Other People's Money, and How the Bankers Use It

by Louis Dembitz Brandeis

Such success as has already been attained is largely due to the unpaid educational work of leading progressive newspapers. But the educational work to be done must not be confined to teaching “the people”—the buyers of the bonds. Municipal officials and legislators have quite as much to learn. They must, first of all, study salesmanship. Selling bonds to the people is a new art, still undeveloped. The general problems have not yet been worked out. And besides these problems common to all states and cities, there will be, in nearly every community, local problems which must be solved, and local difficulties which must be overcome. The proper solution even of the general problems must take considerable time. There will have to be many experiments made; and doubtless there will be many failures. Every great distributor of merchandise knows the obstacles which he had to overcome before success was attained; and the large sums that had to be invested in opening and preparing a market. Individual concerns have spent millions in wise publicity; and have ultimately reaped immense profits when the market was won. Cities must take their lessons from these great distributors. Cities must be ready to study the problems and to spend prudently for proper publicity work. It might, in the end, prove an economy, even to allow, on particular issues, where necessary, a somewhat higher interest rate than bankers would exact, if thereby a direct market for bonds could be secured. Future operations would yield large economies. And the obtaining of a direct market for city bonds is growing ever more important, because of the huge increase in loans which must attend the constant expansion of municipal functions. In 1898 the new municipal issues aggregated $103,084,793; in 1912, $380,810,287.

SAVINGS BANKS AS CUSTOMERS

In New York, Massachusetts and the other sixteen states where a system of purely mutual savings banks is general, it is possible, with a little organization, to develop an important market for the direct purchaser of bonds. The bonds issued by Massachusetts cities and towns have averaged recently about $15,000,000 a year, and those of the state about $3,000,000. The 194 Massachusetts savings banks, with aggregate assets of $902,105,755.94, held on October 31, 1912, $90,536,581.32 in bonds and notes of states and municipalities. Of this sum about $60,000,000 are invested in bonds and notes of Massachusetts cities and towns, and about $8,000,000 in state issues. The deposits in the savings banks are increasing at the rate of over $30,000,000 a year. Massachusetts state and municipal bonds have, within a few years, come to be issued tax exempt in the hands of the holder, whereas other classes of bonds usually held by savings banks are subject to a tax of one-half of one per cent. of the market value. Massachusetts savings banks, therefore, will to an increasing extent, select Massachusetts municipal issues for high-grade bond investments. Certainly Massachusetts cities and towns might, with the coöperation of the Commonwealth, easily develop a “home market” for “over-the-counter” bond business with the savings banks. And the savings banks of other states offer similar opportunities to their municipalities.

COÖPERATION

Bankers obtained their power through combination. Why should not cities and states by means of coöperation free themselves from the bankers? For by coöperation between the cities and the state, the direct marketing of municipal bonds could be greatly facilitated.

Massachusetts has 33 cities, each with a population of over 12,000 persons; 71 towns each with a population of over 5,000; and 250 towns each with a population of less than 5,000. Three hundred and eight of these municipalities now have funded indebtedness outstanding. The aggregate net indebtedness is about $180,000,000. Every year about $15,000,000 of bonds and notes are issued by the Massachusetts cities and towns for the purpose of meeting new requirements and refunding old indebtedness. If these municipalities would coöperate in marketing securities, the market for the bonds of each municipality would be widened; and there would exist also a common market for Massachusetts municipal securities which would be usually well supplied, would receive proper publicity and would attract investors. Successful merchandising obviously involves carrying an adequate, well-assorted stock. If every city acts alone, in endeavoring to market its bonds direct, the city’s bond-selling activity will necessarily be sporadic. Its ability to supply the investor will be limited by its own necessities for money. The market will also be limited to the bonds of the particular municipality. But if a state and its cities should coöperate, there could be developed a continuous and broad market for the sale of bonds “over-the-counter.” The joint selling agency of over three hundred municipalities,—as in Massachusetts—would naturally have a constant supply of assorted bonds and notes which could be had in as small amounts as the investor might want to buy them. It would be a simple matter to establish such a joint selling agency by which municipalities, under proper regulation of, and aid from the state, would coöperate.

And coöperation among the cities and with the state might serve in another important respect. These 354 Massachusetts municipalities carry in the aggregate large bank balances. Sometimes the balance carried by a city represents unexpended revenues; sometimes unexpended proceeds of loans. On these balances they usually receive from the banks 2 per cent. interest. The balances of municipalities vary like those of other depositors; one having idle funds, when another is in need. Why should not all of these cities and towns coöperate, making, say, the State their common banker, and supply each other with funds as farmers and laborers coöperate through credit-unions? Then cities would get, instead of 2 per cent. on their balances, all their money was worth.

The Commonwealth of Massachusetts holds now in its sinking and other funds nearly $30,000,000 of Massachusetts municipal securities, constituting nearly three-fourths of all securities held in these funds. Its annual purchases aggregate nearly $4,000,000. Its purchases direct from cities and towns have already exceeded $1,000,000 this year. It would be but a simple extension of the state’s function to coöperate, as indicated, in a joint, Municipal Bond Selling Agency and Credit Union. It would be a distinct advance in the efficiency of state and municipal financing; and what is even more important, a long step toward the emancipation of the people from banker-control.

CORPORATE SELF-HELP

Strong corporations with established reputations, locally or nationally, could emancipate themselves from the banker in a similar manner. Public-service corporations in some of our leading cities could easily establish “over-the-counter” home markets for their bonds; and would be greatly aided in this by the supervision now being exercised by some state commissions over the issue of securities by such corporations. Such corporations would gain thereby not only in freedom from banker-control and exactions, but in the winning of valuable local support. The investor’s money would be followed by his sympathy. In things economic, as well as in things political, wisdom and safety lie in direct appeals to the people.