Bonds issued by governments, states, and municipalities form a distinct class. The vast majority of these securities have no other pledge behind them than the credit of the nation or the community issuing them. Still they are looked upon as very desirable investments when representing the obligations of a prosperous people. There are some circumstances, however, under which bonds of this type are not attractive to the individual investor, in point of income.

Take our own government bonds, for example. The great bulk of them are owned by our national banks and only a small proportion by investors, considering the many millions of them that have been issued. If they are held at all by investors or estates, it is not because of the interest yielded, but on account of the assurance of their absolute safety.

Our National Bank Act made it compulsory with a national bank, before it could issue any bank notes, to deposit with the United States Treasurer, an equivalent amount of government bonds to secure the payment of these notes. Under the Federal Reserve Act of 1913, the reserve banks have the same privilege. Provision is made for gradually relieving the national banks of their bond holdings and canceling their note issues accordingly. The reserve banks may be required to purchase these bonds, and they in turn will likely use them to secure a portion of their federal reserve notes. Since the reserve banks can secure note issues upon other assets than United States bonds, it is likely that there will be less demand among the banks for new bond issues hereafter.

As a result of this banking legislation, there is a broad market and a constant demand for our government bonds, a demand created by an artificial market which has made it possible for our Government to raise all the money it needs to provide for its fiscal requirements on a 2 per cent and 3 per cent basis and still place its securities at a premium. The banks find it profitable to pay this premium, for they secure a small income on the bonds after paying the tax and, with the notes they can issue, earn additional interest by lending this money out to customers. Without entering into the details of this operation, in which investors are not interested, it can be readily seen why it is that our nation 's bonds bring such high prices, although they bear a low rate of interest.

Bonds Of Foreign Governments

In England, the government bonds are known as consols. This name was derived from an act of the British Parliament consolidating the public debt, and the word is an abbreviation of consolidated. English consols, until recently, commanded a price realizing slightly over 2 per cent, but they have steadily fallen, since there has not been an artificial market for them as is the case in the United States with its national debt bonds. -The banking system in Great Britain is also differently organized. There the note-issuing power is concentrated in a central bank, the Bank of England. For a time, however, English consols were under an artificial stimulus through the adoption of a postal bank system which, by enactment of Parliament, could invest deposits only in British consols. As deposits fall off, so does the market, for the Government's securities narrow, at least, the artificial market provided by law. But even with the decline which has occurred and which at one time even before the war brought the price down to a figure not witnessed since 1848, consols still yielded less than 3 per cent, which showed that the staid British investor valued very highly the credit of his nation and was perfectly content with an income ranging between 2½ and 3 per cent.

All this was suddenly changed by the great catastrophe of 1914. The unprecedented demand of the European governments for capital with which to prosecute the war, and the element of doubt which existed in the minds of investors as to the final outcome, forced even Great Britain to pay more than 4 per cent on its war loans. In order to protect the holders of the old consols against the inevitable decline that would have taken place in their price in the face of the more favorable war loans, a conversion plan was adopted by means of which the holders of the old consols could convert into the new securities on such a basis as to protect their investment.

In like manner does the French peasant investor value the Government Rentes, as the French Government securities are called; the German, his government obligation; and the people of other prosperous nations, their own national securities. However, not all governments can borrow money on their credit as cheaply as the stronger powers. Credit with them varies, as it does with individuals. Some of the smaller nations are forced to pay as high as 6 per cent for loans, and besides they not infrequently allow the underwriting bankers who take the loan and agree to place the bonds, a discount for their services. Some of the minor countries, where there is turbulence and internal strife constantly, cannot even borrow money unless at usurious rate of interest, because they have no stability to offer as an assurance that their loans will not be repudiated.

It cost Japan almost 6 per cent on its loans to finance its war with Russia. The Cuban Government had to pay the same rate. Even Russia, although known to have collected the largest reserve in gold owned by any European power, found it necessary, when in conflict with Japan, to tempt bankers and investors with a high interest rate before they would take its securities. The bonds issued by the governments of the Argentine Republic, Brazil, Chile, Bolivia, Honduras, and other South American Eepublics can be had on a basis close to 6 per cent. This does not at all reflect upon them; it merely fixes the position of their credit in the money capitals of the world. As their credit enhances they will be in a position to refund their outstanding loans on a lower interest basis. Mexico did this some years ago when it replaced a 4½ per cent loan with a 4 per cent bond, thus effecting quite a saving in fixed charges to the Government.