Many problems confront the fiscal authorities when they decide to float an issue of public securities. The rate of interest is an important consideration, as well as the method of securing subscriptions to the loans. Other considerations are from what source the funds will come, the special privileges which shall attach to the holders of the securities, and the length of time they are to run. Many minor considerations exist, also, which must not be neglected.
Interest Rate. - The rate of interest which the securities are to draw, while it is not a distinct factor unrelated to other conditions, is of primary importance in determining the conditions of a bond issue. Ordinarily the attempt will be made, if the bonds are to be put on the market and sold, to have the rate of interest as near as possible to the current rate. If it should be below this, the bonds will sell below par, and the principal of the indebtedness will be larger than the amount which becomes available for the use of the state. If the provision is imposed that the bonds must be accepted at par, the state will be disappointed in finding a market for its securities unless a strong element of patriotism be in existence. Franklin experienced this situation in attempting to borrow from European countries during the Revolution. Because of the low rate of interest he was authorized to pay, no aid could be secured except from France, and this was given from other than economic motives. It may happen at a time when funds are scarce, and the needs of the government are pressing, that the rate of interest will have to be higher than the current rate in order to draw funds to the use of the government.
Other Conditions. - The success of a loan, where all the conditions are predetermined by the fiscal authorities, depends upon their ability to judge the money market and the desires of the prospective purchasers. Frequently these predetermined conditions are designed to attract buyers for the securities. Freedom from ordinary taxes is perhaps the most general privilege attached to government securities. Tax privileges are not always the same, as is evidenced by the various issues of the Liberty Loans. The method of interest payment is made as attractive as possible. Frequently bonds of the same issue are partially of the registered type, and the remainder coupon bonds. Registered bonds appeal to investors who seek protection from loss and theft, while the others are more convenient to the general investor.
In determining the clientele of purchasers, the size of the bond is an important item. Where it is desired that the subscribers come from the general population, the denominations of the bonds will be comparatively small. The fifty dollar "baby bond" used in the Liberty Loans is a familiar example of appeal to popular subscription. The war saving stamps and war certificates were designed to appeal to still smaller investors. The length of time the bond is to run has much to do with its desirability as an investment, therefore this feature is often varied to appeal to different classes.
Disposal of Securities. - Where comparatively small sums are desired, the state need not predetermine the interest rate, but has the alternative of accepting bids for the supplying of the needed funds. The fiscal authorities can make it known to banking and brokerage houses, and the general public, if considered desirable, that a certain amount is needed for a certain length of time, that the securities will bear certain privileges, and let the competition of the prospective lenders decide the interest rate. In this case the burden of the speculative element in the money market rests to a greater extent on the purchaser of the securities. If the market for securities becomes more favorable within the period of the loan, the purchaser may sell and be the gainer; should the market become less favorable, the loss must be his.
In disposing of a bond issue, government officials may make use of a number of agencies. The need for different methods of appeal varies with the size of the loan as well as with the number and classes of citizens whom the officials desire to interest. Everyone is familiar with the various methods of approach which the Federal government used in selling the different Liberty Bonds. Advertising campaigns were carried on by the use of billboards, in magazines, and in the newspapers. Literature was mailed to the individual, while appeals were made in the churches and theaters. The features of patriotism, duty, sound investment, and even loyalty, were emphasized. Different forms of banking institutions were used extensively as government agents in disposing of the securities, while many other business houses, as well as individuals, gave unstintedly of their time and energy to push the sales. In short, practically every method of salesmanship is open to the government, and extensive use has been made of the various methods of approach.