rediscounts of $9,104,938. Of the capital stock subscribed, but $20,000,000 has been paid in, and debentures amounting to $30,500,000 have been issued.

TAX EXEMPTION

This question can be treated as applied to the bonds of Federal Land banks and Joint Stock Land banks and Federal Intermediate Credit banks. The bonds and debentures of all of these banks are exempt from taxation not only by the United States Government, but also free from taxation by state, municipal, or local bodies.

SELF-TEST QUESTIONS

1. What economic developments brought on the present Federal Farm Loan Act, and why?

2. Outline the main provisions of the Federal Farm Loan System and try to give reasons for each.

3. For what purposes may Federal Land banks make loans, and why?

4. Why are interest rates limited to 6%? Why must the margin of safety in the case of land mortgaged equal 100% of the loan?

5. What is the security of Federal Land bank bonds? Is it adequate?

6. What institutions may act as agents for the Federal Land banks in making farm loans? Why cannot individuals act as agents?

7. Explain the amortization plan for retirement of Federal Farm loans. Do you approve of such a plan? Why or why not?

8. What is the purpose of the Joint Stock Land banks? How do they and their bonds differ from the Federal Land banks and their bonds?

9. Why are Federal Intermediate Credit banks needed? Discuss the organization and powers of such banks, giving reason for each statement you make.

10. What are the National Agricultural Credit corporations? Discuss their relations to the Intermediate Credit banks.

XVI

THE ORGANIZATION OF THE INVESTMENT

BANKING BUSINESS

By W. L. HUDSON

Assistant Manager, Sales Department, Harris Trust & Savings Bank, Chicago

Modern investment banking a recent development. Volume of security issues of 1924 an indication of importance of investment business. Types of investment banking houses: underwriters doing only wholesale business, underwriters combining wholesale and retail business, houses doing only retail business. Buying department of an investment banking house. Sales department. Trading department. Accounting department. Numerous services rendered the investor by the investment banking house. Investment banking groups that function in buying securities. Selling groups, syndicates. Functions of various syndicates. Investment Bankers Association of America, its organization, purpose, and service to the investor.

THE investment banking business, as it is conducted in the United States and Canada today, had its inception only about 40 years ago in the courage and foresight of a few individuals who undertook, on their own responsibility and at their own expense, to investigate small municipal bond issues; having satisfied themselves of the security, to purchase outright the entire issues with their own, or borrowed, funds; and to offer the bonds to investors with their recommendation. At that time was introduced into the bond business an element which had not previously existed, and which still differentiates it from the stock business-an assumption of moral responsibility on the part of the seller to base the sponsorship of an issue on conviction of its soundness, acquired through thorough investigation, and to protect the rights of the investor throughout the life of the investment.

The methods and the principles of those pioneers, greatly broadened, to be sure, have extended throughout the entire

bond business of America, which has developed into a highly specialized business of great magnitude whose function is, on the one hand, the origination, or purchase, of properly safeguarded bond issues, thus applying the capital for public or corporate enterprises; and, on the other, the distribution, or sale, of these bonds ultimately to the investor, in that process conveying to the American people specific information, knowledge of investment principles, and individual advice and, of equal importance, a justified confidence in such advice-that have a cumulative and constructive economic value impossible to overestimate.

Some idea of the enormous importance of the bond business to the economic life of the country may be obtained by a consideration of certain figures. The Commercial and Financial Chronicle, in its compilation of capital flotations for 1924, tabulates new issues brought out during that year as follows: Municipal and farm loans, $1,550,195,400; corporations, $2,972,285,300; United States possessions, $8,830,000; Canadian, $151,484,400; Foreign, $778,005,000; a total of $5,460,800, 100. Sales of bonds on the New York Stock Exchange amounted, in 1924, to $2,345,321,300 in corporation issues, $876,930,815 in United States and foreign government issues, and $582,100,500 in municipal issues, a total of $3,804,252,615; and yet that was doubtless largely exceeded by the business transacted in the bond houses of the country. It is, of course, through the sale of bonds that capital is furnished to municipalities for construction of buildings, roads, and the majority of other public works of all kinds; and largely to railroad, public service, and industrial corporations for the expansion of existing enterprises or the creation of new. During the World War the United States Government sold a total of $21,478,356,250 Liberty bonds, in the fourth issue alone, placing $6,993,073,250 with twenty-one million subscribers, and only those who had a part in that achievement know how heavily the government leaned on the bond houses of the country in its accomplishment.

TYPES OF INVESTMENT BANKING HOUSES

In considering the organization of this investment business we approach at once its two great functional divisions, origination or purchase, and distribution or sale; and we can fairly well classify the houses engaged in the business by reference to the parts played in the sequence from original purchase to final sale.

At one extreme we have the large underwriting houses which, either alone or in joint account with other similar institutions, undertake the purchase of large and important issues, distributing them at wholesale only to other houses which in turn carry on the distribution at retail to the investor. Of this type there are few examples.

Considerably more numerous are the large investment bankers who, alone or with associates, undertake large underwritings and dispose of a considerable portion of each issue at wholesale, but retain a substantial amount for retail to their own investor clientele.

There exists also in some numbers a third type of originating, or underwriting house, which heavily emphasizes retail distribution, wholesaling either not at all or to a limited extent, but depending for its market wholly, or in large measure, upon banks, institutions, and individuals.

A most important factor on the side of ultimate distribution is the dealer who is concerned primarily with retail sales, and who underwrites issues of only modest size or none at all, or occasionally participates for a small share in a buying syndicate, but depends largely for his supply of securities upon the wholesale firms. The number of these dealers in the United States has increased greatly in the past 15 years, and some have developed into originating houses of importance. Their sales in the aggregate are, of course, enormous.

And finally we have, as a distributing medium, the bank with a bond department. There are a few large and powerful institutions whose bond departments rank at the very

top in both major functions-origination and distribution; but for the most part even the large financial institutions are content with underwriting municipal or small industrial issues, devoting their attention primarily to retailing securities purchased from the highly specialized bond houses. With the spread of knowledge of investments through the country, the consequent demand for conservative securities has grown to such an extent that a great many banks, even of very limited size, located in the outlying sections of large cities and in small communities, have been led to install bond departments, not infrequently with highly satisfactory results.

The primary function of the bond house from the standpoint of the underwriter is to furnish resources for various corporate or public enterprises, whereas from the sales standpoint it is to supply to the public securities meriting entire confidence. The necessity of harmonizing these frequently divergent interests has led the more conservative houses which retail issues of their own origination to adopt the policy of limiting their consideration of purchases to such bonds as may be offered the public with their conscientious recommendation.

THE BUYING DEPARTMENT

In considering the organization of the individual bond house, as viewed from within, it is perhaps fitting to take up first the buying department, the starting point of the various securities handled. The vital importance of this side of the business is largely unappreciated by the public because of a lack of knowledge of its scope. Yet upon the wisdom and care exercised by this department really depends, in great measure, the safety of the bonds offered by the house. The labor, time, and expense consumed in the negotiations and investigations preceding the closure of the contract for the purchase of an issue of corporation bonds are considerable and are also little understood by investors.