The Washington herald., 1912-08-10
THE BUYER OF
MUNICIPALS.

MONlVn hLOs
Copyright. 1912. by C. NJ. Keys. New
York;
A long time ago. the little town Of OF
tumwa. ILL.,. issued and sold $4,000 Of
its own municipal bonds to help build
q railroad. The issue of these bonds
was supposed to be validated by an act
that was supposed to have passed the
State Senate by vote OF ayes and noes
as required by the Constitution.
Some time later, taxpayer in the town
brought suit to stop the collection OF
taxes to pay interest on these bonds.
In his suit he argued and proved that
the bill authorizing the issue was not
read on three different days In the State
Senate as was required by the Constitu-
tion and that. therefore, the tissue was IL
legal and the town had no right to pay
interest on it. The town lost the suit
and defaulted on the bonds.
Some of the people who had bought
the bonds brought suit to recover. but
they rever did recover because the
court held that they ought TO have known
whether the issue was legal or not be-
fore they bought it. Therefore. they
lost what money they had in these bonds.
This instance is cited not because 1t is
common occurrence in municipal
common occurrence. particularly in re-
cent years. There was a time when hum
dreds Of small municipal bond issues.
put out for the purpose Of helping build
railroads. finance Industrial plants and
for various other similar purposes, de-
faulted or were declared invalid This
was mostly in the period from 1870 to
1884 and was contemporary with a very
much too rapid development that went
on in the Middle West and the West at
that time.
At the present time municipal bonds
are issued very much more carefully
than they ever were issued before in
the history OF this country. Everybody
knows that II there is one danger In
municipal bonds. II is this question OF
the legality of the issue. For that rea-
son. as time has gone on. the people re-
sponsible for the selling Of bonds
Throughout the country have taken step
| after step to see to II that the issue is
| entirely legal. and practically all the
leading municipal bond issues which are
offered to investors in Eastern markets
pass through the hands OF underwriting
houses which employ the best possible
lawyers to examine every step taken by
the municipality In the creation and is
| suing Of its bonds. Therefore. there are
practically no recent cases OF any trou-
BILE whatever in municipal bonds OF any
| considerable size due to illegaIity Of is
sue.
A year or so ago. a lawyer. Mr. Mau-
rice B. Dean. compiled a book covering
: all cases Of illegality OF issue of munich
pal bonds that he could find in the rec
ords. In all thepe were just SO cases.
| Involving less than 500. 900 altogether,
and in the great majority Of these cases.
there was no actual loss to investors or
| bona fde holders.
1 hn
of municipal bonds issued during the
period reviewed was many billions of
dollars. this compilation would seem TO
prove the claim that municipal bonds
| are about the safest class of investment
securities: for the total amount of actual
loss to bondholders in the whole history
OF the country Is a small fraction of one
per cent OF the amount OF the invest
ment made. In recent years, the per-
centage Is even smaller.
There are some States in which num-
cipal bonds have never been held void.
This list includes Connecticut. Della
ware. District of Columbia. Florida.
Georgia. Idaho. Massachusetts,. Maine.
Montana. New Hampshire. Nevada. New
Mexico. Ohio. Oregon. Rhode Island.
Utah, Vermont, and Wyoming. In all
other States there have been cases Of
irregularity. though in some of them IL
was a very small trifing matter. 1lli-
nois has been the most unfortunate State
4 in this respect. followed hy New York,
/ Iowa. Kansas Missouri. and Nebraska,
respectively. OF the big cities, Chicago
has had the most losses Boston. Pitts
/ burg. Cincinnati. and Denver follow.
New York City has a clean record so
| far.
| While. as noted. the amount of illegal
| issues Is extremely small one cannot
really say it is negligible: for nothing
in the investment world Is negligible IL
II can be attended to by the use Of or
| binary common sense. There is one
point about municipals that is worth
\ bringing out as a word of caution. It
is the fact that In most Of the cases
| where innocent bondholders have been
caught. when bonds that were Illegally
| issued defaulted. the courts have said
that the bondhoider should have known
\ the law and should have found out for
himself that this law was not complied
with. In other words. the bondholder
has no recourse on account OF the fact
| that he was ignorant Of the law. or Of
the statutes governing the issuing of
bonds
This danger. small as IL is. will be
| guarded against by the use of ordinary
| common sense methods. The municipal
| bond buyer should buy only from firms
banks. or people whom he knows to be
standing Of the bonds He should re-
quire from these firms that they furnish
him with a satisfactory statement to the
effect that the legality of the issue has
been fully examined. That is the reason
| why a great many large and very con-
| servative buyers OF municipal bonds in
/ sist upon having a full copy of legal in