Municipal Debts - Corporation And County Stocks In The United Kingdom

This, one of the most important classes in the Share List, comprises the bulk of the indebtedness of municipalities and county councils in this country. It commences with the various debts due by the London County Council and the City of London, which are distributed over several stocks known as Metropolitan Consolidated Stock; London County Consolidated Stock; Corporation of London Bonds, Debentures, and Debenture Stock. These London stocks alone amount at present to £62,235,000.

You will doubtless have seen in the public press, and have heard personally, a good deal of discussion as to the benefit, or otherwise, of the burdens that are being placed upon us by our municipal rulers. In order that you may understand the extent of these burdens I have extracted some information on the subject from an article on Municipal Finance in the ' Stock Exchange Official Intelligence' for 1903. In the twenty-five years from 1st March 1875 to 1st March 1900 the local indebtedness of England and Wales increased from £92,820,000 to £293,864,000, or more than 200 per cent. The rateable value of England and Wales had increased by 52 per cent, but the debt increased by 216 per cent. In 1875 the debt per head of the population was £3, 18s. 3d., and in 1900 it amounted to £9, 4s. 4d. You will observe that this does not include the local debt of Scotland or Ireland; but' The Statist,' in an article in November last, gave figures which enable us to make a comparison at different dates for the United Kingdom. The total debts due by the local authorities in the following years were -

(estimated), showing an increase of nearly 100 per cent in fifteen years.

We do not require to consider to-night how much of this debt is justifiable, and how much, if any, has been frittered away in extravagance. The point of view which we, as investors, should wish to take has reference more to the effect of this increase of debt on the credit or solvency of the corporations. We wish, in fact, to find some means of measuring the relative value of their obligations : and our inquiry is therefore limited to the points which bear upon the subject.

It may be premised that the obligations of every well-managed corporation are good securities, to all intents and purposes. Corporation loans are now in most cases secured over the whole assets of the municipality, and practically form a charge over every building and every foot of land within its boundary. It is bound to impose a rate sufficient to meet the interest and such charges as payments to the sinking fund for redemption of the debt; and, on the other hand, it is for the advantage of the ratepayers that expenditure is not incurred to such an extent as to render necessary a rate that would become too great a burden on their property. Such a fault would only be possible through inaction on their part; and inaction to such an extent, when their interests are so much at stake, is hardly within the bounds of possibility. It generally happens that when civic corruption has reached a certain point the ratepayers step in and insist on the stoppage of the abuses from which they suffer. An example of this was seen in New York some years ago when the citizens, who are usually indifferent to municipal affairs, became so disgusted with the rule of Tammany that they crowded to the polling-booths, and having defeated the corrupt party, put in power the nearest approach New York has had to a pure administration.

An investor has to be prepared for the unlikely as well as the likely: and what might possibly happen is, that through the combination of an extravagant corporation and inertness on the part of the ratepayers a debt might be accumulated which would necessitate the imposition of unduly heavy rates, and that the trade or manufactures of the city, being hampered by the heavy rates, should be driven from it, with the result that the mills become empty and the houses are without any one to live in them. I cannot say that I have heard of such a catastrophe occurring in this country, but there has been at least one case of the kind in Canada. The town of Toronto West Junction borrowed, when trade was booming, large sums, - large, at least, in proportion to the size of the town, - and when bad times came heavy rates had to be imposed to meet the interest and sinking fund. The trade of the town was so handicapped by these rates that a considerable number of the manufacturers took their works elsewhere, and the remaining property could not afford the taxation required for the debt. The town had eventually to compound with its creditors for less onerous terms as regards interest and for delay in payment of the principal. It is difficult to imagine such a result in any of the large towns in this country, but it is well to keep the contingency in view.

The eligibility of the bonds of a municipality undoubtedly depends, not entirely, but to a considerable extent, on the fact whether the city authorities are careful or extravagant in the management of its finances. I have said that it does not entirely depend on management, because some cities are so circumstanced that one can hardly conceive a condition which would render them insolvent. For instance, if we take the case of London, it may safely be affirmed that in consequence of its position as metropolis of the kingdom it would be able to pay its debts however heavy a burden the County Council might place on its ratepayers: as the great bulk must live in London, property there will retain its value as long as the country can hold up its head among the nations of Europe. In this way its obligation is of more value than that of any other city in Great Britain. The accident of natural position and the general circumstances of a city, such as the character of its trade and the occupation of its inhabitants, also become factors in estimating the eligibility of its bonds. Seaports like Glasgow or Liverpool are necessary for the trade and manufactures of the country, and certain industries naturally are attracted to such centres. Their prosperity is therefore more assured than that of cities which may depend to a great extent on one great industry, and which would be very seriously injured if that industry should fail. Of course in such an event the whole country would suffer; but, in the first place, the city that is principally supported by a trade that passes away will suffer more severely than another that has two or three strings to its bow; and in the second, the city which has any industry essential to the country, such as shipping, is more favourably circumstanced than one dependent on trades which though important are not absolutely necessary.