PUBLIC BONDS OF DOMESTIC ORIGIN 1. Federal bonds of the United States government, like those of most state, municipal and local debt-contracting governments, are unsecured ob ligations resting only upon the pledge of the issuing government. In case of default on Federal issues there is no redress, for the government cannot be sued. The bonds of the United States have sold at a high price which offered a very small yield to the investor. This is not only because the credit of the government is extremely high, and because it has customarily paid off debts so rapidly that the supply has been small ( a little over $1,000,000,000 before the World War) but because the price is bid up for other than strictly in vestment reasons.
The report of the Comptroller of the Currency for 1915 reveals to how great an extent government bonds were then held by banks and the consequent artificial nature of the market for them. The total value of United States consols of 1930 (the government 2 per cents) was $646,250,150. Of this issue, bonds aggre gating $600,678,600 were on deposit to secure na tional bank notes and $11,525,850 to secure public deposits. Accordingly, less than 6 per cent of this issue was held by other than national banks.
The total bonded debt of the United States on October 31, 1915, was $970,624,590. This figure in cludes three separate issues of the United States, of Panama and $7,307,100 of postal savings bonds. A summary of the combined returns from national banks, incorporated state and private banks and loan and trust companies as of June 23, 1915, showed $811,159,095.53 as the amount of government among their assets. This represents approximately 83% per cent of all United States bonds issued.
The price of pure money, as stated in the findings of the Interstate Commerce Commission in the West ern Advance Rate Case was as follows : 1 These rates may be compared with the investment yields given in the tabulation to follow. It will be seen that none of the government issues except the colonial bonds yield within practically one per cent of the rate for pure money.
The national banks must deposit government bonds with the United States Treasurer in amounts equal to their note circulation. The banks which are de positories for public money must likewise deposit equal amounts of government bonds. The annual report of the Comptroller of the Currency contains calculations of the profit earned by the national banks thru taking out circulation. On this basis, C. F. Childs and Company, of Chicago, published the com pilation, given on page 82, for 2 per cent bonds at the price quoted July 1, 1916.
These bonds fluctuate very little as between boom and panic times. Their principle of fluctuation is the rise and fall of the interest rate.
The chief hazard of this form of investment is that Federal legislation may alter our bond-secured bank currency system and so withdraw the bank support which now keeps prices at an abnormal level.
2. State the field of state bonds, there has been a history of repudiation, during the thirties and forties, the Civil War, the Reconstruction period, and the hard times of the seventies. Such a wave of repudiation is not likely to recur. As a souvenir of repudiation, however, there is in existence a consid erable amount of worthless paper. No state bond issued before 1885 should be purchased by an investor unless an expert has passed upon its standing. The amount of state bonds available is very small, the states being averse to creating standing debts.
The standing of any particular issue is to be judged by the spirit of the people of the issuing state toward their obligations, as evinced by their financial history, and by the legislation they have enacted concerning debt. It is further to be judged by the tax machin ery, the assessed valuation and the amount of out standing debt. The formula for presenting the fi nancial condition of a state to the investor is very simple. For New York State the subjoined state ment was issued in 1915 in connection with the offer ing of the per cent Canal Highway Barge and Terminal bonds due 1945 and 1965, which were priced by the dealers at 104% and accrued interest.