issued or fifty years, at the pleasure of the land mortgage association. But under no conditions is the amount of bonds outstanding permitted to exceed the amount of mortgages held by the land mortgage association.
The business of the land mortgage associations has been done so conservatively that their bonds are regarded as the very best of security and are favorite investments for trust funds, savings banks and any capital seeking a perfectly safe investment negotiable at all times. In fact, these bonds sell next to government bonds, and in case of war, or even threatened war, they sell better. The government may be overthrown or compelled to suspend payment of interest, but the farm real estate that secures the bonds can not lose its value.
The rate of interest the bonds bear is 3 per cent., 312 or 4 per cent., at the option of the farmer securing the loan, but the price at which they sell depends upon the condition of the money market. At the present time (July 1, 1912) 3 per cent, province of Saxony Pfandbriefen are selling at 81.00, 312 per cent, at 90 and 4 per cent, at 99.80, while the 4 per cent, national bonds of Germany are selling at 100. In case a farmer borrowing $1,000 chooses a 3 per cent, interest rate and the 3 per cent, bond are only selling for 81.00, he gets only $810 and pays $30 per year interest, that is, 3 per cent, on the face of the bonds, and gives his note and mortgage for $1,000. But on the other hand, if 4 per cent, bonds are selling at par and he chooses a 4 per cent, loan, he gets his $1,000 in cash for his Pfandbrief and pays $40 per year interest and gives his mortgage and note for $1,000. It is always regarded as the best policy for the borrower to choose the class of bonds selling nearest par, unless they are selling above par, in which case the farmer securing the loan gets a premium over and above the amount of his liability and it is to his advantage to take such loans. When the bonds go above par they are called in and paid off by the farmers refunding their debts at lower rates of interest. Here comes the advantage that the farmers reserve for themselves in the privilege of paying off the bonds at will. Just such a thing happened when in the seventies the rate of interest advanced to 5 per cent., due to the scarcity of money and the enormous demand for it in building railroads on the continent and ten years later the rates of interest sank until 3 per cent, bonds sold close to par and the farmers rapidly paid off their loans made at the high rate of interest by using new bonds at the lower rate of interest and selling them to pay off the old ones.
Central Land Mortgage Association
In order to widen the market for the Pfandbriefen a central land mortgage association was established in Berlin in 1873. By this means it was thought to make them an international security and to give them
