-loan associations, 84. dividends, 71. emergency created by failure of syndicate of bond-houses to re- new contracts with, 30. established by Farm Loan Board, 7. evidence collected by, concerning appraisal value of farm, 67. expenses of, 70. , partly met by fees, 70. final appraisal conducted by, 67. financial agents of the United States, 92. functions of, 12, 92. good-roads movements encouraged by, 96. gross profit of, 70. holding of stock of, by farmer borrowers assures low rate of in- terest, 80, 81. interest paid on bonds, 28. insurance policies written by, 69. joint liability of, 84. legal departments of, 95. may reject loan, 75. location of, 9. net profit of, 70. organization of, 10. profit of, 70. provision for raising funds, 24. purpose of, service rather than profits, 73. reserves of, 70, 71. seed-grain loans made through, 92. INDEX 269 Federal Land Banks, — Continued statement of Farm Loan Board concerning dividends of, in year ending November 30, 1919, 71. stock of, held by borrowers, 71, 80. terracing encouraged and in some cases required by, 97. Federal Land Bank Districts, establishment of, 7. Federal Land Bank of Saint Paul, ruling of, concerning livestock raising and dairying in North Dakota, 96, 97. Federal Reserve Act, amendments necessary, 5. Federal Farm Loan Act follows, in exempting capital of banks from taxation, 44. and rural credit, 21. Federal Reserve System, service to business world, 51. Fees, upon application for loans, 74. to Federal land banks for appraisement and examination of title, 70. for title, very low, 95. First mortgage, Federal farm loan must be secured by, 58. Fixed capital, 50. Foreclosure, under Federal farm-loan system, 73. on second mortgage, 73. only two instances of, reported by the Federal Farm Loan Board, 67. Foreign rural-credit systems, see European rural-credit systems. Germany, Government bonds of, prices on, during World War, 47, 48. land-mortgage bonds in, prices during World War, 47, 48. Landschaften of, some principles of, embodied in the farm-loan system, 78. rural-credit systems, 3. United States embassy in, to investigate land credit there, 4. Good-roads movements, encouraged by Federal land banks, 96. Government bonds, prices of, in Germany during World War, 47, 48. and see United States government bonds. Government regulation, of banks and insurance companies, 39. 2 70 THE FEDERAL FARM-LOAN Guardian, may not take out a Federal farm loan unless father, mother, hus- band or wife of ward, or holding joint interest in ward's property, 59. Hearings, conducted by Farm Loan Board, 1916, 8. Hollis-Bulkley or Committee Bill, 5. Illinois, risk in making lOan in, contrasted with risk in Minnesota, 54. Improvement, definition of term, 60. "Infant" industries, and the tariff, 45. Inflation, in land values, 39, 40. , discounted in appraisal, 66. Inspecting, cost of, 53. Insurance, 41. amount required by land bank, 69. companies in which held, 69. difficulty of securing, in poor or remote sections, 69. Farm Loan Board, rulings on, 69 n. Federal land banks encouraged to write, 69. objections to writing of, by Federal land banks, 70. Insurance companies, government regulation of, 39. Insurance of title, 95. Interest, on bonds, paid by land banks, 28. Interest payments, on Federal farm-loan bonds, 40. Interest rate, see Rate of Interest. Investment, in farm-loan bonds, made legal for trust funds, 27. Investor, farm loans previously made to suit investor rather than farmer, 49. Joint-stock land banks, under Moss-Fletcher or Commission Bill, 4. Joint-stock land banks, see Appendix A, 103-110. Kansas City Title and Trust Company, Smith I';., 44. INDEX 271 Land bank appraiser, sec Appraiser, land bank. Land Banks, see Federal land banks. Land mortgage bonds, convcrlibiiilj' of, 25. European expcrienec in, 25, 27. prices of, in Gcrniany during World War, 47, 48. stability of, 25, 47. uniformity of, 25. Lands, Western, I, 46. , values increased by settlement, 2. Landschaften, some principles of, embodied in Federal farm-loan system, 78. Silesian, prices on debentures of, 46, 47. of Mecklenburg, prices on debentures of, 47. of Posen, prices on debentures of, 47. Lawyers, secretary-treasurers of 9 per cent of national farm-loan associa- tions, 90. Legislation of states, making Federal farm-loan bonds legal investment for trust funds, 27. Liability, in European co-operative credit systems, 8t. of every land bank for every other land bank, 84. of members of national farm-loan associations, 81. in United States national and state banks, 81. and see double liability, and unlimited liability. Liberty loan, third, 31. Livestock, raising of, in North Dakota, required by land bank ruling, 96, 97. Loan committee, sec National farm-loan associations, loan committee. Loans, seed-grain, made through Wichita, Spokane, and St. Paul land banks, 92, 93. and see Federal farm loans. Long-term credit, purpose of Federal farm-loan system to establish, I. Long-term investment, desirability of land-mortgage bonds as, 47. Federal farm-loan bonds, desirability of, as, 26, 27. Long-term loans, supplied to fanners by Fedcnd farm-loan system, 91. 272 THE FEDERAL FARM-LOAN Marketing of bonds, necessity for, 27. and see Sale. Mecklenburg, Landschaft of, prices on debentures of, 47. Merchant marine, subventions to, 45. Minnesota, risk in making loan in, contrasted with risk in Illinois, 54. Missouri, equity proceeding in district court of, to contest constitutionality of Farm Loan Act, 34. Montana, average rate of interest on farm-mortgage loans in, 52. Mortgages, upon crops, security for seed-grain loans, 93. held by land banks, exempt from taxation, 43, 44. inconvenience to investor in purchase of, 41. of New London Society, 2. not to be refunded by Federal farm loans unless incurred for agricultural purposes, 62. pledged as collateral to farm-loan bonds, security underlying, 42. practise of substituting, in early debenture companies, 39. and see Second mortgage. Mortgage bonds, distinguished from debentures, 37. Moss-Fletcher or Conmiission Bill, 4. Napoleonic wars, prices on land debentures during, 46. National farm-loan associations, admission of members, 79. agency system replaced by, 12, 13. amount of loans, 85. applications for loans appraised by, 66. attempts to form, merely for the purpose of getting " easy money," 86. authorized to issue certificates, 82. board of directors of, 79. , passes on appraisal report of loan commit- tee, 66. capital reserves and earnings of, secure mortgages, 42. capital stock in land banks, 24. certificates, see Certificates. composition of, 17. co-ope«ative efforts of, 98. INDEX 273 National farm-loan associations, — Continued co-operatively owned by members, 84. corporations, 79. dividends, 71. , rcloaned, 98. double liability of members, 42, 81. excluding the shiftless from membership in, 87. extent of territory, 85. functions, 14, 16, 17. future additions to membership in, to come within existing asso ciations, 86, loan committee of, appraises application for loan, 66. , submits written rei)ort on value of farm, charac- ter of applicant, etc. compensation of members fixed by Farm Loan Board, 85, may reject loan, 75. members encouraged to co-operate for other than borrowing pur- poses, 83, 84. number of members, fixed by Fatm Loan Board, 85. most desirable size, fixed by Farm Loan Board, 85. number organized during first year, 85, 86. • second year, 86. third year, 86. number not increasing and why, 86. number on December 31, 1920, 86. officers of, 79. organization of new associations practically complete, 86. problems in forming, 85. qualifications for membership in, 58, 59, 72. qualifications for membership in, encourage good farming, 80. reserves of, 71. secretary-treasurers of, see Secretary-treasurers. self-governing in local affairs, 79. voting power of members, 81. Nationality, 85. New England, debentures sold in, 38. farm appraisal in, 68. New London Society United for Trade and Commerce (Connecticut), 2,3. New Mexico, average rate of interest on farm-mortgage loans in, 52. Norris, G. W., former commissioner of Farm Loan Board, quoted, 83, 84. North Atlantic States, debentures sold in, 38. 274 THE FEDERAL FARM-LOAN North Dakota, co-operation in an association in westehi, 98. crop failures in, 96, dairying promoted, 98. livestock raising and dairying in, required by land bank ruling, 96, 97- report of State Agricultural College, 97. "One-crop" districts, 9. Orchards, valuation of, for Federal farm loans, 61. Organization, tenii>orary board of, of land banks, 5, 10. Organizations, farmers', represented at hearings, 1916, 8. Pasture land, appraisal of, 60. Personal element in appraisal, see Ai)praisal. Personal security, determines whether a loan shall be liberal or conservative, 64. less important than real security, 63, 65. under a national system, 65. Pomerania, prices on land debentures of, 46. Population, Bureau of Census reports on, 99. cityward trend of, 98, 99, 100. Posen, Landschaft of, prices on land debentures, 47. Potato warehouses, encouraged by land banks, 96. President of the United States, appoints four members of Federal Farm Loan Board, 7. appropriated $5,000,000 for seed-grain loans, 92, 93. Prices prevailing in community, a factor in determining appraisal value of land, 64. Profit, items in gross annual, of land banks, 70. net, of land banks, 70. Prussia, bank of, stock, 46. government bonds, prices of, 46, 47, 48. government railroads of, stock, 4(3. prices on land dd)cnturcs of, 46. East Prussia, prices on land debentures of, 46. INDEX 275 West Prussia, prices on land debentures of, 46. Public domain, 2, 46. Race, 85. Railroads, of Prussia, stock, 46. transcontinental, and land grants, 45. Rate of interest, average, on farm-mortgage loans 52. to borrowers, 32. , artected by 5 per cent enforced stock-holding and by dividends on that stock, 71. -, fixed by Farm Loan Act, 52. established by Farm Loan Board, 28. on Federal farm-loan bonds, 32. ^ to April 30, 1918, 31. , reduced by tax-exempt feature of bonds, 43. , standardized, 52, 53. influence of borrower-stockholders in determining, 80, 81. on land mortgages, reasons for variation in, 53, 54. on land-mortgage bonds, 25. on loans, 71. on railroad bonds and industrials, 45. uniform, advocated in spite of variations in risk, 54. , a feature of the Federal farm-loan system, 50. , throughout United States to borrowers under Federal Farm Loan Act, 52. variation in, on farm-mortgage loans, 53. variation in, with risk, 53, 54. Registrar, see Farm-loan registrar. Religion, 85. Repayment of farm loans, from earnings of land, 49, 55. ^ impossible if term too short, 51, Reserves, of land banks, 40. Revolution of 1848, prices on land debentvires during, 46. Risk, distributed, by Federal farm-loan system, 54. in making loan in Minnesota and in Illinois, compared, 54. variation in, causes variation in interest rate, 53, 54. Rural-credit institutions. New London Society, q.v., 2, 3. state, a failure, 3. 276 THE FEDERAL FARM-LOAN Rural-credit institutions, — Continued and see European rural-credit institutions. Saint Paul, Federal Land Bank of, 92, , ruling concerning livestock raising and dairying in North Dakota, 96, 97. , amount of seed-grain loans made through, 93. , assisted by agents of Department of Agri- culture, 94. Salability, of land, a factor in determining its appraisal value, 64. discounted by appraisers in case of inflated values, 66. ruling of Farm Loan Board concerning, 64. relation of, to earning power, 66. see Sale value. Sale, of Federal farm-loan bonds, proposal for future, 35, 36. , during war, 29. , through syndicate not satisfactory, 32. , through single bank, proposed, 33. , in advance of loans, 37. Sale value, of farms securing Federal farm loans, data on, 67, 68. inflation in, discounted by appraisers, 66. of land, a factor in determining its appraisal value, 64. relation of, to earning power, 66. Saving, certificates issued by national farm -loan associations to encour- age, 82. Savings banks, 83. SchuLz-Delitzsch banks, 3. Seasonal demands for funds, 53. raises interest rate, 53. Second mortgage, advantages to holder of, under Federal farm-loan system, 73. security of, 73. taken at sale of land to tenant-borrower, 72. Secretary of Agriculture, request of, for appropriation for seed-grain loans, 93. Secretary of Trea^ry of United States, ex-officio chairman of Federal Farm Loan Board, 7. authorized by Farm Loan Board to buy bonds at par. Secretary-treasurer, advantage of, who is resident where association has headquarters, 90. INDEX 277 Secretary-treasurer, — Continued compensation fixed by Farm Loan Board, 85. co-operative efforts of, in a northern Wisconsin association, 98. co-operative efforts of, in a western North Dakota association, 98. duties of, 79. necessary qualities of, 89, 90. occupations of, 90. success of association dependent upon, 8g. Security, personal, more important than real, 65. underlying Federal farm-loan bonds, 42. standardized, 42. Seed-grain loans, made throtigh Federal land banks of Wichita, Spokane, and Saint Paul, 92, 93. Seventh Federal Land Bank District, co-operation of banks in, 90. secretary-treasurers in, 90. and see Loans. Sheep-raising, encouraged by a secretary-treasurer in North Dakota, 98, Short-term loans, supplied to farmers by county banks, 91. Silesian Landschaft, prices on debentures of, 46, 47. Small cultivators, rather than large to be financed by system, 72. Smith, vs. Kansas City Title and Trust Company, 44. Southern Commercial Congress, 4. Speculation, no Federal farm loans for, 74, 80. Spokane, Federal Land Bank of, 92. , amount of seed-grain loans made through, 93- , assisted by agents of Department of Agri- culture, 94. Standardization, of credit and of form of security under Federal farm-loan system, 42 . State Agricultural College of North Dakota, report of, 97. State banks, double liability of members, 81. Stock raising, encouraged by a secretary-treasurer in North Dakota, 98. 278 THE FEDERAL FARM-LOAN Subventions, to merchant marine, 45. sui)ply of capital, variation in, 53. Supreme Court of the United States, decision concerning constitutionality of Farm Loan Act, 34.. , delay in rendering, 35. suit concerning constitutionahty of Farm Loan Act, ^.\. and see Appendix D. Syndicate, of bond houses for sale of Federal farm-loan bonds, 28, 32. , failure to renew contract, 30. , objection to sale of bonds through, 32, 33. Tariff, protective, and "infant industries," 45. Tax-exemption, of Federal farm-loan bonds, 43. , argument for, 45. , commission for examining foreign rural- credit systems, reports in favor of, 43. ■ , essential to farm-loan system, 46. , reason for, 45. • , validity of, in Farm Loan Act, Supreme Court decision concerning, 44, and see Supreme Court and Appendix D. , vigorously opposed, 44. Tax-free securities. Federal farm-loan bonds 7 per cent of, 45. outstanding, 44, 45. Tenants, Federal farm loans obtained by, 72, national farm-loan association certificates an advantage to, 83. success of secretary-treasurers in assisting, 73. Term of Federal farm loans, see Federal farm loans. Terracing, encouraged and in some cases required by land banks, 97. Third Liberty loan, 31. Title, abstract of, to be furnished by applicant, 68, 85. , corrected by legal department of land bank, 95. examined by land bank, 69. fees for examination of, 70. insurance of, 95. unsatisfactory, a ground for rejection of application for loans, 75. validity of, 41. INDEX 279 Treasury Department of the United States, Federal Farm Loan Bureau established under, 7. capital stock in land banks, 19. purchase of Federal farm-loan bonds, 31. Trust companies. Federal farm-loan bonds made legal investment for, 27. funds of, 83. Trustee, may not take out Federal Farm Loan, 59. Turnover, of the farmer, 51. of the merchant or manufacturer, 51. United States, bonds, see Bonds. farm mortgage debentures in, 38. Federal land banks as agents of, 92. Federal land banks as depositaries for, 92. President of, authorized European investigation in land-credit systems, 3, 4. and see President of the United States. Commission for examining foreign rural-credit systems, 4. , declares in favor of tax- exemption, 43. Department of Agriculture of, see Department of Agriculture. Department of State of, see Department of State. support of government of, essential to system during Supreme Court suit, 35. Supreme Court, see Supreme Court. Treasury, see Treasury. Unlimited liability, in European co-operative credit systems, 81. Value, appraisal, of farm, as determined by scientific appraiser, 63. , , as determined by practical appraiser, 64. . , provision of Act concerning, 64. -, ruling of Farm Loan Board concerning, 64. and see Appraisal. Victory Loan, 31. Voting power, of members of national farm-loan associations, 81. West, cheap lands in the, i, 46, , values increased by settlement, 2. 28o THE FEDERAL FARM-LOAN Wichita, Federal Land Bank of, 92. ^ amount of seed-grain loans made through, 93. . , assisted by agents of Department of Agri- culture, 94. Wisconsin, dividends of an association in, reloaned for purchase of dairy cattle, 98. World War, prices on government and land-mortgage bonds in Germany dur- ing, 47. 48. sale of farm-loan bonds during, 29. Wyoming, Average rate of interest on farm-mortgage loans in, 52. THE END UNIVERSITY OF CALIFORNIA LIBRARY Los Angeles This book is DUE on the last date stamped below. 2 4 1950 Form L9-42»n.-8,'49(B5573)444 THE LIBRARY UNIVERSITY OF CALIFORNIi LOS ANGELES iiG Wi prud - C 2051 Federal farm- U5W7 loan sy s tem in operation. MAR 2 4 1950 EG 2051 U5VJ7 UC SOUTHERN REGIONAL LIBRARY FACILITY """ ll||!|l|| III III II Ijlil ||II!I I III II !||||| Ml) I II [ I I III! AA 000 571 729 3