may form such an association if the aggregate of the loans desired by the membership is not less than $20,000. Each member must take stock in his association amounting to 5 per cent of the sum he desires to borrow. The associa tion, in turn, must subscribe for stock in the bank to an amount equal to 5 per cent of the sum it wants for its members. In both cases the stock is held in trust as security for the loan. If a prospective borrower cannot pay for his association stock he may borrow it as a part of the loan on his land. Under this plan, then, every borrower must be a stockholder in his local association, and every association a stockholder in its district land bank. Each stockholder is liable for the acts of his association up to twice the amount of his holdings. Money for the loans comes partly from the capital of the Federal land banks and partly from the sale by the banks of bonds secured by first mortgages on farm lands. After a Federal land bank has loaned $50,000 on first mortgage, it may obtain permission to issue $50,000 in farm loan bonds based on these mortgages, sell the bonds in the open market, and use the proceeds to lend on other mortgages, repeating the process until bonds equal to twenty times its paid-up capital are outstanding. No Federal land bank may charge more than 6 per cent on its mortgage loans, nor more than 1 per cent above the rate paid on the last issue of its bonds. To make these bonds attractive to investors they, as also the mortgages upon which they are based, are exempted from all taxation and are made legal investments for fiduciary and trust funds. In addition to the twelve Federal land banks and the national farm loan associations of borrowers, the act permits the establishment of joint stock land banks with a minimum capital of $250,000, and with authority to lend directly to borrowers on farm mortgage security and to issue farm loan bonds. These banks are under the supervision of the Federal Farm Loan Board, but the Government does not lend them any financial aid. They are free from many of the restrictions imposed on the Federal land banks. Subject to the 50 and 20 per cent value limitation and the limitation as to territory, they may lend more than $10,000 to any one person, and make loans for purposes other than those prescribed for Federal land banks. They are limited, however, in their bond issues to fifteen times their capital and surplus. The country has been divided into twelve Federal land bank districts, and twelve Federal land banks have been established, one in each district, as follows: Springfield, Mass., Baltimore, Md., Columbia, S. C., Louisville, Ky., New Orleans, La., St. Louis, Mo., St. Paul, Minn., Omaha, Neb., Wichita, Kan., Houston, Tex., Berkeley, Cal., Spokane, Wash. The twelve land banks opened in the spring of 1917 with an aggregate capital of $9,000,000, of which all but about $107,000 was subscribed by the Government. The Act provides that after subscriptions of farm loan associations to the capital stock of a Federal land bank shall amount to $750,000, one-fourth of all subsequent subscriptions shall be applied to the retirement of the stock originally subscribed. At the close of the year 1919, the capital of the twelve banks had increased to over $21,000,000. In August, 1919, a suit to contest the constitutionality of the farm loan act was instituted in Missouri. The case on appeal to the United States Supreme Court is still pending. READING REFERENCES Conant: Principles of Money and Banking, Vol. II, Bk. V, Ch. III. Herrick: Rural Credits. Kniffen: The Practical Work of a Bank, Ch. III. : Phillips Readings in Money and Banking, Ch. XXVII. Scott: Banking (National Social Science Series), Ch. I. White: Money and Banking, Bk. III, Ch. I. CHAPTER XI THE NATIONAL BANKING SYSTEM 81. Origin of the system. The national banking system established in 1863 grew out of the financial difficulties of the Civil War. It will be remembered that after the adoption of the independent treasury system in 1846 the Government had no relation with the banks of the country, keeping its funds with the various sub-treasuries established in several leading cities. When the war broke out the Government was compelled to turn to the banks for help. Instead of meeting the war expenses by taxation, it resorted to loans, which could be obtained quickly only from the banks. The banks of New York, Philadelphia and Boston agreed to advance $150,000,000 in gold on three-year notes bearing interest at 7.30 per cent to be reimbursed from the proceeds of bond sales, and they also undertook to market the bonds when they were issued. In August of 1861 the Government began to issue noninterest bearing notes payable on demand at the subtreasuries. The banks objected to the issue of these notes because it threatened their own circulation and also the permanence of redemption in specie. When later in the year heavy issues of these notes were made the banks found that their specie reserves were falling rapidly and on December 31, 1861, they suspended specie payment. The Government having no adequate fund of specie to sustain the mass of paper issued was likewise compelled to suspend. Early in 1862 the Government resorted to the issue of "legal-tender" notes without interest and with no 162 provision for redemption. The result was a general disappearance of coin, a great depreciation of the whole paper currency, and a heavy increase in the cost of carrying on the war. In this emergency, Congress was ready to accept a plan for a national banking system which Secretary of the Treasury Chase had proposed as early as 1861. He urged its adoption, first, to provide a market for government bonds so as to replenish the public Treasury; and second, to provide a safe and uniform national currency. The latter purpose was finally accomplished, but the adoption of the national system brought little aid to the Treasury during the war. The organization of national banks proceeded so slowly during the war that the Government received from this source only about $100,000,000, which was less than 4 per cent of its borrowings during the war. The original act was defective in many respects, so in 1864 it was completely revised. Even then the state banks which were expected to reincorporate under the new law did not do so in large numbers. In 1865, however, Congress passed a law imposing a tax of 10 per cent on all notes issued by state banks. As this provision practically made it impossible for state banks to issue notes their conversion into national banks soon became general. A national currency, safe and uniform, was thus insured; safe because protected by government bonds, and uniform because issued by a government bureau to all banks, in the same form and under similar conditions. The chief provisions of the national bank law, as amended from time to time, will now be briefly reviewed. 82. Bond deposit and circulating notes.-Prior to the passage of the Federal Reserve Act in 1913 each national bank before opening for business was required to deposit with the Treasurer of the United States a certain amount of government bonds. Against the bonds thus deposited it was entitled to issue circulating notes up to the par value of the bonds, but not exceeding the market value thereof 1 Prior to 1900 only 90 per cent. 1 and not exceeding its paid-in capital. National bank notes are not legal tender for private debts, but are receivable and payable by the Government except for import duties and interest payments on the public debt. Every national bank must receive the notes of every other at par, and redeem its own notes on demand at its own counter. It is also required to keep on deposit in the United States Treasury a sum of "lawful money" equal to 5 per cent of its circulation for the redemption of its notes. This is not a "safety fund," for each deposit belongs to the bank making it, and is held for the redemption of its own notes alone. The act of 1863 required each bank to redeem its notes over its own counters only, but as amended it provided for the establishment of redemption agencies in certain leading cities. In 1874 a new system of redemption was provided, making the Government responsible for the redemption of mutilated notes from the redemption fund which each bank must keep good at all times. The expense involved in sending these notes to Washington and replacing them with new notes is borne by the banks. The present system of redemption does not test effectively and continuously the ability of every bank to redeem its notes on demand. To apply such a test it would probably be necessary to forbid any bank to pay out any notes except its own, as in the Canadian or Federal reserve note plan. The chief effect of the system has been to provide a method for replacing worn and mutilated notes with new currency. The Government is ultimately responsible for the notes of every national bank. It is bound to pay on demand all national bank notes presented, and not merely to the extent of the redemption fund. To protect it in this responsibility it has ample security as follows: (1) the bank's bond deposit beyond the par value of which a bank cannot issue notes; (2) the 5 per cent redemption fund; (3) a first lien upon the bank's assets; (4) the personal liability of stockholders. Until recently banks could reduce their circulation only by redeeming their notes over their counters and sending |