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Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter XXXV

Commerce and Finance - Chapter XXXV

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII






By the term securities we usually mean stocks or bonds of
corporations, either public or private, and mortgages upon real
estate. These are evidences of property, and in the eyes of the
law are regarded as personal property. Being negotiable or as-
signable by mere delivery, and readily convertible, they are
extensively used as collateral security for loans and other con-
tracts, and have gradually taken the name of se-
Definition curities. The value of any security depends upon

the character of the property which it represents,
and the rate of income which it is reasonably certain to produce.
The more secure the investment is regarded, the higher its
market price is apt to be, and therefore the lower the rate of
income which it yields. Investors who are willing to assume
risks are comparatively few, and those who wish to be certain
of the return of their capital are satisfied with smaller dividends.
United States government bonds may be classed as the high-
est order of securities before the public. Our faith in the in-
tegrity and stability of the government is such that we do not
hesitate to invest in its bonds at very low rates of interest.*
During the great Civil War our government issued
Governments large amounts of bonds for war purposes, but the
amount has been gradually reduced, by payment

*The lowest rate which any of the government bond Issues draw is 2
per cent.


of the public debt, and the rate of interest lowered, while the
price has advanced until they are no longer a profitable class
of investments. The national banks now absorb a large portion
of our government bonds in compliance with the National Bank-
ing Law. The remainder of them are mostly taken as invest-
ments for trust and other funds where safety and facility of con-
version are greater considerations than a high rate of interest.
They are considered absolutely safe and always marketable.

State and municipal bonds are in some instances high class
securities, and in others of a very low grade. Unfortunately
many of the states have not preserved their credit in financial
markets. Swayed by popular impulse, they have, in times of
stress been led into the suicidal error of repudiating their just
obligations. A lack of patriotism and state pride combined with
a knowledge of the fact that a "state cannot be sued" has in
several instances resulted in dishonest legislation. Even where
bonds have been issued with an honest purpose, there have come
unreliability political disturbances leading to a revulsion of
of state sentiment, or affording an opportunity to dema-

gogues to assail public creditors and perhaps se-
cure a majority of votes against the payment of just debts.* For
these reasons, state securities are not usually regarded favorably
by investors.

"Whoever buys the paper of a state should do so with the
distinct understanding that he has nothing but its honor to
rely upon, unless the commercial relations of its citizens should
be of such a character as to make its financial credit important
to their business interests. There is for that reason little like-
lihood of such states as New York and Massachusetts ever repu-
diating their obligations." These states contain the two great-
est money centers of the country, and being the chief lenders,
they could not afford to set an example of repudiation to other

*Twelve states of the union have broken faith with their creditors at
different times, and either openly repudiated or Ignored their outstanding
obligations In whole or In part.


states. What has been said in regard to the uncertain value of
state securities applies to some extent to county, town and
municipal obligations. The same people compose the state and
the local organization, and the same moral sentiments exist con-
cerning both obligations. There is this important distinction,
however, that municipal obligations can be enforced in the courts,

provided they are properly created. There are
securities many points which go to determine the value and

reliability of municipal securities. The first of
these is the legality of issue. If the bonds have been in litiga-
tion their legal status has probably been fixed by the courts,
but unless this is the case, their legality should be investigated by
a competent lawyer. Besides the legal points involved and the
disposition of the municipality to pay, there is also the question
of its ability to meet its obligations. The laws in many of the
states limit the power of municipalities to issue bonds to a
small percentage of the taxable property,* thus aiming to pro-
tect both creditors and taxpayers, but since the bonds must be
paid out of the taxes, and taxes are dependent upon the value
of property, it follows that the payment of a bond issue is con-
tingent upon the general prosperity of the town or business
community. As our cities and other municipalities grow in
wealth and population, they become better able to meet outstand-
ing obligations, especially where bond issues have not kept pace
with population, and hence the tendency of this class of securi-
ties is to gradually improve in the estimation of investors. One
disadvantage in the case of bonds issued by small municipalities
is that not being widely known the market for them is a limited
one. This makes them to some extent undesirable investments,
except for people who do not regard ready negotiability as im-
portant. With such investors they are favorite securities. The
bonds of some of the larger cities are only slightly less esteemed
than those issued by the general government.

*In Illinois the limit is 5 per cent.


Leaving now the consideration of the securities of public
corporations, we come to that larger class of mortgage securities
based upon private property, either corporate or individual.
Mortgage securities may be divided into two general classes,
one of which is based upon the actual value of the property
mortgaged and the other upon the earning power of the property.
Thus when a man loans money and takes as security a mortgage
upon the house and land of the borrower, he estimates the actual

value of the house and land. He does not wish to
securities become in effect a partner with the mortgagor by

making the repayment of the loan dependent
wholly upon the borrower's success in business. He wishes the
security to repay the loan in case the borrower fails to pay;
hence if he is prudent he loans but one-half or two-thirds of
the actual value of the security, so as to leave abundant margin
for shrinkage in case of forced sale. But suppose he loans to a
corporation say a railroad company by purchasing its bonds,
he depends for the security of his money not upon the property
as such, consisting of road-bed, depot buildings, etc., but upon
the business success of the road. If the road does a profitable
business the bonds are safe, otherwise not. There is not a rail-
road in the United States that would sell for its bonded in-
debtedness in case its business was to cease. The rails and ties
would be worthless except as old iron and wood, and the right
of way could be sold to neighboring farmers at only a small
price. Considered simply as real estate, the entire property
of a railroad company would be worth but a small fraction of its
bonded indebtedness. The value of the bonds, then, is sustained
by the profits or income from the property. From this another
reason is apparent why when a railway company becomes finan-
cially embarrassed the courts appoint a receiver to take charge
of and run the road, pending a settlement with the creditors.
To stop the operation of the road would be to vastly depreciate
if not ruin and destroy the property. The investor, therefore,


who contemplates the purchase of railway securities should con-
sider well the present and future earnings of the corporation.
If its earning capacity for any reason becomes seriously im-
paired, nothing can save the bondholders from loss. And yet
railroads are such a necessity to our civilized life, and their
traffic so dependent upon our industrial system that their income
can be made the basis for borrowing money as safely as can a

It is apparent from the foregoing that the desirability of
railroad bonds as an investment is dependent upon two con-
ditions, viz.: With old, established roads these two factors in
the problem can be easily ascertained, but with new roads the
question of earnings can only be surmised, and if the manage-
ment of the company is defective, or the earnings
other ifonds are overestimated the result is likely to be a re-
ceivership and reorganization, with all of their dis-
astrous consequences to investors. In the case of street railroads,
telephone systems, water and gas works, the franchise is usually
a valuable asset which will support a considerable bond issue,
especially when it has many years to run. On the other hand,
the danger of competition is always a menace to the income
of a corporation unless it has an absolute monopoly. Thus gas
and electric companies are competitors and the profits from each
may be correspondingly reduced.

The value of the security afforded by bonds of ordinary com-
mercial and manufacturing corporations must be estimated
wholly upon the merits of each individual case. Each interest
must be investigated in all its bearings in order to reach a
wise decision, while competition, management and public re-
quirements are important factors which should be carefully
considered by the investor before placing his money.

There are many uncertainties that threaten stocks which do
not appertain to bonds. The latter are secured upon the prop-
erty or earnings of the corporation, and are fixed and determined,


but the value of stocks rests largely upon the earning power and
the management of the corporation and also the future condi-
tions under which the company may conduct its
stocks business. The investor in stocks should, there-

fore, anticipate the future and weigh the proba-
bilities of business success. A business which is successful
to-day may be run at a loss next year or compelled to close down
entirely. Competition is constantly shifting and must be met
in a variety of forms. New inventions and labor saving processes
may give a temporary advantage to those who discover or secure
them first, and reduce the dividends of companies which were
prosperous before. The telephone competes with the telegraph,
and the trolley car cuts into the suburban traffic of steam rail-
roads. Lines of business which yield large returns especially in-
vite competition, and as a result the business may become over-
done and profits entirely disappear. The stock of companies
formed to use or promote new and useful inventions is frequently
the most profitable and where a monopoly is thus secured for a
time, large fortunes have been made. Late investors in such
stock, however, are very likely not to fare so well. Every hour
shortens the life of a trade monopoly. Among the safest stocks
are those of well managed banks and insurance companies. The
states exercise a supervision over these companies, and their
shares can generally be relied upon as representing actual cash
investments, especially in those states where the laws are strict
concerning such corporations and the general administration of
law is considered good. In the case of banks, however, the
stockholder often incurs the risk of liability to creditors to the
extent of the face value of his stock, in the event of the bank
becoming insolvent.

Mortgages on real estate are considered a desirable class of
securities, especially when the mortgage represents not more than
one-half the actual market value of the property, and where the
property is located in a prosperous and growing community.


Many insurance companies and savings banks decline to loan
upon wooden houses, confining their investments to securities
upon either stone or brick improvements for the
Mortgages" reason that these are less liable to deteriorate by
the ravages of time or to be destroyed by fire.
Other investors prefer mortgages upon residence property upon
the theory that a man will protect his home from foreclosure
when he would not other property. Unless there is a decided
advance in the value of land in the vicinity of the property
mortgaged, the mortgagor should aim to reduce the amount
of the mortgage at maturity by making a part payment at least,
since property naturally deteriorates with time, and at the end
of three or five years the property may not be as good security
for the debt as it was originally.

Eeal estate mortgage notes are usually made payable to the
order of the maker and are then endorsed by him in blank.
This makes the security transferable by mere delivery, and hence
the holder of a mortgage may sell it, and an investor purchase it,
the same as any other chattel. The buyer must of course, exer-
cise good judgment and proper care to see that the security is
sufficient and the character of the property satisfactory before
investing. By trusting to representations of brokers in regard
to these vital points, instead of making a personal investigation,
investors have been known to find later on that their money
was paid for a comparatively worthless security.

As the country becomes more densely populated, and the un-
occupied lands of the West are taken up, the farm lands in the
great Mississippi Valley become more valuable and prices tend
to advance. Mortgages upon good, productive farms in the
central west are therefore growing in popularity
Mortgages an ^ more and more absorbing the capital of in-

vestors. Paper resting upon landed security in
the newer and rapidly developing sections of the West, where
farming is uniformly successful is almost sure to be good. But


like city mortgages farm securities must be carefully investigated
or disaster may result. There have been mortgage companies
located in western cities whose business consisted in making
loans on farms and selling the securities to eastern investors. In
some instances these companies guaranteed the paper. But
as the loan company used the same money over and over again
to make the loans, it is apparent that their guaranties would
soon exceed the amount of their capital and hence become prac-
tically worthless. One objection to farm loans is the uncertainty
of payment of interest in case of a crop failure. What an in-
vestor wants is not only safety of principal, but regularity as to
payment of interest. A locality where there is a diversity of
crops is preferable for desirable mortgages, since in case there
should be a failure of one crop, the mortgagor may yet be able
to pay his interest from other products. Where a single crop is
depended upon, or the land is situated so that it is subject to
overflow, resulting in an occasional total failure of crop, the
mortgagor may be compelled to default in the interest perhaps
for a year.

Then again, investors would do well always to consider the
disposition and ability of debtors to pay. No matter how good
the security, the mortgagor's credit has an important bearing
upon the value of his paper as security for money
DispositK loaned or invested. Where public officials repudi-

ate their just obligations and the laws are framed
in the interest of the debtor class, investors may well beware.
As previously noticed, several of our states have openly violated
their obligations, and hostile laws have been passed against
capital by both state and municipal governments. It can hardly
be expected that private citizens will prove to be shining ex-
amples of integrity when those in authority above them are
thus derelict. Investors, therefore, aim to avoid such localities.

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