Tapping tbe Money Markets
FINANCE AND BUSINESS
F. H. Dobbin
MOST of us have at some time in our lives borrowed money. I do so myself, because I believe that opportunity should not be neglected. Presence of mind at the right moment will do much towards placing a man in funds; which may be a positive convenience, let alone a practical help.
And as in the case of the individual, so in that of the town, city or municipality, either or all may and probably will need money. The necessities of municipal improvement, of repair, of additions to and enlargement of facilities are ever in advance of the ability to raise or draw together sufficient money to meet expenses. Were municipalities to practise the laudable
idea of settling for each expenditure as each is in succession incurred by taking the necessary money from the ratepayers en bloc, there . would be ructions and a general emigration from that locality.
It is safe to assume and within a reasonable limit to say that not ten per cent, of the people in any given municipality give thought to or understand how money is raised by way of loan to meet the expenditure of the present, so far as public works of permanent value and service are concerned. So it is proposed to set down and illustrate in narrative the routine and procedure in such cases made and provided, to quote from the statute.
Let us put certain facts in the shape
of a homely illustration, representing a monetary transaction between, two individuals, premising that what is related, though in a minor way, is practically what takes place when the village, town or city wishes to replenish its coffers from the money markets of the world.
Here are a number of men. Mr. Hopkins, sitting over there by the window, desires very much the use of ten dollars. Just now his pockets are empty; pay-day being too far away and his need pressing, he decides to borrow—if he can. Casting about for a man of means from whom to make the loan he remembers he has been told that Mr. Wetherbee is something of a capitalist and is reported to have ready money in his possession. Now, Mr. Wetherbee happens to be standing over by that post. The attitude convinces Mr. Hopkins that Mr. Wetherbee is in a receptive mood, and he approaches the throne. He states his wants, indeed, he presses his needs. Yes, Mr. Wetherbee happens to have ten dollars about his clothes. He is not averse to parting with it, as a
loan, but on certain conditions. Will Mr. Hopkins agree? The borrower who wants money very much and needs it very badly is in no position to demur. He assents to the conditions.
Believing Mr. Hopkins to be honest and of a sincere mind to repay the loan and it being the month of January, it is stipulated that the loan shall be repaid in ten months, and that interest at the rate of ten per cent, shall also be paid. And then, being a careful man, especially if he be Scotch, Mr. Wetherbee takes thought and mentions something else—security. Mr. Hopkins may have the very best intention regarding payment, but contingencies arise, in ten months’ time. He may be sick and spend the time on his back in a hospital, instead of earning money. He may die, and dead men never pay debts, that is personally. So Mr. Wetherbee insists on security.
It is plain that the only sufficient security that exactly balances ten dollars in money is ten dollars in cash. Mr. Hopkins is at present without
that ten. Indeed, if he had it he need not borrow. Being held down to business he says, “Here is a camera, a fishing rod and a second-hand lawn mower. They’re worth at least eighteen dollars. You take these and (hold them against my payment.” Mr. Wetherbee feeling assured that he can turn the chattels into cash for at least ten dollars, consents, and the transaction is closed.
Mr. Hopkins being an honest man intends to discharge the debt, and if he be prudent as well he takes thought as to how he may best do so when the time for payment arrives. He must, at the expiration of ten months, have eleven dollars, the principal sum and the interest. So he decides to “save up,” as the boys put it, and places an 62
empty salmon can on the top of his bedroom closet shelf, proposing to drop into it at intervals sufficient to discharge his liability. The moment he makes his first deposit he begins to form what is known as a sinking fund, and this sinking fund is the bottom—the foundation, so to speak —of all our system of municipal borrowing. Indeed it imports more, it is the provision for repayment of pro-
vincial and even Dominion liabilities. The sinking fund is the practical evidence of recognition of the promise to pay and the tangible evidence of an honest intention so to do.
Mr. Hopkins presently takes other thought. It occurs to him that he may hand the sums to Mr. Wetherbee, from time to time and so pay him off.
Certainly, he will do so. Finally he reviews the possibilities of making payment and reaches the conclusion that he may do so in several ways :
First, he may put aside in instalment sums sufficient to meet the liability in one payment.
Second, he may make nine payments of one dollar and one payment of two dollars.
Third, he may make payment of ten cents, cash, each month, and at the end of the tenth month pay ten dollars.
Fourth, he may make ten even payments of one dollar and ten cents each.
As outlined above, we see what takes place when municipalities proceed to borrow money, generally by an issue of bonds, or as they are termed, debentures. A debenture is simply a gigantic note-of-hand, executed with the approval of the municipality under certain conditions and signed by the governing officials so empowered to sign. In the commercial world the basis of all borrowing is credit. Credit is simply the assumed belief that an industry, business, individual or municipality, has in the past paid its or their debts and may be relied on to do so in the future, and that provision will be made to meet payment when payment falls due. Three things are essential, in the case of a municipality—the authority to borrow, a specific object on which or for which the money so borrowed is to be expended and a proper and sufficient provision to ensure payment.
The authority emanates from the people, expressed through the city, town or municipal council, in the form of a by-law. The terms of this bylaw are -submitted to the people, though there are certain modifications to this almost invariable rule, in which case action may be taken by the governing body without consulting the ratepayers. In signifying approval of the proposed loan it is very generally the case that only freeholders, those of the ratepayers who are owners of property in the shape of real estate,
or who have leases that extend so far into the future as the term for which the debentures are issued, vote on the proposition. A ratepayer who -has only a tenant’s interest at stake is debarred from being one to saddle on the municipality a debt which he may not be there to help pay. Oddly enough he is required to pay his share so long as he remains in the place, and the sums required from year to year appeared on his tax bills. The procedure generally followed is to present the by-law having for its object the raising of a sum of money, before the municipal council, when it is given what is termed its first reading. If the terms are satisfactory and the council so agree it is read a second time, then submitted to the people and if approved given a third reading and passed, being signed by the officials appointed, given the official seal and becomes a part of the records of the place.
Just here it may be asked what security a municipality can ofïer as a collateral guarantee that the money so borrowed will be repaid? In brief, all public properties are assets. These include public buildings essential to the public service, such as schools, town or city halls, fire stations, etc., and further, all the rateable property of the citizens, should such contingency arise. Curiously, the property or buildings, the means to erect or acquire which have been borrowed become in turn a very tangible security for future borrowing, as the debt incurred is liquidated. While a limit is fixed beyond which the borrowing power of the municipality may not extend at any given time, this limit is from time to time enlarged as the place grows in size, wealth, population and resources and with corresponding needs. Further borrowing powers are granted by the legislatures of the -several provinces. Most municipalities have set apart or have acquired lands with increase in value. A very tangible security is that of park lands. These may be at one time on the outskirts of the town or city. Ten
years afterwards the growth of the locality may have brought these lands into a surrounding of residential places, and the enhanced value may be very considerable. Indeed, it is said that if Central Park, in New York, were sold for what it would bring the sum derived from the sale would be sufficient to pay off the whole indebtedness of the city and provide funds to run the city for the next five years.
A debenture is, as stated, a note-ofhand of the municipality, on which it agrees to pay the sum named thereon at the end of a certain period. It states the amount of the whole loan, the specified part of the loan represented by the individual debenture, the number of debentures issued of that particular group or series, date of payment, authority and purpose for which issued, the rate of interest, together with a definite statement as to who shall make payment and where payment will be made. There are no ifs or buts. No ambiguity. And it is a part of the contract that the money derived from the sale of the debentures shall be expended on the works or proposition for which the money is raised. If for erection of bridges, then bridges must be built. If for schools, then schools will be built. One could not be done with the money raised for the other.
Debentures are generally issued in terms of ten, twenty or thirty years. Money seeking this form of investment is that which it is wished shall remain undisturbed for a considerable period, and when it is returned will come back in an unbroken sum. Accompanying and attached to each debenture, which may be one of a series each of the face value of $1,000, are coupons, twenty, forty or sixty in number, as the case may be, for ten, twenty or thirty years. Generally interest is payable half-yearly during the term for which the debenture is issued. The coupon carries a serial number, corresponding to that of the debenture, together with a statement
of the interest amount and date of payment, and each coupon is signed by the presiding officer of the municipality and by the treasurer. Each coupon is really a cheque, made out, dated ahead, stamped and accepted, and is good for its face value when presented as specified in the bond. All the holder of the debenture has to do is to trim off the coupons, present for payment and receive the money.
Having got itself into debt to the extent of say $30,000, how is payment to be made by the municipality? Where will the money come from? How shall it be gathered? Who takes care of it?
The court of first and last appeal in the matter of money for expenditure is the ratepayers. As they are benefited they should pay, and from those living and owning property in the locality or enjoying rentals all funds must be derived. The money is not taken at once, but on the instalment plan. The burden is ever tempered to the backs that bear it, the wind to the shorn lamb.
It has been assumed that the town has plunged itself into debt with the object of erecting a bridge, a fairly permanent form of public improvement. The. money having been raised by an issue of debentures, and all formalities observed, the work is put under contract. Payment 'is to be made, of the principal sum, $32,500, in twenty years. ' How is this proposal carried out?
The town has borrowed $32,500 and the rate of interest is four and onequarter cents on the dollar. So a rate is struck, based on the assessed value of the entire property in the town (it being assumed that the town at large is benefited) that will have furnished at the end of twenty years money sufficient to pay the interest charges and principal. If the assessed value be taken at, say $8,500,000, the amount required will be $1,381.25, for annual interest, and $1,091.41 for the sinking fund, $2,472.66 altogether. This works out to a rate of twenty-nine one-
hundredths of a mill on the dollar and every thousand dollars of assessment means 29 cents. So that the opulent owner of the property assessed for $3,000 will pay each year by way of taxes, 87 cents, and keep it up for 20 years. Of the total cost incurred in providing the bridge he pays $17.40. The bridge really costs the town close on to $50,000. It is a singular fact, illustrating the value of the use of money, that the interest charges amount to about one-half as much as the bridge cost in the first place. A bridge is good for many years’ service. Clearly then, its usefulness passing on away into the future, and being there to be used by those coming after, we serenely propose to do something for posterity, despite the fact that as yet posterity has done nothing for us. So, as shown, the payment is spread over twenty years. If the life of the structure extend so far as fifty years, then the town has a $32,000 asset, on which to raise money for further improvement. During three-fifths of the period indicated the matter of the sinking fund is a very serious and solemn proposition. It is the town’s sheet anchor so to speak. If faithfully kept up and administered, to it the town may point with pride and in security. If not kept up then will come a day of reckoning, dire and bothersome. The care of the fund is very important.
It is assumed that the members of a municipal council are a representative body of men. Possibly they are in the sense that they represent many shades of human intelligence and activity. As their tenure of office is transitory, and as councils have been known to get a place into trouble by indiscreet enterprise and leave to their successors the embarrassing function of straightening matters out, it is well, that the sinking fund should be placed out of reach and where it may not be tampered with. There is ever the temptation to use money on hand to tide over a year of abnormal expenditure or to cover up a deficit. In many places the procedure is to
place the interests of the sinking fund and its administration in the bonds of a body entirely distinct and apart from the municipal council. In the case of a town this body is known as the town trust commission. Its members are not elective, that is, placed there from year to year, and from time to time, by popular vote, but by appointment made by the council. Its members retain office, in many cases, for life, certainly for extended periods. In such ways they become familiar and well grounded in the finances of the place, its prospects, its responsibilities. The commision forms a sort of balance wheel, regulating and keepng in steady motion the accumulation of funds, and employment from year to year. In places larger
than towns the function exercised by commissions is often taken care of by the municipal staff of treasurer and assistants. ,
As money accumulates it is banked, subject to the order of the commissioners. From the fund so accumulated the interest coupons are paid as presented, from year to year, but the amount required to cover the principal sum of the debt is kept inviolate. And here a curious state of affairs arises. Not only should the commissioners keep the fund secure, they must make use of it that it may grow by earning.
We are reminded of the .story in the New Testament, that storehouse of facts, legend and illustration, the parable of the talents, taken from the daily lives of the Jewish people. How a man of some considerable means, going on a far and long journey, divided his wealth among several, with
the injunction that use should be made of the capital so entrusted.
Of the number accepting the trust all but one respected the conditions and using discretion and diligence gained in proportion. The last, however, having fear of the responsibility and meaning only to keep himself safe, hid in the ground the money entrusted to him. It earned nothing, while secure, and his proffer of the trust back without interest gained for him the reward that his lack of commercial acumen deserved. In this way, as the sinking fund is entrusted to the commission, it is a plain duty, not only to guard but to use. As the fund accumulates it may be, indeed often is, loaned to the municipality to be used again, to be paid for that use, and thus the fund devised to secure the payment of interest and of principal becomes the means of raising and earning the money to form itself.