Besides the subscriptions to their capital stock and the surplus and reserves accumulated out of earnings, the federal land banks are permitted to issue bonds, known as "federal farm loan" bonds, which are made obligations of the United States government and are secured by first mortgages on improved farm lands in the United States. The security behind these bonds seems unquestionably strong since (1) they are direct obligations of the United States; (2) they are issued under a national system, subject to national supervision; and (3) they are secured by the assets of the issuing bank, and the twelve banks are jointly and severally liable for principal and interest of each and all the bonds issued by any and all the banks. These assets, outside of the cash reserve, consist largely of first mortgage notes, the mortgages being for sums which range from one-half to one-fifth the value of the mortgaged realty, these fractions becoming smaller as repayments on the loan are made. The mortgages are placed only on farms that are occupied and tilled by the owner (borrower), and loans are not made to absentee landlords and speculators. Moreover, the mortgages are indorsed by the local national farm loan asso-ciation, the members of which are jointly and severally liable to an amount double that of their holdings of capital stock. The period of the mortgages ranges from 5 to 36 years, and provision is made for amortization of the principal by annual level payments of at least 1 per cent in excess of interest charges.

The borrowing farmers, by adopting the principle of collective indorsement or guaranty, improve the security behind their mortgages. As an alternative to the local national farm loan association, the act provides that the federal land bank may engage loan agents in its districts, but in this case the agent must provide the added security by the guaranty or indorsement of a responsible and acceptable third party.

Under the old system an investor bought the original mortgage and note, and was thereby subject to certain disadvantages, since he must either have personal knowledge of all the essential circumstances affecting the security in question or he must rely upon a third party for such information and protection. The federal land bank now constitutes the market for such mortgages and notes, and regulates and supervises their issue and watches their security. It assembles farm mortgages carefully selected according to reliable standards, and on the basis of such mortgages as collateral issues bonds in convenient denominations, running for suitable periods of time, and with convenient and reliable means for collecting the payments of principal and interest and with a ready market if at any time the holder wishes to sell the bonds.

The bonds have other good investment qualities besides their excellent security. They run for 20 years, bear 4 1/2 or 5 per cent interest, are tax-exempt, are acceptable by the government as security for government and postal savings deposits, are a legal investment in most states for trust funds, and are safeguarded by the fact that the total volume of loans may not exceed 20 times the capital and surplus of the issuing bank. During 1917-1918 war financing cut off the market for these bonds, and Congress authorized the Secretary of the Treasury to buy $200,000,000 of them to hold until the market should become favorable. The sale of federal farm loan bonds has been somewhat retarded by doubt as to the constitutionality of the Federal Farm Loan Act; this handicap was removed, however, by a decision of the United States Supreme Court, February 28, 1921, sustaining its constitutionality.