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made on both lands and town property for periods varying from eighteen years and seven months to sixty-one years and eight months.
The borrowers must pay each year one-half per cent to form a surplus fund until one-tenth of the loan has been amortized or covered, then one-half per cent of nine-tenths, then one-half per cent of eight-tenths, etc., until the loan is six-tenths paid up.
The loans and the bonds draw the same rate of interest, and the loans are made in bonds which are sold for the borrower's account.
Most of the banks must set aside from five to ten per cent of their net earnings to the surplus each year, until this shall reach eight per cent of the capital.
The business of these banks increased very rapidly.* Some bad loans were made, but the rise in the value of property from 1870 to 1882 protected them. In the decade from 1873 to 1883 they lost four and one-half million roubles on foreclosures, but since then have been loaning with greater care.
A complete list of dividends shows that although a large surplus has been accumulated by all, they have still paid from seven to fifteen per cent.
The loans of any bank must not exceed ten times its capital, and the banks have had to increase their capital accordingly from time to time. They are subject to the active control of the Minister of Finance.
These banks have had no foreign market for their bonds, and in 1874 these fell to eighty per cent. They, therefore,
combined to limit the total amount loaned in 1874 to thirty million roubles, which caused the bonds to rise to from eighty-six to eighty-seven per cent. In 1875 they were quoted at from ninety-three to ninety-five per cent, and, excepting the period of the Turkish War, they remained from then on at about this rate until 1885. In 1890 they were quoted at from 103 to 104 per cent.
Up to 1885 the banks had issued almost entirely six per cent bonds, and in January, 1890, two-thirds of the bonds drew this rate. A conversion to five per cent was effected that year, and as the bonds were payable on giving notice, the bondholders had to choose between receiving cash or five per cent bonds at par, an operation by which two and one-half million roubles per annum were saved for the bor
What also probably caused the bonds to rise after the fall of 1873 was the formation of the Central Mortgage Bank of St. Petersburg, in April, 1873, in order to assist the smaller mortgage concerns that were unable to market their bonds at a fair price. It had a capital of 16,000,000 roubles, of which forty per cent was at once paid in. About one-third of the shares belong to the government. Further payments on the stock were made in 1876, 1877 and 1887, so that the capital is now fully paid in.
This bank makes no direct mortgage loan whatever itself, it only issues bonds based on the bonds of the other concerns which are then deposited with the National Bank. The principal and interest of the latter bonds are payable in paper roubles, the bonds of the Central Bank in gold, and it has, therefore, constantly sustained losses caused by the downward course of paper money. It paid in 1873 a dividend of twelve per cent; in 1874, 10.45 per cent; in 1875, 12.65 per cent; and in 1876, five per cent; since then no dividends have been paid. And as the government is to blame for the depreciation of the currency, it was natural enough that it should come to the assistance of the bank in
1887 and pay in 3,000,000 roubles on its shares of the capital stock, thus making them fully paid up, besides refunding to the bank the actual loss sustained up to that time, viz: 3,400, 808 roubles. The bank was, however, given to understand that in the future it would have to operate entirely at its own risk.
The respective series of bonds of this bank are redeemable in the course of twenty-seven and one-half, forty-three and one-half, and fifty-four and one-half years. Of five and onehalf per cent bonds were in 1890 outstanding and known in Berlin, 7,192,500 roubles, and of five per cent bonds, 31,931,000 roubles. In 1890 the five per cent bonds were quoted in Berlin at ninety-three per cent.*
In 1894 it was finally decided to liquidate this bank. After the market for the bonds of the smaller banks had become good, it was no longer needed. Its gold bonds will be converted into government bonds, and the Russian government will take control of all its assets, with the expectation of realizing perhaps only twenty-five per cent for the shareholders.†
The history of both the mutual and the joint stock mortgage concerns of Russia thus affords an illustration of the misfortune to a country of not having the same monetary standard as the rest of the civilized world, and the rates of interest at which bonds have been issued show a difference of over one-half per cent in favor of the gold bonds, as follows:
+ Frankfurter Zeitung, May 30, 1894. The 5% and 5 per cent bonds will be exchanged for 3 per cent government bonds with a bonus of 11 and 10 per cent, to compensate for the lower rate of interest. (L'Économiste européen, 1894, p. 820.)
Which of the three different systems: mutual credit association, government banks, and private joint stock banks, is likely to gain the day is difficult to tell.
The real test of the strength of a mortgage loan institution is perhaps the rate at which it can obtain money. Up to the last conversion in 1890, the private banks, which for other reasons seem preferable, show inferiority in this respect. One cause probably is that when loans are made in bonds to be sold at the borrower's expense, sufficient regard is not had to the effect of new bonds on the money market. And another reason is that these banks have limited themselves to Russia alone as a market for their bonds.
At present, however, the bond quotations of the different institutions do not show any marked difference in favor of any except the bonds payable in coin.†
*Bond Quotations, Bank of Moscow-1881-1891:
+Bond Quotations, May 8, 1891, as reported by L'Économiste russe:
On the whole the Russian mortgage concerns deserve admiration. In spite of innumerable difficulties, large amounts have been loaned at a trifle over five per cent. And while it is true that it is only through an absolute guarantee by the government that money has been obtained at less than five per cent, and although the peasants are still, where not assisted by the "Popular Banks," in the clutches of the village usurers, it cannot be doubted that the imitation of German methods of mortgage banking as above described has been of immense benefit to the Russian people.
D. M. FREDERIKSEN.