Francis Wrigley Hirst.

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property he maintained was valued at about 35 per cent of its
actual worth, and consequently the tax rate was really only
I per cent instead of 2.87." He pointed to the example of great
cities, such as St. Louis and Chicago, which had overstepped
their debt limits. The council protested, but the legislature
raised the limit to 7 per cent, with the result that between 1896
and 1900 the total debt rose from $10,675,000 to $14,503,000.

In 1877 the mayor of Cleveland had attributed the growth
of debt partly to the partisan (or "spoils") system of adminis-
tration, and partly to the government by "boards," which led
to large annual deficits, partly again to a vague notion that the
"special" debt need not be taken into account. Since 1902 the
debt of Cleveland and other cities in Ohio has been governed
by the Longworth bond act, which laid down the main condi-
tions under which new loans might be contracted. Interest
must not exceed 6 per cent, but there is no limit to the period
the bonds may run. A loan issue must be authorized by a
two-thirds vote of the council, and if the amount issued in any
year exceeds i per cent of the valuation it must be submitted
to a popular vote.

The total debt of Ohio cities must not exceed 4 per cent of
the valuation, unless an extension is authorized by popular
vote, in which case the maximum is fixed at 8 per cent. Bonds
to be paid by special assessment are not included, nor, according

«P. 209.
82300° — ID ID 141



National Monetary Commission

to a decision of the Supreme Court in 1906, are debts contracted
before the act. Also waterworks bonds and sinking funds have
recently been excluded. Nevertheless, Cleveland has reached
the limit which requires submission to the popular vote. In
October, 1906, the people rejected proposals for the is^ue of
$2,300,000 worth of new bonds. In addition to the powers
under this act, the council may raise temporary loans for sani-
tary purposes, and can issue "deficiency bonds" to meet a
revenue deficit. These, however, must not exceed i per cent
of the valuation, and popular consent is required.

In 1873 more than one-third of the city taxes went to meet
the interest on the debt, and throughout the decade the per
capita expenditure of interest was heavy, the highest point
being $2.73 from 1876 to 1880. From 1896 to 1900 it was $1.66,
but had increased to $1.95 in 1904. This is larger than the
average for Chicago, Philadelphia, St. Louis, Detroit, or Mil-
waukee — cities of the same class as Cleveland — and the only
city in Ohio where the burden per capita is as heavy is Cincin-
nati. But the credit of Cleveland (as of other American cities)
has risen steadily. Before 1875 it was 7 per cent, in 1875 some
bonds were issued at 6 per cent and sold slightly under par, the
true rate being 634 P^r cent. The next year 6 per cent bonds
sold at a premium, and after 1878 no further 7 per cent bonds
were issued. From 1887 to 1891 the general rate was 5 per
cent. Some 4 per cent bonds sold at par in 1881, and since
1893 nearly all issues have been at that rate, $1,000,000 of water-
works bonds in 1902 selling at a premium, which made their
real yield less than 3.3 per cent. Under a recent act the city of
Cleveland must offer all its bonds at par to the sinking-fund
commission, and can then offer them for public sale to the
highest bidder, after the sale has been advertised thirty days in
advance. They can not be sold privately until this public offer
has been made. Before 1 877 all bonds were sold in the eastern



142



The Credit of Nations

markets by the personal exertions of the treasurer. Although
various sinking funds have been initiated since 1862, and their
existence may have helped to secure stability in the city's
credit, yet the steady increase of net indebtedness shows that
their operation has not been very effective.

Net indebtedness of Cleveland.

184 1 $20, 000

1 865 410, 000

1870 I, 764,000

1875 3, 189,000

1 880 6,520, 000

1885 ^ 5. 671, 000

1890 6, 983, 000

1895 8, 930, 000

1900 12, 082, 000

1906 24, 274, 000

The existing debt is divided under the following main heads:
General government, protection to life and property, health and
sanitation, highways, charities and corrections, education,
recreation, municipal industries, temporary loans, assets of
sinking funds. Of these in 1906 the most important items were,
health, $6,825,000; highways, $6,952,000; and municipal in-
dustries (waterworks, cemeteries, and market), $4,476,000.

From this more detailed illustration we may turn to glance
briefly at the debt and credit of some other important munici-
paUties — Boston and Philadelphia in the East, Chicago and Kan-
sas in the Middle West, and Richmond, Va., in the vSouth. For
the information received I am indebted to the officials of the re-
spective cities. In general, it may be noted that the high price
of American municipal issues is due partly to the restrictions
on borrowing imposed on their cities by the various States, so
that as a rule the total debt can not exceed an amount equal to
a small proportion of the valuation made for the city taxes.



143



National Monetary Commission

(A) RESTRICTIONS ON MUNICIPAL BORROWING.

In Philadelphia the debt must not at any time exceed 7 per
cent of the valuation, and in any one year no new debt can be
incurred to an amount exceeding 2 per cent of the valuation
without a consenting vote of the citizens. The debt of Boston
must not exceed 2% per cent of the average valuation for three
years. In practice these restrictions are not rigid, as various
classes of debt — waterworks debt, for example — are considered
to be of a special character, and are omitted in reckoning the
limit. In Richmond the limit of the total debt is considerably
higher — 18 per cent of the assessed value of the taxable estate
of the city — and there is still a comfortable margin between
the actual and the possible indebtedness.

(B) AMOUNT AND GROWTH OF THE DEBT.

The statistics for Boston are the most complete, dating back
to its incorporation in 1822. Before 1875 the city annexed sev-
eral smaller municipalities.



1822
1827
1830
1840
1850
i860
1870
1880
1890
1900



Gross funded
debt.



Sioo, 000

I. on, 775

891.930

I, 698, 232

6, I9S, 144

8,491,599

18.687,350

42,030, 125

53.930,095

86, 996, 978



Sinking
funds, etc.



$299,096

228,028

171, 439

310. 259

967, 175

9, 215,831

14, 188, 021

22, 854, 262

28, 663, 641



Net debt.



$100, 000

712, 678

663, 902

1.526. 793

5,884,884

7.524, 424

9,471,519

27, 842, 104

31.075.832

58,333.337



The total debt on January i , 1908, for the city and county, in-
cluding sinking funds, was $103,732,906, but this included
$60,211, 900 of debt outside the limit and $14,456,366 of sinking
funds devoted to the redemption of this debt. When these are



144



T h



r e



d i t of Nations



deducted the remainder, $29,064,639, is well under the statutory
limit — 2}i per cent of the valuation, which in 1908 amounted to
$31,945,756.

The debt of Philadelphia (which has been defined by the su-
preme court of Pennsylvania as the authorized debt less the
amount of city certificates purchased and uncanceled in the
sinking fund) has grown as follows during the last ten years :



1904
1909



Amount au-
thorized, 7 per
cent of valua-
tion.



?6o, 516, 122
81,345, 181
92, 210,443



Gross funded
debt.



$Si, 241, 295
S6,337. 245
88,770,220



Sinking fund.



516,078.000 I $35,163,295
4,995.575 51.341.670
9, 135, 200 I 79.635,020



It is apparent that the margin between actual and possible
indebtedness has shrunk rather severely of late. But the
assessed valuation reported for taxation rose from $864,000,000
in 1899 to $1,317,000,000 in 1909. In Richmond the figures for
the last thirty years are these :



Population.



Bonded debt.



Floating debt.



Rates of
interest.



1880.
1890-
1900.
1909-



63, 600



85.050
a 1 14, oso



$4,478, 245
5,928,015
7,227,447
9, 282. 758



$2, 162
180, 000



Per cent.
6,8.

8,6,5,4.
8.6.5,4.
8,6,5,4, 3 M.



a Local census in 1907.

The salable assets of the municipality, which were only
$4,023,513 in 1880, are now estimated at $14,701,627, while the
limit of the bonded debt under the city charter (18 per cent of
the valuation) is now $10,340,906. The city has no floating
debt. All accounts are closed at the end of each financial year.
A new tax assessment is made every five years.



145



National Monetary Commission

(C) ISSUE AND SALE OF BONDS — PRICE AND RATES OF INTEREST.

In Boston (of which the secretary to the statistics department
remarks "the credit of the city is good and always has been")
the municipal bonds are little dealt in on the stock exchange,
being usually taken by a S5^ndicate of bankers w^ho sell them
to their own customers. Within the last twenty-seven years
the city treasurer has three times sold bonds over the counter,
when the money market has been unsettled. The last occasion
was in 1907. Annual loans are made in anticipation of taxes
and the city pays the ruling rate of interest, or a little less, for
such loans. They are almost always paid off within the fiscal
year in which they are raised.

The average annual rate of interest on the funded debt is
now about 3.68; on the total debt it is about 3.7. The whole
interest charge in 1908 was $3,836,646. The highest prices
realized at the issue of bonds since January, 1874, have been:



Bond issue.



1896
1900



$200,000, 4 percents, for 30 years at

$100,000, 4 percents, for 40 years at ...
$700,000, 3 J-i percents, for 40 years at.



SiiS- 437
114.330
108.817



In 1906 three issues at twenty, thirty, and forty years at 4
per cent all reahzed 106.44. No stock during the period 1874-
1909 has been issued below par, though during 1 903-1906 3^
percents w^ere issued just above par. In 1906- 1908 the 4 per
cent issues realized loi and over.

The bonds of Philadelphia are as a rule sold privately only
at the counters of the leading bankers after they have been
awarded by the mayor of the city in accordance with the bids
of the said bankers. This award is always to the highest and
most responsible bidder, after due advertisement of the loan
has been made. The following prices have been paid during

146



T h



C



r e



d i t of Nation



the last decade by the sinking fund, for bonds issued by the
city, and may be taken as a fair average:



Year.


Issue.


Price.


1898


3 per cent


i5i03. 270

100. 583
104. 400

101. 178
105. 000
lOI. 036
104. 299
104. 299
103- S90
103. 250




(3 per cent

10


1899


[3 'A per cent


1900


3 per cent


1902


3 yi per cent. ,


1904


3 }i per cent .


190S


4 per cent


1907


4 per cent.


1908


4 per cent


1909


4 per cent .







The decline in credit of the last ten years reflects the inter-
national movement, and is less than that of New York City.

Most of the city bonds of Chicago are taken by investors, and
few are bought and sold on speculation. They are seldom
listed on the stock exchange. In the crisis year of 1907 some
difficulty was experienced in disposing of the bonds, but this
was felt in all cities — New York raising its rates to 4^ per
cent. Between 1893 and 1908 issues were made at from 3>^
to 4>^ per cent, the price varying from par to 106. In 1898
two issues of 3>^ per cent stock were floated at over 106.

Official statement of bonds sold by the city of Chicago from i8gj to 1908,

inclusive.



Date of issue.



Kind.



Sale.



Premium.



July, 1893
Jan., 1894

July, 1894



July, 1895

Jan., 1898
July, 1896



River

Municipal

Water

Sewerage

River improvement

Water

River.

Water

Tunnel

do



Per cent.
4
4



4

3A

4



jSSoo, 000

60, 000

130, 000

785, 000

346, 000

446, 000

I, 263, 000

I, 485, 000

100, 000

100, 000



Par.
$103.26
103. 26
102. 83
102. 83
103. 26
104. 64
104. 64
103. 66
103. 78



147



National Monetary Commission

Official statement of bonds sold by the city of Chicago from 1893 to 1908,
inclusive — Continued.



Date of issue.



Kind.



Rate.



Amount.



Sale.



July.

Oct..

Jan.,

July.

Sept.,

Jan.,

July,

July.

July,
Apr.,
May,
July,
Aug..
Sept..
Oct..
Nov.,

Dec,
July.



1899
1899
1899
1904
1904
1 90s

1906
1908
1908
1908
1908
1908
1908
1908

1908
1909



Tunnel

do

do

Municipal

do

Judgment funding

Permanent improvement -
General corporate pur-
poses

General corporate

do -

Judgment funding

General corporate

Judgment funding

General corporate

do

Judgment funding

General corporate

do



do

Judgment funding.



Per cent.
i%

3H
3H
3H
4



4

4

4J4

4J4

4

4

4

4

4

4

4

4

4



$98,000

100, 000

98, 000

618, 000

228, 000

5, 250,000

3, 000, 000

2, 000, 000
I, 400, 000
I, 000, 000

300, 000
I, 000, 000

IIS, 000
I, 000, 000

SCO, 000
85, 000

750, 000

100, 000
I, soo, 000

200, 000



S103.66
103. 28
I04- 41
106. 07
106. 1 1



$6, 600. 00
so, 197.00

II, 620. 00

5, 614. 00

28, 127. 00

8. 439- 00

Par.

Par.

Par.

3, 150. 00

535- so

6, 521. 00

I, 106. 10

10, 216. 66

I, S40. 00



The population of Kansas City at the beginning of the year
1910 was estimated at about 375,000, and the debt of the city
was $4,000,000. The city's credit has only fluctuated between
4 and \Y2 per cent during the last twenty years. "Bond
brokers and trust companies," writes the city clerk, "usually
buy our bonds at a premium of 4 to 7 per cent." Kansas City
has no means of borrowing for temporary deficiencies. It
"must live within its current income."

After the civil war the city of Richmond 8 per cent bonds
were as low as 80, but in recent years Richmond Fours have
touched \ob]/%. That they are little affected by panics is shown
by the fact that in the worst months of 1907 they sold at par
less Y2 per cent brokerage. They are sold chiefly in New York,
Baltimore, and Richmond. For many years all moneys to meet



148



The Credit of Nations

temporary deficiencies have been supplied by local banks,'* the
rate of interest not exceeding 6 per cent and usually being 4
per cent.

For many years Richmond's bonds have been considered good
investment securities. By refunding at 4 per cent the city has
saved $25,000 in annual interest; the charge was $380,383 in
1900 and $354,972 in 1908, although the debt had increased by
$1,250,000. Of the whole debt ($9,282,758) more than
$7,000,000 is in 4 per cent bonds, and only $184,000 in 8 per
cent. Part of the debt matures each year between 1909 and
1942.

(D) MUNICIPAL SINKING FUNDS.

The arrangement for municipal debt redemption is generally
under the control of sinking fund commissioners. In Boston a
certain percentage is required by law to be raised for the redemp-
tion of outstanding loans at maturity. In the fiscal year 1907-8
(ending January 31) the various sinking funds of this city
amounted to $31,734,763, and during the year $2,611,700 of
debt was paid and canceled, while $5,249,000 of new issues were
created; but of these $3,447,800 was taken at par by the com-
missioners of the sinking funds, and of various trust funds held
by the city.

The city of Richmond has also sinking fund commissioners,
and by an ordinance of the council i^ P^r ^^^rit of the entire
gross bonded debt must be appropriated to the sinking fund.
By a law of the State of Virginia, 1903, Richmond was empow-
ered to issue bonds to redeem outstanding bonds. They were
to be sold to the highest bidder for cash, not under par, with
interest at not more than 6 per cent. The existing sinking fund
in 1909 was $1,723,361. In Philadelphia the sinking fund in
1909 stood at $9,135,000.

a Another method of meeting temporary deficiencies is that pursued by
Springfield and other cities, which borrow on short-term bonds usually
bearing interest at 6 per cent.

149



The Trade Balance of the
United States



GEORGE PAISH

Editor of The Statist



151



THE TRADE BALANCE OF THE
UNITED STATES.



I. — On Trade Balances.

The term "trade balance" is generally used for the
purpose of indicating the excess value of a country's
exports of merchandise over the value of its imports
of merchandise or the excess value of a country's im-
ports of merchandise over the value of its exports of
merchandise. In monetary circles the term is employed
to denote the ability of a country to import supplies of the
precious metals. If the rate of exchange of one country
upon other countries is at the level which permits of gold
imports, it is said that the balance of trade is in favor of
the country importing the gold. On the other hand, if the
rate of exchange of any country is at a level which ad-
mits of gold exports, the balance of trade is said to be
against the country exporting the gold. In the sixteenth,
seventeenth, and eighteenth centuries a favorable trade
balance was a matter of great concern to statesmen and
to financiers. At that time it was supposed that any
country which imported goods of greater value than the
goods it exported would be seriously injured by having to
make payment in the precious metals for the difference
between the value of the goods imported and the value of
the goods exported, and that any country which persisted



153



National Monetary Commission

in purchasing goods of greater value than the goods it ex-
ported would be totally drained of its stock of the pre-
cious metals and would be ruined. The theory of the
supreme importance of a balance of exports over imports
was known as the "Mercantile system." Efforts to se-
cure favorable trade balances led to the passage of many
laws for restricting imports and for stimulating exports.
As commerce developed and international banking ad-
vanced it was recognized that a nation could under cer-
tain circumstances purchase goods of a greater aggregate
value than it exported without sustaining any drain upon
its stock of the precious metals or suffering any inconven-
ience whatsoever, and in recent time no one has paid any
great amount of attention to the question of the trade
balance other than for the purpose of ascertaining the fac-
tors w^hich caused the imports of certain countries largely
to exceed their exports or of discovering the reason for
the exports of certain countries largely exceeding their
imports.

The great change in the theory of commerce that has
taken place in modern times is due to the recognition of
the fact that the volume of trade which any .country
enjoys quickly adjusts itself to the needs of that country,
and that the effect of a sudden disturbing influence to
trade — such as a crop failure, labor troubles, etc., which
temporarily reduce a nation's exporting power — can be
got over by financial operations in the great international
money markets, and that excessive drains of the precious
metals are not now to be apprehended. Experience has
shown that apart from sudden catastrophes the foreign



154



Trade Balance of United States

trade of every country is of a very elastic character,
that the volume of imports or of exports quickly responds
to the necessities of the case, and that no country can have
an adverse balance of trade except for a short time and as
a consequence of some unexpected disaster which tem-
porarily diminishes its power to make payment for goods
imported. Even at such times countries in good credit
have no difficulty in borrowing temporarily or perma-
nently the sums required to settle the balance due to other
countries for commodities purchased or obligations
incurred prior to the disturbing event — a process which
averts any excessive denudation of the stock of the
precious metals possessed by the country experiencing the
disaster.

II. — Capital Investments and Trade Balances.

The nations of the world may roughly be divided into
two classes. In Class I are the countries whose imports
exceed their exports, and in Class II are the countries
whose exports exceed their imports. Generally speaking,
the nations in Class I are the lending countries; those in
Class II are the borrowing countries. The lending country
has to receive payment for two things, (i) for the goods
it exports and (2) for the interest upon the capital which
it has in former years supplied to other countries. Exclud-
ing all other considerations the imports of a country
which has placed capital in other lands must necessarily
exceed the value of its exports to the extent of the pro-
duce it receives from other countries in payment of the
interest upon its capital. On the other hand, the country



155



National Monetary Commission

that has borrowed capital from other countries, other
factors being excluded, must export a larger amount of
produce than it imports in order to pay, first, for the
produce imported and, second, for the interest upon the
capital it has previously borrowed from other nations.
Hence the exports of the borrowing countries exceed their
imports and the imports of the lending countries exceed
their exports.

The situation is not usually confined to the mere re-
ceipt by a lending country of interest upon capital pre-
viously lent or the mere payment of interest by a borrow-
ing country upon capital previously borrowed, and it will
be worth while briefly to indicate the normal course of
the trade balance, first, of a country which invests capital
in other lands, and, secondly, of a country which borrows
capital from other countries. Were there no interfering
conditions the value of the goods, in which I include the
precious metals, imported by a country must exactly bal-
ance the value of the goods exported in exchange. But
when a country commences to invest capital in other
lands its exports begin to exceed its imports. Capital in-
vestment by one country in other lands means that that
country is willing to sell goods to other lands and to take
payment in securities of one class or another. Should
the capital investments extend over only one year the
exports of the lending country in the year in which
the loan is made would exceed its imports to the extent
of the sum invested. Should no additional investments
be made, the imports of the lending country in the fol-
lowing years would exceed its exports to the extent of



156



Trade Balance of United States

the interest or dividends it received upon the capital
invested. As time goes on, and the total amount of capi-
tal invested by it in other lands attains to larger and
larger figures, the annual sum received as interest upon
the capital embarked rivSes correspondingly. In this case
the balance of exports over imports resulting from the in
vestment of capital becomes smaller and smaller in conse-
quence of the increasing sums received per contra from
the interest upon the capital previously invested. After
a time the annual sums which a lending country receives
for interest exceeds the additional sums it lends in each
year, and in spite of its continued investment of capital in
other lands its imports exceed its exports. For the clearer
understanding of the matter I set out supposititious
statements to show how investments of capital and the
receipt of interest affect the trade balance of a country —

1. That neither lends nor borrows capital.

2. That is beginning to invest capital in other lands.

3. That has in the past invested capital in other lands
but has temporarily ceased to make new investments.

4. That has both invested capital in other lands in the
past and is still investing annual sums equal to the interest
received on former investments.

5. That has in the past invested capital in other lands
and is investing fresh amounts equal to less than the
interest received.

I . A country that neither lends nor borrows and which
has an exchange trade of $500,000,000:

Exports fcoo, 000, 000

Imports 500, 000, 000

Balance - - - Nil.

82300"— 10 II 157



National Monetary Commission

2. A country beginning to invest capital in other lands
and which places $100,000,000 of capital abroad in a year:

Exports $600, 000, 000

Imports 500, 000, 000

Balance of exports over imports « lOO, ooo, coo

3. A country that has invested abroad in the past a

sufficient amount of capital to yield an income of $100,-

000,000 per annum from interest and which temporarily

ceases to make fresh investments of capital:

Exports $500, 000, 000


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Online LibraryFrancis Wrigley HirstThe credit of nations → online text (page 11 of 16)