Finally, a state bond may be judged by the strength of the bond recital and the regularity of is sue, the desired merit being such a clear-cut and un equivocal obligation that no peg is left for the spirit of repudiation to hang upon should times of great stress come in the future. State bonds are bid up slightly against private investors outside the state of issue, by the requirements of certain insurance laws, by the limitations of trust fund and savings bank in vestment, and by tax exemption when they are in the hands of citizens of the issuing state.' The high standing of state bonds is indicated by the fact that they are universally made legal for invest ment of savings bank funds, with certain limitations. In New York, for example, a savings bank may pur chase the bonds of any state, provided that within the past ten years the issuing commonwealth has not been in default more than ninety days on the principal or interest of any obligation issued since 1878. Of course there must be no default at the time the bonds are purchased.
A group of quotations of state bonds, furnished by Redmond and Company of New York City, as of August 29, 1916, is as follows: 3. Municipal bonds.—The term "municipal bond," in investment circles, covers the financial obligations of practically every type of local subdivision. Bonds of counties, townships, boroughs, parishes, school dis tricts and a great variety of special assessment dis tricts are embraced in this class. It was estimated in 1913 that the total amount of outstanding bonds of cities, villages and towns alone was $2,985,555,484. The purposes for which these debts are contracted are to build schools and other public buildings, to build sewers, to pave and improve streets, to acquire waterworks, or to refund existing issues. An important cause of the increasing output of bonds is the increase of that class of service rendered by cities which requires property or permanent physical improvements. The increase of issue does not in volve a deterioration in the quality, as between earlier or later issues. All public bonds of the same class stand upon an equal footing, irrespective of the date of issue.
To some extent municipal bonds are taking the place once occupied by railway bonds. They are bid up against private investors by the legal limita tions under which trustees invest, by the restrictions placed by state legislation upon the investments of insurance companies since the insurance scandals of 1905, by the legislation of 1910, which made state and municipal bonds acceptable as security for postal sav ings deposits (railway bonds being debarred), by the exemption of Federal, state and municipal bonds from the operation of the Federal Income Tax, or even the necessity of declaring them under that law, and by the exemption from taxation granted by many states to the issues of their own municipalities.
Some causes of the growing popularity of municipal bonds with all classes of investors are given by Mr.
Howard F. Beebe of Harris, Forbes and Company, as follows: (a) The long-standing prejudices have gradually worn away under the better understanding of the reasons for old de faults and repudiations, and the knowledge that there will be no repetition of those unfortunate conditions which brought them about.
(b) A realization that they can be marketed under un favorable financial conditions as well or better than other forms of property.
(c) The enlightenment which has come in recent years on the fundamental weaknesses of all private or corporate se curities as compared with the fundamental strength of securi ties payable by the taxing power.
(d) The relatively good income which may now be had from an investment in this class of security.
(e) The obvious advantages under the Federal income tax law, and the certainty that this tax will grow heavier rather than lighter.
(f) The growing scope of municipal functions insures a steady supply of all grades of municipal bonds.
(g) The steadily improving laws governing issuance and payment of public debts.
4. Municipal bonds and savings bonds, as a class, are regarded highly as conservative investments. In each instance the credit of the is suing municipality is to be taken into consideration, just as the credit-standing of an individual or of a cor poration is to be considered before accepting a note or purchasing bonds or stock. The restrictions im posed by the New York legislature on the investment of savings bank funds in this type of security may be taken by the private investor for his own guidance.
Savings banks in New York may invest in the bonds, interest-bearing obligations or revenue notes, sold at a discount, of any municipality or school or poor district of the state, provided such obligations were legally issued. The bonds of incorporated cities of other states are also made legal investments, with certain restrictions. The bonds must be those of a city of not less than 45,000 population, in a state that was admitted to the Union before 1896, and which has not repudiated or defaulted in the payment of in terest or principal of any obligation since 1861. It is required that the city shall have been incorporated for more than twenty-five years before the making of the investment, and that it must not have made default since 1878 for more than ninety days in the interest or principal of any obligation. Another important provision is that when the indebtedness of a city, less its water debt and sinking fund, exceeds seven per cent of the taxable valuation, its bonds shall cease to be an authorized investment until the indebtedness is reduced within the seven per cent limit.