This section of the book is from the "Introduction To Public Finance" book, by Carl Copping Plehn.
There are practically two methods for the negotiation of a public loan. One is to prepare the bonds or other evidences of debt for sale, fixing all the conditions and offering them to all comers who will acceptthose conditions. The other is to determine the amount to be raised, and then to negotiate with bankers or capitalists or other persons in order to ascertain on what terms the sum can be raised. There are, of course, many variations of these plans, but these are the principal ones. In the first case the State loses in a measure the advantage of competition between the lenders. One of the best examples of this method is the so-called "popular subscription." For example, a State decides to issue a certain number of bonds at a fixed rate of interest, selling them to all comers at a stated price. Certain places are designated for the reception of subscriptions. If the terms offered are too low, i.e. offer too little advantage to the purchasers, only a part of the loan will be taken up. If they are too high, the State, of course, suffers a loss. In this case everything depends on the ability of the fiscal officers to gauge the market. This task is comparatively easy if the State already has a large number of stocks outstanding, the market price of which will roughly indicate the possible rate of interest that will be accepted on a public loan. But the extent to which the new loan will probably depress the market will have to be considered.
If the second method be the one chosen, the State lets it be known that bids for a certain sum are desired. The bankers and capitalists, and sometimes the public at large, then compete for the privilege of taking either the whole issue or a part of it. The different bankers offer to provide the whole or a part of the money needed at a certain rate of interest, or if the face of the bonds and the rate of interest have been fixed, offer to buy the stocks at a certain rate, generally quoted as so much per hundred. The most favourable terms offered by reliable bidders are then accepted, and they deliver the money in mass or in instalments to the treasury, in such form as may have been agreed upon, receiving in return the securities, which they are then at liberty to dispose of as they see fit. If the market price rises the gain goes to the capitalists, if it falls they lose. Of course the sums needed often exceed the wealth of any one person or group of persons, and each purchaser has to depend on his ability to dispose of the securities to raise the money to meet his agreement.
In both of these cases various secondary considerations as to the form of the loan, the length of time it has to run, etc., affect the result. Sometimes it has been deemed wise to combine the two methods. That is, to negotiate with the bankers for terms on a part of the debt, and then to offer another part on similar terms to popular subscription, or even to allow of more general competition as to the terms.