Security Behind Government Bonds

The interest that government obligations call for is usually provided by the proceeds from taxation, external or internal. Some countries place a tax on certain widely used commodities and set the revenue aside for the payment of interest on the public debt. In no other way, except in isolated instances, are government bonds secured. Should a government debt be repudiated, its payment to the holders of its obligations could not be enforced by recourse to law. The reason is that a government cannot be sued, since it is not amenable to the statutes of any other government, while its own people cannot recover from the institution that they themselves have created and whose laws to govern them they have enacted.

In our own country the freedom of the Government from any civil action even goes so far as to exempt the states. South Carolina repudiated some of the bonds issued during the reconstruction days and neither the interest nor the principal has ever been paid. Nor can the holders enforce payment. Some of the bondholders have attempted, and so far have succeeded, in getting a number of these bonds into the possession of another state, because one state can bring legal action against another to recover on a disputed claim. South Dakota did sue South Carolina in the United States Supreme Court to enforce the payment of these bonds and recovered judgment, but even then a state cannot collect, as it cannot attach the property or revenues of another state and certainly cannot take up arms against it to make it pay. In the end such matters must be left to the honor of a state for settlement.

State Bonds

The means the Government adopts to raise money are followed on a smaller scale by the forty-eight separate states. They have uses for funds likewise. Improvements in the highways are a constant necessity. There are the public buildings to provide for. The need of other improvements benefiting the people of the state is constantly arising. To provide the funds by direct taxation would prove too burdensome, and it is unjust to force one generation to share the whole burden of financing some public undertaking, the advantage of which will be participated in by generations to come. The theory is, and it is a very good theory, that such debts should be divided equally and this is accomplished by issuing bonds running for a long term of years and carrying a fixed rate of interest. When such bonds are authorized, the state, usually through its elective officer, the state treasurer, invites bids for them and disposes of the bonds to the highest bidders.

The privilege of bidding for such bonds is not restricted. The humblest investor can make an offer and if it is among the successful tenders when the bonds are allotted to the highest bidders, he will obtain the bonds to the amount of his bid if there are enough to go around. There is one restriction, however, which has been adopted as a general practice to guarantee that the bonds will be taken by the successful bidders or bidder, and this is that a certified check for a nominal per cent must accompany the bids as a guarantee of good faith.

How unjust it would be to have one generation carry the entire burden of an important public improvement, can best be illustrated by the improvement and electrification of that great highway of commerce, the Erie Canal, by the state of New York. It is estimated that this work will cost about $100,000,000 and to provide the funds the legislature, a short time ago, authorized a state bond issue to the amount authorized as the work progresses. Posterity will derive greater benefit from this vast undertaking than will the present generation.

Some states whose credit is excellent, fix by statute the interest rate and even the price which must be realized for whatever bonds the legislature authorizes. But this is not always an advantage. Capital may not be so available as to be attracted by a low rate of interest, and if this is true we witness the failure of a bond issue, because there are not sufficient bids for it. This has even happened with New York State, rich as it is. The state, in normal periods, experiences no difficulty in get-ing all the money for its requirements with a 3 per cent bond. Furthermore, bankers and investors bid eagerly for the bonds at a premium over the price fixed by law at which they may be sold. But during the depression following the 1907 panic, there was a time when the State Treasurer was compelled, because of the failure of bids, to come within the state law's requirements to purchase an issue of bonds with the available cash in the state's sinking funds. The line of demarcation in credit is as pronounced with states as it is in individuals. The far western and sparsely settled states are forced to pay larger interest to tempt capital. Thus we see that capital is a ruler whose power is supreme.