FEDERAL BONDS NOW ISSUED TO PAY FOR PUBLIC WORKS.

In connection with the last loan made by this Government it is interesting to note that formerly the debt of governments represented the cost of wars, but more recently an increasing portion of government debts in other countries as well as our own represents the cost of industrial undertakings. It follows, therefore, that bondholders have a further security for the payment of the interest in the earning power of properties, such as the Panama Canal or the Russian railway system, in addition to the regular source of public revenue, that is, the taxing power of the nation.

FEDERAL BONDS SAFEST OF INVESTMENTS.

Of all possible investments, therefore, the United States Government bond is probably the safest.

RATE OF INTEREST ON FEDERAL BONDS LOW.

By reason of this fact, however, the interest return is correspondingly low. The splendid credit of the nation is such that our Government bonds sell at a higher price than the bonds of any other nation, over $730,000,000 of the $913,000,000 outstanding bearing only 2 per cent interest, the lowest rate of any national issue. This is due, however, not merely to the greatness of our resources and the smallness of our debt, but also to the fact that our national banking system is largely based on the bonds of the Government, the national banks being required to put Government bonds in the United States Treasury as security for their issue of notes or bank bills. The exact status of the Government bond as a form of investment is summarized as follows by the editor of the Bankers' Magazine:

Government bonds are an ideal investment for trust funds, but the artificial stimulus given to the price of these securities, owing to the uses made of them by the national banks, has tended to place them beyond the reach of fiduciary institutions. In fact, United States bonds are rapidly losing their investment character and are becoming more or less speculative. The 2 per cent bonds selling at 103 and upwards maintain their price not because of the interest yield, but because of the special uses to which the bonds may be put by the national banks. It is hardly necessary to say that if the special privileges with reference to security for bank circulation and deposits were removed from United States bonds, their price would fall to a level to make them attractive investments for savings banks and trust companies.1

While yielding a very low rate of interest at present, it is well to remember, however, that the purchasers of Government bonds during the Civil War realized 6 and 7 per cent on their purchases when the war issues were refunded, and that, in the long run, part at least of a permanent fund might be invested profitably in Government bonds.

1 See Bankers' Magazine, vol. 72, p. 371.

FEDERAL BONDS ATTRACTIVE TO LIFE-INSURANCE COMPANIES DURING WAR.

The desirability of Federal bonds as an asset is also attested by the history of life-insurance investments. Except the savings banks, lifeinsurance companies were, until the recent days of corporation growth, the only conspicuous and extensive repository of the people's savings. Since the organization of the insurance department of the State of New York in 1859, the annual statements of the insurance companies have made the public familiar with the merits and earning power of the various classes of investments. These statements seem to show that different kinds of investments have been profitable at different periods in the history of the United States. Statistics compiled from reports of the 29 largest life-insurance companies in the country display an interesting variation in the life-insurance companies' record of investments in public bonds. Beginning with 5.9 per cent of life-insurance assets in 1860, these investments increased to 16.1 per cent in 1870, 23.4 per cent in 1880, and then fell off to 9.2 per cent in 1890 and 8.6 per cent in 1900.1

The general significance of these different variations in life-insurance investments at different periods would seem to be this: That in times of public peace and ordinary business activity Federal bonds yield too low a return to be attractive investments, but that in times of public peril and prolonged industrial depression they are in great demand. In the beginning of the history of the big life-insurance companies in this country there was no large field of investment open to them outside of mortgage loans, notes on policy premiums, and public loans. The great transcontinental railroads were not yet built or projected, the era of gas light, electric light, and water companies had not yet dawned. The most remunerative investments of half a century ago were mortgages and premium notes and the life-insurance companies accordingly put 80 per cent of their money into those securities. Not until the Civil War broke out did public bonds rival mortgages or premiums in favor. With the outbreak of hostilities, however, and the cessation of industrial activity the life-insurance companies hastened to transform their mortgage loans into public securities. While gold was at a premium Government bonds could be purchased at a price which yielded a rate of interest in paper as high as 10 per cent. The maximum price of 285 per cent was reached in July, 1864, at which point the purchasing price of greenbacks was but 36 cents on the dollar. When at length the effects of the war began to wear off and the premium on gold declined, while chances for remunerative investments began to multiply, the Government bonds came gradually to look less and less attractive to the insurance companies, until at the present time they are only used as investments for

1 See "The Investments of Life-Insurance Companies," by Lester W. Zartman, instructor in insurance, Yale University (1906).

unemployed funds. It is important, however, when considering the safety of investments to note that, during the financial depression of the seventies, the insurance companies purchased a large amount of Federal bonds and held them, even though the Government was refunding them at a lower rate of interest, until after 1880. About that time railroad securities began to come into high favor, and since then the insurance companies have become heavy purchasers of railroad bonds, nearly 29 per cent of their assets in 1900 being in that form of securities.

STATE BONDS.

Only less secure than United States bonds, according to the testimony of numerous writers on investments, are the obligations of the sovereign States of the Union.

State bonds usually sell [says one author] upon a basis which may be taken as the equivalent of pure interest, with no element of risk or speculation involved. The obligations of different States sell at different prices, in accordance with market conditions and the relations of supply and demand, but there can be no question of the equal ability of all States to pay their obligations. Repudiation of State debts has occurred in our history, but only in cases where an overwhelming majority of the citizens were opposed to the creation of the debt at the time of its issue, but lacked the means to control the situation. Such instances are chiefly to be found in the case of the socalled carpet-bag governments of the Southern States after the Civil War.1

STATE BONDS NOW SAFE HOLDINGS.

The conditions under which the repudiated State bonds were issued are so different from any that now obtain or are likely to occur again that there is to-day no reason for believing that any of our State issues of recent date are anything but safe holdings. The bonds of those States which have maintained an unbroken record for payment of their debts are in such high favor that, like Government bonds, they are out of the reach of the majority of investors. During the War of the Rebellion Massachusetts met all its obligations in gold, even when gold was selling at a stupendous premium. Its credit is consequently very sound. The issues of New York State are likewise in high favour and yield the investor approximately 3 per cent. Nearly all the States are now, however, on a sound financial basis, so that their bonds are among the safest of securities.

Some State issues [says Montgomery Rollins] have valuable assets in the shape of income-producing property, which contribute toward the payment of the principal and interest of its obligations; such, for instance, are the large income-producing State-owned wharves and docks in San Francisco.

1 See How to Invest Money, by George Garr Henry, vice president Guaranty Trust Co., New York (1908).

2 See Investment Problems, by Fisk and Robinson (1907).

Again, an indebtedness of this nature may be incurred for some improvement more or less local in its nature, the particular section benefited being primarily responsible for the liquidation of the debt, for which, nevertheless, the State has obligated itself for payment, an example being bonds issued by the Commonwealth of Massachusetts for the benefit of the Metropolitan Water District.

RATE OF INTEREST ON STATE BONDS NOT HIGH.

The interest return from most of our State securities is not large, and consequently their purchase is more or less limited to institutions such as insur ance companies and savings banks, or to trustees of estates, or to those seeking a particularly conservative form of investment and who can afford the low rate of interest.1

MUNICIPAL BONDS.

Municipal bonds are declared by one writer to be " among the most popular and safest forms of investments." 2

Municipal bonds [says another author] have steadily grown in favor for individual investment. They have always been in demand by institutions, and the savings banks of the country at the very outset were permitted to purchase and loan upon them, or to loan money to towns and cities, which is substantially the same thing. Numerous favorable court decisions have further established their position, and no one to-day hears the theory advanced, as was the case 40 years ago, that a municipal bond is a third mortgage, the Federal and State debts taking precedence as first and second mortgages. One of the strongest points in their favor has been the decision of the United States Supreme Court in the celebrated income-tax case, in which it was held that these bonds were exempt from the operation of the income tax. As a result of this conclusive opinion by the court of highest resort any shade of doubt that may have remained as to the desirability of municipal bonds for the investment of individual or trust funds has been swept away.3

In this connection Judge Dillon has written:

The Supreme Court of the United States has upheld the rights of the holder of municipal securities with a strong hand, and has set a face of flint against repudiation, even when made on legal grounds deemed solid by the State courts,. by municipalities which had been deceived and defrauded. [Further:] The value of such securities is largely due to the course of adjudication in respect thereto by the Supreme Court and the reliance which is felt by the public that it will stand firmly by the doctrine it has so frequently asserted.*

In his little book on Municipal Bonds, Eben H. Gay quotes the case of Moultrie County v. Fairfield (see 105 U. S., 370 (1882), to prove that should repudiation be attempted judgment may be secured against the city for the amount of interest or principal in default, and the officials who have hitherto refused to levy the necessary tax compelled, by writ of mandamus, so to do.5

1 See Money and Investments, by Montgomery Rollins, p. 373.

2 See

Investment Securities," by George B Caldwell, manager bond department, American Trust and Savings Bank, Chicago, Ill., in American Investment, February, 1906.

3 See Savings Banks and Safe Securities, by J. G. Dater, p. 58.

4 See Dillon's Municipal Bonds, p. 7.

5 See Municipal Bonds, by Eben H. Gay, published by N. W. Harris & Co., bankers, Boston, 1890.

LARGE INVESTMENTS IN MUNICIPAL BONDS.

With the safety of municipal bonds assured, their increased popularity as an attractive form of investment has caused a phenomenal growth in the municipal indebtedness of the country. According to the Federal census of 1902, the funded debt and special assessment loans of minor civil divisions amounted to $1,561,433,680. The steady increase in urban population, as shown in the following table, explains this large indebtedness.

TABLE XXXVII.-Showing population living in cities at each decade.1

ness.

1 This table includes cities of 8,000 and over.

The development of cities and the wonderful advance made in material comfort through waterworks, pavement, gas and electric plants, sewers, drains, and sanitation within the last half century, while creating a new form of indebtedness, has greatly advanced the valuation of real property, which, despite increased obligation, furnishes more than adequate security for the indebtedWise legislation has afforded still further protection to these obligations by limiting the bonding power of communities, so that to-day the net municipal debt of the country bears an exceedingly low ratio to the assessed valuation of the property upon which it is a lien. Another point in favor of municipal bonds is that, while furnishing adequate security to investors, they possess also a highly recognized standard of value in all money centers. Thus they are readily accepted as collateral in bank loans and, while not fluctuating widely in the market, or subject to the attacks of unprincipled speculators, they are readily marketable. In nearly all the important cities of the country investment bankers are ready and anxious to buy, sell, or exchange such securities in order to supply the enormous investment demand for them from individuals and corporations.1

The purposes for which municipal bonds are issued is illustrated by the following classification of the funded debt and special assessment loans of minor civil divisions in 1902, compiled from census

returns.

1 See Savings Banks and Safe Securities, by J. G. Dater (1898), p. 64.