The Bridgeport times and evening farmer., 1920-06-19
MUNICIPA AL BONDS DESCRIBED BY
 BOND MANAGER

Municipal bonds, American
 bankers and investors use the term,
 comprise the obligations of our lesser
 governmental units, whether states,
 special districts, counties, or cities.
 Their distinguishing features, includ-
 ing the exemption from taxation
 which makes them so popular today,
 are those generally characteristic of
 a public debt.
 These bonds have been issued for a
 wide and ever increasing variety of
 purposes. New York city borrowed
 scores of millions to build subways,
 and Illinois has authorized large
 bond issue to carry out it's ambitious
 highway improvement program. All
 over the country communities have used bonds to finance schools, parks,
 waterworks and similar projects; inj
 short the history of municipal bor-
 rowing is the story. of public pro-
 gress.
 In the past American municipal
 bonds have not always held the high
 position which is theirs today. During
 the forties of the last century such
 bonds were issued to finance rail
 roads which have never been built,
 and in the darkest days of American
 hiStory-the Reconstruction period
 following the Civil War-certain mo-
 torious "carpetbag' legislatures sad
 dled their states with debts which
 benefited only their own corrupt
 was not difficult to persuade the tax payers that these debts need not be
 honored; a few states even adopted
 new constitutions specifically repudi-
 ating the old bonds
 To prevent repetition of these scandals, reputable dealers now spare
 no effort to assure themselves of the
 legality and honesty of a bond issue
 before offering it to the investing public. Lawyers who specialize in
 that field examine the validity of the bonds in the same thorough manner
 in which a title guarantee company searches the title to a piece of real
 estate. When these precautions have
 been taken, repudiation under the shadow of law is practically impos- sible and as a class probably no ob1i- gation can be considered safer today than the American municipal bona. These bonds are ordinarily a direct or general, obligation of the entire
 community, supported by all it's tax
 ing power. Occasionally they may be special assessment bonds'' which
 are payable out of the proceeds of taxes levied upon the property direct
 ly benefited by local improvement Such bonds are sometimes covered by
 a general obligation clause, the com munity at large undertaking to pay them from other revenues in case the special levy should prove insufficient. Taxes of course are a first lien on all taxable property, that the muni- cipal bondholder is often said to have a first mortgage on the entire city.
 American laws permit neither an individual nor a community to ne 'glect its debts, and the experience of those communities which have as- pired to be a law unto themselves in
 this respect, has not been such as to encourage further attempts of that kind There are a number of cases | on record in which bondholders have successfully sued municipal corpora tions through the courts, gaining verdict which included principal, 1n- tereSt and the costs of the trial The state itself cannot be sued without 1,s own consent, but those states winch have in the past taken advantage of
 this or any other excuse, have narur- ally found investors deaf to their su subSequent appeals for money-a serious thing for a growing commun- 1ty which must borrow frequently. With the precautions now taken to assure the validity of each issue any attempt at repudiation must be pa tently illegal, and so long as the Americam people retain that respect for law which is the foundation of
 our whole government our muni- cipal bonds must be considered among the safest investment in the world.
 Recently high taxes have made tax exemption one of the most important features of municipal bonds. Most issues of this type are exempt from taxat.NA in the state where issued, and all are exempt from the levy which bears heaviest on security holders-the Federal Income Tax
 Though economists have criticised this exemption, in the opinion of
 many prominent lawyers any attempt to make the income tax cover muni- cipal bonds would be unconstitution- a1
 The consequence has been to make municipal issues a particularly 'desir- | able investment for men whose large I income makes them liable to the heavier taxes. To an investor whose l taxable income is s2O,ooO, 4 1-2 per cent. municipal bonds give about the same net return as taxable issues | yielding 5.4 per cent; to an investor | with an income over $50,0OO they net more than 1-2 per cent. taxable | bonds, and bondholder whose in- 1 come is in excess of $100,00O finds | them equivalent to a taxable security | yielding over II per cent. Under | these circumstances, the wealthy in | vestor turns naturally to the tax | free bonds and a railway or indus | trial security must pay handsomely indeed to draw his intention.
 l However, others than the wealthy | do well to consider the attra ctions of 1 municipal issues. They have always | been a standard investment for sav- | ings banks, to whom tax-exemp ption 1 is of little importance. Now the | world wide shortage Of capital which | has resulted from the war, has af- i fected public well private bor- | rowers, and while municipalities still l pay less for the use of money than | do business corporations, the return | to be obtained from investment in | municipal bonds is higher than in 1 many years. As the safety of such | issues remains unimpaired conserva- : i tive investors everywhere are taking | an increasing interest in municipal | bonds.