1130 A NATIONAL PLAN FOR AMERICAN FORESTRY 



and building and loan associations come readily to mind. These 

 have been developed chiefly to serve the needs of persons wishing to 

 save and lend capital, although the building ancf loan associations 

 originally had an equal aim of serving borrowers. Of more recent 

 development are institutions organized specifically to serve needs of 

 borrowers. These include smaller institutions such as credit unions, 

 but the more outstanding examples are the Federal land banks, the 

 intermediate credit banks, and the home loan banks. To be suc- 

 cessful all such institutions must provide a very high degree of security 

 to the funds of lenders. 



Whether organized primarily to serve lenders or borrowers, all these 

 institutions require the exercise of the age-old governmental function 

 of protecting the average individual against the encroachments of 

 thievery and dishonesty. These encroachments, which in a simpler 

 society took the form of direct assaults on individuals for the purpose 

 of wrongful appropriation of private property, now take the more 

 subtle and far more effective form of financial manipulation. To 

 prevent losses from this cause as well as from misappropriation of 

 funds by persons in positions of trust, and to reduce losses from 

 incompetent management to a minimum, it has increasingly become 

 a duty of Government to supervise aU sorts of banking and financial 

 institutions. 



In connection with efforts to accomplish the above ends it has been 

 learned that correct methods of organization and operation result in 

 economy and that mass borrowing on sound lines tends to provide 

 credit capital at lower cost to industry. The Federal land banks have 

 been reasonably successful in attaining these objectives, greatly 

 reducing interest rates on farm mortgages in localities remote from 

 centers where investment funds are plentiful. No Federal land bank 

 bonds have been defaulted. 



An institution to serve borrowers should be organized and operated 

 in such a way as to (1) limit safely the amount of credit capital used 

 by the borrower, (2) provide an interest rate within or not much 

 beyond the earning capacity of the enterprise, and (3) provide a rate 

 of amortization the enterprise can meet without the added expense 

 incident to refinancing. 



LIMITING THE AMOUNT OF CREDIT CAPITAL USED 



It is a frequent practice to provide credit capital to the extent of 

 50 to 60 percent of the total capital required in an enterprise. By 

 various subterfuges even these limits are exceeded. No doubt cir- 

 cumstances occasionally arise in which the use of credit to this extent 

 is justified, especially if means for rapid amortization of the excess 

 percentage are available. Events of recent years have made it plain, 

 however, that the use of credit capital to these percentages is at- 

 tended by risks of loss of the physical property by the borrower and 

 loss of investment funds by the lender. If the financial needs of an 

 entire industry are to be served, with full consideration for stability 

 of the credit capital throughout the business cycle, the limit of credit 

 capital should as a regular practice be fixed far below 50 percent. 



One of the fundamental reasons for limiting permanent credit 

 capital lies in the changes constantly taking place in capitalized value. 



