FEDERAL LAND BANKS

283

To insure the success of each separate Federal land bank the Government is lending its funds without interest until $15,000,000 are loaned to the farmers of each district. The Government will not receive back the last of its advances for the stock of each district bank until almost sixty millions more have been borrowed. The act also provided that, if aid were necessary, the Secretary would lend the land banks amounts requested up to an aggregate of $6,000,000.

Each of the twelve land banks is managed by a board of seven directors. The Federal Farm Loan Board appoints three of these directors and three are elected by the farm loan associations and borrowers through agencies (see 130), one from each of the three divisions into which each land bank district is divided. The seventh director is a director at large chosen by the Farm Loan Board from the three nominees who receive the greatest number of nominations from the farm loan associations and borrowing agencies.

One fourth of the capital of each land bank has to be kept in liquid assets, and not less than 5% in U. S. bonds. A reserve of 20% of each bank's capital must be built up by carrying to it one fourth of the earnings for each half year. After the 20% reserve is reached 5% of earnings is to be added to the reserve. Each local association is required to reserve 10% of its earnings until its reserve equals 20% of its capital. Afterwards 2% of its earnings must be reserved. If a local association liquidates, its unused reserve is transferred to the Federal land bank of the district.

An application for a loan must be approved by the local loan committee, and then by the appraiser of the Federal land bank. The mortgage note of the borrower is then indorsed by the local loan association before it receives the amount of the loan from the land bank. To

obtain more funds, the land bank applies to the Federal Farm Loan Board through the farm loan registrar of the district for its approval of an issue of bonds. The bank tenders to the registrar as collateral security first mortgages on farm lands or U. S. bonds, which must be assigned to the registrar as trustee before the bonds can be issued. The registrar verifies the securities and gives what information he has concerning them to the Farm Loan Board. The Board investigates the securities as it deems best. No issue of bonds can be made until the Board gives its approval in writing. The bank issuing the bonds are primarily liable for them. Every other land bank is also liable for the payment of the bonds. The twelve banks may also act together and issue consolidated bonds, the proceeds to be allotted upon an agreed basis, each bank being primarily liable for its share. "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 Government of the U. S., and as such they and the income derived therefrom shall be exempt from federal, state, municipal, and local taxation." 2

The farm loan system has provided capital for agricultural development; it has standardized one type of land mortgage; it has equalized rates of interest upon farm loans reducing rates in the west and southwest by from 1% to 4%.

220. Farm loan associations. These are explained in sections 130 and 219.

221. Joint-stock land banks. These are entirely independent of the Federal land banks but subject to the supervision of the Farm Loan Board. They must have a capital of not less than $250,000 owned by not less than ten persons, with not less than five directors. These

2 Section 26 of the Federal Farm Loan Act.

FEDERAL INTERMEDIATE CREDIT BANKS 285 banks can lend on farm land security for any purpose, but one can operate only in the state of its principal office and one adjoining state. The joint stock bank may issue its own bonds, not to exceed in the aggregate fifteen times its capital and surplus. In order to issue bonds application must be made through the registrar to the Farm Loan Board and the proposed collateral must be approved. The Board may then give its permission. Borrowers from these banks are liable only for their own loans. The activity is independent, not cooperative. The hold of such methods of doing business on a large part of the American people is demonstrated by the number of these banks successfully competing with the Federal land banks. 222. Federal intermediate credit banks. As a part of the Federal farm loan system Congress in 1923 created twelve intermediate credit banks, one to be located in each city where there is a Federal land bank (see 219), and to be managed by the directors and officers of that bank. Each bank has a capital stock of $5,000,000 divided into shares of $5 each, all of which is subscribed for by the United States Government subject to call in whole or in part. These banks are under the control of the Federal Farm Loan Board. Three reports are made each year and all expenses which are incurred by the Board on account of the credit banks are assessed against them. The function of the banks is to discount farmers' notes for local banks and other financial institutions for a period of from six months to three years. When the banks were first opened the Farm Loan Board placed the maximum period of discount at nine months. The banks do not do business with individuals, but under certain conditions they may lend direct to farmers' cooperative associations. The agricultural credits act gives the powers of the banks as follows: 3

3 The entire text of the act is printed in the Federal Reserve Bulletin, March 1923, page 303.

(1) To discount for, or purchase from, any national bank, and/or any state bank, trust company, agricultural credit corporation, incorporated live-stock loan company, savings institution, coöperative bank, coöperative credit or marketing association of agricultural producers, organized under the laws of any state, and/or any other Federal intermediate credit bank, with its indorsement, any note, draft, bill of exchange, debenture, or other such obligation the proceeds of which have been advanced or used in the first instance for any agricultural purpose or for the raising, breeding, fattening, or marketing of live stock:

(2) To buy or sell, with or without recourse, debentures issued by any other Federal intermediate credit bank; and

(3) To make loans or advances direct to any coöperative association organized under the laws of any State and composed of persons engaged in producing, or producing and marketing, staple agricultural products, or live stock, if the notes or other such obligations representing such loans are secured by warehouse receipts, and/or shipping documents covering such products, and/or mortgages on live stock: Provided, That no such loan or advance shall exceed 75 per centum of the market value of the products covered by said warehouse receipts and/or shipping documents, or of the live stock covered by said mortgages.

The reports which national banks make to the Comptroller of the Currency are available for the confidential use of a Federal intermediate credit bank as a guide in making loans or buying paper. As a condition of the loans made to state banks, trust companies, and savings institutions, a credit bank may require a written consent that the reports of these banks to the state authorities be available for examination by it. The law specifies that written consent must be obtained from other institutions to whom advances are made for regular examinations of their condition by the staff of the Comptroller of the Currency.

The credit banks may in their discretion sell loans or discounts which they have made, either with or without their indorsement. They have the privilege of rediscount

AGRICULTURAL CREDIT CORPORATIONS

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ing with a Federal reserve bank paper that is eligible for rediscount provided it has not been indorsed by a nonmember bank which is eligible for membership. They have power subject to the approval of the Farm Loan Board to borrow money and to issue collateral trust debentures or other similar obligations. These debentures may have a maturity not to exceed five years and must be secured by an equal amount of cash, or notes, or other obligations which the bank has purchased or upon which it has made loans. The debentures are exempt from all taxes and are limited in amount to ten times the paid-up capital and surplus of the bank. The interest rate on these debentures must not exceed six per cent. Each bank is secondarily liable for the debentures of every other Federal intermediate credit bank.

Rates of interest or discount are established by the credit banks subject to the approval of the Federal Farm Loan Board, but no rate may exceed by more than one per cent the rate on a bank's last issue of debentures. No paper is eligible for discount at a credit bank if the original borrower was charged a rate in excess of one and one-half per cent more than the discount rate of the credit bank at the time the loan was made.

One half of the net earnings of the credit banks are to be paid to the United States. The other half is to be used to build up a surplus fund until it equals the capital. After that ten per cent of the net earnings is to be added to surplus and ninety per cent is to be paid to the Govern

ment.

223. National agricultural credit corporations. — The agricultural credits act of 1923 provided for the formation of national agricultural credit corporations. They may be organized anywhere by any number of natural persons not less than five, or they may come into existence by

4 Federal Reserve Bulletin, March 1923, page 303.