Lastly, let us consider the securities that are offered and taken for loans. First may be noticed bonds, stocks, and other collaterals. These are often taken for time loans as well as those on demand. The notes that are given provide for the mode of selling the securities if the loans are not paid at maturity. The pledgee, the bank, is forbidden in most cases to take the stocks in payment; it must sell them in open market, and if there is a balance over, it must account for this to the borrower. It is entitled to make itself good and nothing more. It is a general principle of law that an agent or trustee can not become the purchaser in any sale of the principal's property. The temptation would be too great of taking advantage of his situation to forget or neglect his trust relation and sacrifice his principle. Banks therefore can not ordinarily become the purchasers of property pledged to them as security unless the note of the borrower specifically provides for this, or unless the property is taken by agreement. Sometimes a bank will agree with a debtor to take his property and discharge the debt; when this is done the bank becomes the absolute owner, and should the property thus taken subsequently advance in value, the bank would be the sole gainer.

When a bank incurs a heavy loss from the failure of the makers or indorsers of paper, sometimes the president will resolve henceforth to lend less money on such paper and lend more on bonds, stocks, and other collaterals, the worth of which is daily known in the market. But when the stock market suddenly goes to pieces, and values shrink enormously in an hour, then he has a poorer opinion of collaterals, and concludes that, on the whole, notes with responsible makers or indorsers are quite as safe as notes secured by ordinary stock and bond collaterals.

And this is the verdict of long experience. No security is proof against depreciation. The makers and indorsers of notes fail, bonds and stocks also decline in value. Absolute security is to be found nowhere.

A national bank is forbidden from taking its own stock as security. The reason is worth giving. Formerly state banks were often organized without any real capital. The shareholders would give their individual notes for the stock, organize the bank, issue its notes which the shareholders would receive for their notes discounted by the bank, and return them immediately in payment of their shares. By this method a bank would be organized without one dollar of real capital. It would, in truth, have its own notes and the individual notes of its shareholders; nothing more. To prevent this, national banks are forbidden to take their own stock as security. There is nothing, however, in the law to prevent a bank from taking the stock of another bank, and consequently it is possible for shareholders of different banks to exchange shares and get loans on them. This practice is in vogue in Canada, where a law prevents shareholders from pledging the stock of their own bank as security for loans obtained from them National banks are forbidden also from taking real estate as security for loans. The reasons are twofold.

Congress sought to prevent banks from ever becoming the permanent owners of much real estate through the failure of borrowers to pay their loans and the taking of their land in payment The other reason is, Congress having a proper realization of the unsatisfactory nature of such security, restricted banks from taking it. The experience of state banks prior to 1863 had shown that real estate security was often fluctuating and delusive and immense losses had been incurred in lending money on this seemingly solid basis. The wisdom of this restriction has never been much questioned.

Notwithstanding the law, banks on a few occasions have made loans on real estate security. How have the courts dealt with them? The state courts declared that the banks could not collect their loans, because they had violated the law. The Supreme Court of the United States decided differently.1 Both parties, so the court said, had violated the law, the borrower was as guilty as the lender. He ought not to be permitted to take advantage of his own wrong. He must therefore repay the money, because in justice he should do so. But the bank, so the court declared, had rendered itself liable to a revocation of all its privileges, and if the act was repeated, it would be the duty of the Controller of the Currency to proceed against the association and take away its charter. This admonition was enough, and no bank has since, openly at least, violated this provision of the law.

A national bank, however, may take a mortgage of real estate or land itself to secure a past debt. A bank discovers that a borrower is likely to fail and asks him to furnish additional security, and he gives the bank a mortgage on his real estate. This can legally be done.

It may be asked, can not the law be easily evaded by making a simple loan and then giving real estate security shortly afterward? The law doubtless has thus been evaded on more than one occasion. Still, if it should ap pear that the transaction was simply to evade the law, the bank, would subject itself to the danger of losing its charter, a risk too great to offset against the possible gain from making a loan of that kind, whatever might be the temptation in the way of a high rate of interest.

1 National Bank v. Matthews, 98 U. S. 621.

When a bank thus takes real estate for a past debt, it can hold the land not longer than five years. If it can not find a purchaser during that time, it must sell the land by auction. The law permits a bank to hold it for this period presuming that a purchaser within live years can be found; if he does not appear, it must dispose of the property publicly. A banking house therefore is the only real estate which a national bank can hold permanently.

13. Interest

Finally something may be said concerning interest. The national banking law provides that a bank can not exceed seven per cent in a state or territory where no rate is prescribed; where a state fixes a rate, that may be followed. If the state law is violated, Congress has prescribed what may be done with the offending bank. If the offense consists of an agreement to receive more than the legal rate, which has not been paid, the bank can collect no interest whatever; it the interest has been collected, the borrower can recover twice the entire amount paid if he desires, within two years from the time of paying it. If he did not pay illegal interest on a note when it became due, and gave a new 011c with the illegal interest added thereto, and, when that matured, gave a third to which the; illegal interest was added in the same manner, the entire interest is forfeited, and not simply the interest due on the last note of the series.