Corporation Loans Subject To Political Influence

IN this chapter I (On The Natural Value Of Different Stocks: Banks And Insurance Companies) propose to consider the natural rank of those securities which are subject to the influence of politics and of Governments, local or central, from which, so far, all private businesses, even the most colossal and complete of monopolies, have been practically free. I shall begin with Corporation Loans, and follow my usual plan of first trying to form some general estimate of their possibilities and outlooks on the positive side as it were, and then, turning them over and looking at them from the reverse or negative side, examine them with the view of determining the nature of the special risks to which they are exposed. To begin with, then, we may say in general that, being Loans, they are founded on Money primarily, and so participate in the relative stability which, as we have seen, attaches to Money values over Industrial ones. In the second place, these Money values, collected from the rates, rest on tangible property, which also has more stability, and over longer periods, than the products of Industry. A third important point about these Corporation Loans is that they are usually sanctioned by the Local Government Board before they are issued; and that, too, after a most careful audit of all the circumstances and conditions, the assets and liabilities, of the municipalities on whose rates they are founded. Besides this, the Government, before sanctioning a Corporation Loan, sees to it that the loan shall be so small in comparison with the rateable property which lies behind it as security, as to be practically beyond the reach of all foreseeable fluctuations or depreciations in the value of that property. Not only so, but the Government takes care also that the term of years which elapses before the loans are redeemable shall be strictly limited to the average length of time during which the works on which the loan is spent are likely to last; and without burdening overmuch future generations of property holders. In buying land, for example, the Government insists that the loan for the purchase of it shall be repaid in from sixty to eighty years; the erection of stone or brick buildings, baths, electric lighting, gasworks, in from twenty to forty years; footways, steamrollers, trees for street improvements and the like, five to ten years, and so on. But even this is not all. The Government is also rigorous in insisting that the rate of interest charged shall be adjusted to the length of the loan - 3 1/2 per cent if it does not exceed thirty years, and 3 3/4 per cent if it does not exceed fifty.

Security Of Corporation Loans. Corporation Loans And Repayment. Corporation And Investors Protected By Government

All this is in the interest of and for the protection of the general public who invest in these loans. But the Government looks after the Corporation as well, and prescribes how and when the capital and interest of the loan are to be redeemed : the idea being to make the annual sums as nearly equal as possible throughout the whole period during which the loan has to run. Loans, for example, for periods exceeding thirty years are to be repaid by equal yearly or half-yearly instalments of principal, with interest on the balance of principal from time to time outstanding; while loans for shorter periods are allowed to be paid in equal yearly or half-yearly instalments of principal and interest combined. By means of these and other expedients, the Government has arranged that everything shall be so smoothed and levelled, so square-cut and measured to rule before the loan is floated, that the interest required to meet it shall be kept, as we have seen, at a point of safety so high above all possible or probable fluctuations in the yield from the rates, that these Corporation Loans, while as steady and level in their smaller way as Consols, shall be only just below them in security as well. Indeed, the fact that so many of them in the United Kingdom have been made into Trustee Stocks is only an expression of the public recognition of their high rank as investments. It is true that the loans are expended as often on financially unremunerative as on productive works. Education, bridges, highways, street improvements, sewerage, and parks, for example, yield no pecuniary returns; and as business propositions are . apparently nothing but an incubus on the rates. But this is not really so; for it is precisely works of utility, convenience, ornament, or sanitation, like these, that add to the value of the house property on whose rates a large part of the security of these loans is founded; so that they are rather an additional security than a detriment.

Corporation Loans As Stable As Consols. Corporation Loans Compared With Other Stocks

If, then, we would sum up the positive merits which the Government in its efforts to protect the public and give it full security has given to these Corporation Loans, we cannot do better, perhaps, than compare them with the comparatively unsheltered and unprotected condition of other stocks. And the first thing that strikes us is, that while other stocks have to depend for their solvency on the limited liability of a limited number of individuals of uncertain means and sources of income, loans to Corporations are secured on the tangible property of whole cities or towns, whose rateable values, besides, can be calculated from year to year almost to a certainty; and so, like an elastic band, can be made to stretch or contract to the yearly requirements of the loan, with the utmost exactitude.