N° CHAPTER NINE RATE OF INTEREST O loan on mortgage shall be made under this act at a rate of interest exceeding six per centum per annum," exclusive of the installments paid toward the reduction of the principal of the debt. In this way the congress of the United States undertakes to limit the cost to the American farmer of long term money on first mortgage. Elsewhere the law provides that farm loan bonds "shall bear a rate of interest not to exceed five per centum per annum.” It is also provided that in no case shall borrowers be obliged to pay more than one per cent in excess of the rate yielded by the last previous issue of bonds made by the land bank from which the farmer gets his loan. One Point Margin. In effect, the law permits a margin of one point between what interest borrowers pay and lenders receive, to cover the expenses and profits of the institutions operating under the act. ! In the case of the co-operative institutions, such as federal land banks and national farm loan associations, whatever profits accrue over and above expenses and reserves, are divided pro rata among the borrowers who create those profits. The same one point margin applies to joint stock land banks, but their profits accrue entirely to their shareholders and in no sense to their borrowers. Market Will Govern. The law may prescribe rates of interest and may limit the margin for expenses and profits to not more than one point by percentages, or to one-fifth reckoned in actualities. But the actual cost of the money to the borrower will depend upon the price at which he or his land bank can sell his or its bonds. No fiat of Congress can fix the rates at which money shall be lent. Acts of Congress may supervise rates, security, privileges and the like, but the law of supply and demand governs the cost of credit as it does of labor and commodities, in the last analysis. Creating a Market. As time goes on, these bonds will become "seasoned," the public will appreciate them, they will be more and more in demand. Then they should sell not only more readily, but at better pricesthat is, at par even though bearing a relatively low rate of interest. This is merely another way of stating that the market for farm loan bonds has got to be created, developed, fostered and promoted until the merits of these securities have become so thoroughly established that, like government bonds, they almost will sell themselves. How long this will take, cannot be foretold. The time required will depend in large measure upon the management of the system, the efficiency with which it is conducted and the energy with which the public are educated to recognize the merit of its securities. Selling the Bonds. Only under abnormal conditions, will the farm loan bonds issued by any federal land bank bearing five per cent and free of all tax sell for less than par. This means that such a bond of a denomination of $100 and yielding two and one-half per cent interest every six months should sell for not less than $100. But suppose that while the system is in its formative period, the bonds of some one federal land bank do not command par in any market. A simple provision of the statute provides for this contingency, as follows: "Funds transmitted to farm loan associations by federal land banks to be loaned to its members shall be in current funds, or farm loan bonds, at the option of the borrower." The proviso cited would enable the borrower to accept bonds at par and then to sell them at a discount, or at a premium, as the case might be. Nothing in the act prevents any land bank from selling its bonds below par. Indeed, it specifically provides that in buying bonds, federal land banks may pay par or less. In other words, the bonds will seek their level in the money market, as is treated more fully in Chapter Fourteen. The borrower may reap the profit or get the benefit of any premium upon the original issue of bonds for which his mortgage is part of the collateral. On the other hand, he may stand the loss if at first the bonds can be sold only at a discount. For after a land bank has loaned its capital, the only way it has of obtaining further cash to lend is through the sale of its bonds. To be sure, it may obtain a loan from the national treasury, but manifestly that will be but temporary and only for a relatively small amount. The bank cannot stand the loss should its bonds sell below par. Nothing in law or equity requires it to stand the loss. The bank must either restrict its operations until its bonds become so well established as to command at least par, or the borrower must be willing to stand the loss between the face of his loan and the price at which the bonds sell. Otherwise, the borrower, like the bank, must await a more favorable market for the bonds. Local Demand for Bonds. This is all the more reason why everything possible should be done to create a home market for these securities in every local community, by encouraging thrift savings, to be invested in bonds issued by the federal land bank of that district. Threefold benefit will result from such thrift: 1. Young and old who never before saved, will get into the habit of saving and by the |