Municipal Bonds

Counties, large cities, and small municipalities borrow money on much the same lines of financing as are followed by the states and the general government. Here and there various restrictions exist, but in general they follow the same plan of raising funds. To prevent the cities from over-borrowing, most states have wisely fixed a limit. For example, no city in the majority of eastern states can legally authorize more bonds than will equal 10 per cent of the assessed valuation of the taxable property, and when it has reached this figure, it must wait until there has been an increase in the value of the assessable properties to permit adding to the public debt. This is a wise provision, as it acts as a safeguard against creating an indebtedness beyond the ability of the population to carry comfortably. Such bonds are also disposed of by inviting public bids, which bids, by law, must be advertised. To give a distinct identity to these bonds, they are usually named after the purpose for which they are issued.

A city may decide on making some street improvements, and bonds be authorized for this purpose and designated as street improvement bonds; or they may be courthouse or school bonds, highway bonds, grading bonds, etc. Thus the character of a county, city, or municipal bond may be determined by the name employed to distinguish it from other bonds authorized by the same community. My space is too limited to go into all the details governing the many thousands of such obligations which have come into existence. I can only refer to them generally and in the broadest light. For instance, New York City now has a public debt in excess of $1,000,000,-000, all of which is represented by a great many classes of designated bonds. New York City is a steady borrower. It needs money for docks, subways, boulevards, and many other forms of public improvements. Some of these bonds earn their own interest charges and so are not a burden on the taxpayers. This is the case with the bonds authorized to raise the money to build the subway and with those issued to build the large water front piers owned by the city and rented to the steamship lines. The interest on other bonds is provided by taxation of the property owners who are the direct beneficiaries of the improvements.

Tests Of Safety

It must be anticipated that where there is such a multitude of communities, small and large, there will arise many complications in determining the character of their securities as investments. As a result, also, there will be a wide range in their income yield. The business done in such obligations reaches enormous totals. It would prove highly interesting if it were possible to describe in one section a subject which could only be adequately dealt with in a whole book - the care that must be exercised by bankers who make a specialty of dealing in municipal obligations.

Before bidding for these bonds, such houses, through their attorneys, first assure themselves that the bonds have been legally issued, by which is meant that the electors authorizing the bonds were within the law. They must, in instances where the legality of the issue is not in doubt, satisfy themselves that the community can meet the taxation to pay for the issue. A growing settlement, in its ambition to anticipate the future too far ahead, may assume more obligations than it can carry, and as a result complications arise. Dealers in municipal bonds wish to avoid this danger even when it is a remote contingency. Money is a hard taskmaster. It has no sympathies. However, considering the total obligations of the multitude of our United States communities, estimated in the neighborhood of $10,000,000,000, they have had such an unusually satisfactory record as safe investments that investors need no other assurance from the "bankers than that their legality is beyond question and the amount of the issue is within reasonable bounds.

Conditions which affect the standing and value of the bonds of national governments as well as of our own state governments are perhaps less legal and more political than is the case with municipal bonds. The chief points to investigate are:

1. The honesty, honor, and good faith of the people.

Have they the sense of duty and obligation in connection with their national debts?

2. The stability of the government. Are revolutions with repudiation of debt common and likely, or does a stable government prevail?

3. The resources of the country. Are the natural resources and industry of the people such as to warrant the amount of the debt which the state owes?

4. The fiscal policy of the government. Is it progressive and sound or wasteful?

5. The supply and demand for the bonds. Do they depend upon a natural or an artificially stimulated market for their sale?

Government, State, And Municipal Bonds. Test Questions

1. What is the pledge behind government bonds?

2. Explain how our National Banking law created an artificial demand for United States bonds.

3. What are consols?

4. How did Great Britain protect the holder of old government bonds in financing the great war!

5. What factors determine the interest rate which governments are required to pay? Illustrate.

6. What remedy has a bondholder in case a state repudiates the bond?

7. Why are permanent improvements frequently financed by means of bond issues?

8. How do governments raise the money with which to pay principal and interest?

9. What investigations do bond houses make regarding municipal issues?

10. What are the tests of a good government bond?