aid them in marketing their products at less expense and at better prices. Manufacturers have often adopted the device of placing the sale of their products in the control of a single corporation. The revolution in business methods in recent years is very largely a concentration either in the production or sale of an article. If farmers profit by the elimination of competition in the sale of their farm products to consumers, they will profit by eliminating competition in the sale of their farm-mortgage securities. If gigantic business concerns find it profitable to eliminate competition in selling manufactured products, merchandise and all other articles of commerce, farmers will profit by eliminating competition in the sale of their securities in the money markets of the world.

CHAPTER IX

INADEQUACY OF RESERVE FUND

THE Commission Bill, the Sub-committee Bill, and the Senate Committee Bill do not provide ample reserve funds to provide perfect safety in the payment of the bonds, authorized to be issued by the banks. The price at which bonds sell necessarily determines the rate of interest the farmers pay. The bonds are the farmers' mortgages, slightly modified in form so as to conform to the demands of investors, and the usages of the financial world. The public must know that these bonds are an absolute safe investment. The law, therefore, must above all things, in some manner, by some method, means or requirement, make the mortgage bonds absolutely safe. The capital of a bank should not be regarded as a part of the reserve or guaranty fund, except such portion as shall be specifically set aside for this purpose and safely invested for the benefit of bondholders. The decree which founded the Crédit Foncier declared that its "guaranty fund" should be 25,000,000 francs1 or about $5,000,000. This fund, now called its capital, has grown to $45,000,000.

The Crédit Foncier is required to set aside additional funds as a reserve to secure its bonds. This institution does not need to invest its capital in making farm-mortgage loans, because it is allowed to sell its bonds in advance of making loans, to secure the funds therefor. It is plain, therefore, that the capital of land-credit institutions should not be regarded as a part of the reserve, guaranty, or

1 Senate Doc. 214, 63rd Congress, p. 655.

insurance fund only in so far as this capital shall be kept invested in some absolutely safe securities, which will be quick assets, available at any time to meet defaults in the payment of interest or principal on mortgages. It will be instructive to examine the Commission, the Sub-committee and the Senate Committee bills to ascertain what portion of the capital of the proposed land banks is available as a reserve, guaranty or insurance fund.

Sub-division (c), Section 16, of the Commission Bill authorizes national farm land banks:

"(c) To use its capital stock, surplus, and deposits as a revolving fund for the negotiation of such first mortgage or first deed of trust farm loans; or to use the same for the purpose of buying in its national land-bank bonds and of holding them temporarily; or to loan its capital and surplus on first mortgages or first deeds of trust for a period not exceeding five years: Provided, That not to exceed 50 per cent. of such capital and surplus may be permanently invested in such national land-bank bonds and the remainder of the capital and surplus can be permanently invested only in United States Government bonds, in the bonds of the State in which such bank is operating, or in such other securities as may be approved by the Commissioner of Farm-Land Banks."

The Federal land banks are given power under subdivision "second," section 15, of the Sub-committee Bill to invest their capital as follows:

"Second. To invest such funds as may be in its possession by the purchase of first mortgages on real estate situated within the Federal land bank district within which it is organized or for which it is acting."

Under sub-division "second," of section 15, of the Senate Committee Bill, every Federal land bank is given power as follows:

"Second. To invest such funds as may be in its pos-session in the purchase of first mortgages on farm lands

situated within the Federal land bank district within which it is organized or for which it is acting, preference being given to mortgages taken by farm-loan associations within the district."

Section 13 of the Sub-committee Bill, H. R. 16,478, introduced May 12, 1914, among other things provides as follows:

"Ten per cent. of the capital stock of every land bank shall be invested in bonds of the United States."

However, the Sub-committee Bill re-introduced March 2, 1915, by Mr. Bulkley of Ohio, H. R. 21,603, contained this provision:

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Five per cent. of the capital stock of every land bank shall be invested in bonds of the United States."

It will be observed that the Federal land banks under the original bill were required to invest 10 per cent. of their capital stock in government bonds, while under the bill subsequently introduced such banks were required to invest but 5 per cent. of their capital stock in government bonds.

In Section 13 of the Senate Committee Bill the Federal land banks are required to invest 5 per cent. of their capital stock in government bonds. The provision is as follows: "Five per cent. of the capital stock of every land bank shall be invested in bonds of the United States."

The foregoing provisions show that in the Commission Bill the land banks may keep their entire capital invested in farm mortgages, with bonds outstanding against those mortgages. The bond-issuing banks under the Sub-committee and Senate Committee bills are likewise authorized to invest all their capital in farm mortgages, except 5 per cent. thereof which must be invested in government bonds. Only that portion of the capital which is required to be kept invested in government bonds should be regarded as a part of the reserve, guaranty or insurance fund. It is true, of course, that the capital invested in farm mortgages would

be available as a final asset to meet the obligations of a land bank, in case of failure or bankruptcy proceedings. But the capital of a land bank which is used as an operating or working fund to enable the bank to carry on its business of negotiating and selling farm loans, should not be regarded as any part of the fund designed to meet losses. Because capital thus used is naturally not available when most needed, and when thus used impairs the credit of the bank. Under the Commission Bill the bond-issuing bank may have a capital of only $100,000. The bank may issue mortgage bonds up to fifteen times its capital or to the amount of $1,500,000. This bill does not provide for the accumulation of any reserve as special security for the bonds issued, but does limit annual dividends to 6 per cent. per annum until a surplus shall be accumulated equal to 15 per cent. of the authorized capital. Whether any such surplus would be created is a matter of uncertainty. But if a bank accumulated a surplus equal to 15 per cent. of its capital of $100,000, the surplus would amount to $15,000. This would be but 1 per cent. of the outstanding bonds which it would be authorized to issue. The bill provides for no reserve fund. The Subcommittee Bill requires that one-fourth of the net earnings shall be carried to a reserve account," until it shall equal 20 per cent. of the outstanding capital stock of the bank. The bond-issuing bank with a minimum capital stock of $500,000, would be required to have a reserve account of $100,000. Under the bill the bank is allowed to issue bonds equal to twenty times its capital stock or to the amount of $10,000,000. One hundred thousand dollars reserve would be 1 per cent. of the amount of bonds it would be authorized to issue. Five per cent. of its capital must be invested in government bonds, which would amount to $25,000. This would amount to one-fourth of 1 per cent. of its outstanding bonds. This would provide a total reserve fund of only one and one-fourth per cent. of

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