8 
 
 BONt) HOUSE 
 
 itiiiiiiiiii 
 
 CHi^MBER 
 
 i'i'li 
 
 ,.LJ 
 
 
 |l|ill<(li|Httlliltltl>IMt 
 
 IlllllitltttllllUII 
 
 :M:it:i(ii!i;titill!illllllli;iiiiialilliiiiiMi..iMM
 
 SITY OF CALIFORNIA 
 S ANGELES 
 
 THE GIFT OF 
 
 MAY TREAT MORRISON 
 
 IN MEMORY OF 
 ALEXANDER F MORRISON 
 
 J
 
 • » 
 
 THE WORK 
 
 • i» ••1*1 
 
 OF THE 
 
 BOND HOUSE 
 
 BY 
 
 LAWRENCE CHAMBERLAIN 
 
 WITH KOUNTZE BROTHERS, BANKERS, NeW YoRK 
 AUTHOR or 
 
 'THE PRINCIPLES OF BOND INVESTMENT" 
 
 NEW YORK 
 MOODY'S MAGAZINE BOOK DEPARTMENT 
 
 1912
 
 « ■ . i . 
 • « ' "• • 
 I 'if*. 
 
 Copyright, 1912, by 
 A . W. F ER RI N 
 
 
 »•• • * •
 
 4^5-/ 
 PREFACE 
 
 ABOUT eighteen months ago IMr. Ferrin, 
 the proprietor of Moody's Magazine, 
 requested me to write an article for his 
 publication summarizing the services to the com- 
 munity that are performed by the American bond 
 houses. It was his intention that men associated 
 with other representative houses should write 
 monographs on each separate bond house func- 
 tion. Their articles were to be elaborations of 
 the several kinds of service that I had described 
 in brief. 
 
 Whether because of engagements or reticence, 
 the specialists in the various departments of the 
 business, after reading my contribution in proof, 
 suggested that the interest of a comprehensive 
 and uniform presentation would best be served 
 if I undertook the entire series, which I did. 
 This is the explanation of the unusual form 
 this book has taken. 
 
 While writing the articles I had no thought 
 of making a book from them; but again I have 
 been governed by suggestions from the bond 
 houses. Certain of them wished the text in con- 
 venient form for distribution in (juantity among 
 their clients. If the articles bound arc of some 
 
 3 
 
 431741
 
 4 PREFACE 
 
 value for this purpose they may be of interest 
 to the public in general ; therefore this book. 
 
 These circumstances explain why a number of 
 phrases, and perhaps even sentences and para- 
 graphs, have been repeated in the following 
 chapters, or have been taken from my book, The 
 Principles of Bond Investment, that was pub- 
 lished last year. Indeed the introductory chap- 
 ter of this series was printed in that work. 
 
 I trust that I have faithfully presented bond 
 house conditions as they are. If I have erred 
 on the side of idealism, perhaps these pages will 
 lead the public to require and a greater number 
 of the investment houses to offer the quality of 
 service I have described. 
 
 Lawrence Chamberlain. 
 Montclair, N. J., September 1, 1912.
 
 CONTENTS 
 
 CHAPTER PAGE 
 
 I. The Functions of the Bond Houses 9 
 
 The Importance of the Bond Business — 
 Ignorance of the Bond Business — Prev- 
 alence of Bond Buying in New Eng- 
 land — Bankers vs. Brokers — The Functions 
 of the Bond Houses — The Purchasing 
 Function — The Advisory Function — The 
 Banking Function — The Bond Houses as 
 Fiscal Agents — The Selling Function — The 
 Protective Function. 
 
 II. The Purchasing Function 28 
 
 Bond Investment as a Science — Laboratory 
 Methods — Special Counsel — One Man Buy- 
 ing — Financial Report Agencies — Railroads 
 as Scientific Financiers — Buying to Satisfy 
 Clients — The Professional Standard — The 
 Effect of Interest Rates on Bond Buying — 
 Stock Bonuses. 
 
 III. Buying Municipals 41 
 
 The Ten Investment Elements — The Prin- 
 cipal Function of the Bond Houses — Muni- 
 cipal Buying — The Buying of "Legals" — 
 The Bond Attorney — The Selling Cost and 
 Price of Legals — Carrying Charges — Un- 
 intelligent Proposals for Municipals — 
 Municipal Bond Bureaus — General Market 
 Municipals — Municipal Defaults.
 
 6 CONTENTS 
 
 CHAPTER PAGE 
 
 IV. Buying Railroad Bonds 56 
 
 Common Characteristics of Railroad and 
 Municipal Bonds — Railroad Bond Under- 
 writing — Underwriting by Retail Houses — 
 The Profits of Underwriting — A Penn- 
 sylvania Railroad Flotation — Railroad 
 Blanket Refunding Issues — Equipment 
 Bonds — Railroad Bond Investment — Pro- 
 prietorship and Management — Community 
 of Interest — Management — Physical Char- 
 acteristics — Earning Power and Capitaliza- 
 tion. 
 
 V. Buying Corporation Bonds 74 
 
 What Corporation Bonds Are — Classifica- 
 tion of Bonds — Corporation Bond Invest- 
 ment Principles — Knowing the Business of 
 the Corporation — Water Companies — Gas 
 Companies — Street Railways — The Income 
 of Public Service Corporations — Bond 
 Houses as Specialists — The Newness of 
 Corporation Bonds — Industrial Issues — 
 The Competition for Public Utility Bonds 
 — The Preference for Public UtiHties — The 
 Profit in Corporation Bonds — Costly Dis- 
 tribution — Construction Propositions — The 
 Bond Houses as Reorganizers. 
 
 VI. The Advisory Function 91 
 
 Advising a Woman — The Ethics of Sales- 
 manship — Financial Jackals — English Sell- 
 ing Methods — Financial Advisory Systems
 
 CONTENTS 
 
 CHAPTER PAGE 
 
 — Bond Advertising — General Publicity — 
 Advertising Investment Principles — Special 
 Circulars — Investment by Correspondence. 
 
 VII. The Protective and Banking Functions.. 104 
 
 The Mercantile vs. the Protective Policy — 
 The Spirit of Trusteeship — Bond Guaran- 
 ty — The Cost of the Guaranty — The Pro- 
 tective Function Applied to Marketability — 
 The Cost to Clients of Artificial Market- 
 ability — Bonds as Collateral — The Banking 
 Functions of the Bond Houses — The Cost 
 to Bond Houses of Artificial Marketability 
 — The Bond Houses as Banks of Deposit — 
 The Protective Function Applied to all 
 Bond Qualities — Protecting Security — As- 
 suming Losses — Protection in Reorganiza- 
 tion. 
 
 VIII. Selling Bonds — The Banker's Viewpoint. 119 
 
 The Development of Bond Selling — The 
 Trouble with Bond Selling — The Cost of 
 Selling — The Profit in Specialty Selling — 
 Failures from Competition and Miscarriage 
 of Issues — Selling Economies : Consolida- 
 tion of Houses — Local Representation — 
 Bank Representation — The Economy of 
 Selling Collateral Trusts — Consolidation of 
 Issues not Houses — The Selling Depart- 
 ment of an Ideal Bond House — The Sales 
 Manager — Territorial Managers — The Road 
 Men — College Men as Salesmen — The 
 Training of Green Men.
 
 8 CONTENTS 
 
 CHAPTER PAGE 
 
 IX. Selling Bonds — The Investor's Viewpoint 137 
 
 The Strength of the Investment Demand — 
 Savings Banks as Bond Buyers — The 
 Volume of Municipal Bond Sales— Annual 
 Listings on the Exchange— The Obscure 
 Issues — The Investor Should Know His 
 Own Requirements — Complex Nature of 
 Security — Complex Nature of Market- 
 ability — Second Consideration: Form of 
 the Investment — Third Consideration : 
 Proper Type of Bond — Fourth Considera- 
 tion : The Proper Bond — Choosing a Bond 
 House. 
 
 Index 150
 
 CHAPTER I. 
 
 THE FUNCTIONS OF THE BOND 
 HOUSES. 
 
 1. The Importance of the Bond Business. 
 
 That part of the pubHc which does not buy- 
 bonds has a very meagre idea of the importance 
 and value to the community of the bond busi- 
 ness. It is not necessary to resort to many 
 figures. It is necessary only to realize that 
 bonds are the chief resource of our govern- 
 ment in times of war, of our states and muni- 
 cipalities in furtherance of public works and 
 buildings, of our railroads, of almost all public 
 service corporations and many industrial cor- 
 porations. In round numbers $1,500,000,000 
 of American bonds are marketed every year 
 and almost all of them pass through the hands 
 of American bond houses. Even those issues 
 of which the ultimate nominal market is the 
 New York Stock Exchange are first offered 
 and sponsored by dealers in bonds. In vol- 
 ume and number the transactions cm the ex- 
 change are only a mere fracti(jn of those in 
 direct merchandising. Of this $1,500,000,000 
 of bonds one-third is absorbed by insurance 
 companies, savings banks, trust companies and 
 other banks (in approximately equal amounts) 
 
 9
 
 10 FUNCTIONS OF BOND HOUSES 
 
 and the remaining two-thirds by corporations 
 (for reserve, etc.) and by private investors in 
 this country and abroad. 
 
 2. Ignorance of the Bond Business. In view 
 of the vast importance of the bond business 
 in the economic life of the country, it is some- 
 what surprising that so little is known about 
 bonds and the bond business. No one who 
 has had experience in selling bonds will deny 
 that the "average man" who has accumulated 
 a surplus is far more conversant with stocks 
 and the basic principles of stock speculation 
 than with bonds and the principles of bond in- 
 vestment. The reason, however, is not far 
 to seek. While human nature remains what 
 it is^ the element of chance, with its exhilara- 
 ting risk, will be more attractive to men than 
 the element of approximate certainty that is ar- 
 rived at by painstaking, uninspired care. Since 
 the stock market is more interesting and prob- 
 lematical than the bond market to the majority 
 of readers, journalism, in the course of its duty 
 to purvey to the majority, perennially fills its 
 financial pages with time-honored summaries 
 of yesterday's exchange doings, to-day's gos- 
 sip and circumspect conjectures as to the mor- 
 row. 
 
 3. Prevalence of Bond Buying in New 
 England. Although, relatively speaking, the 
 number of people at all conversant with bonds
 
 FUNCTIONS OF BOND HOUSES 11 
 
 is small through the country at large, it is 
 sometimes surprising to find what a large 
 proportion of the well-to-do in the North- 
 eastern States, which have been educated to 
 bond buying, have at some time or other 
 bought bonds. Every Eastern bond house has, 
 or ought to have, a list of at least 70 per cent 
 of all the bond buyers of consequence in every 
 city or town in New England. A comparison 
 of this list with a list of all persons estimated 
 to be worth $50,000 or more, whether bond 
 buyers or not, will prove the prevalence of 
 bond buying in this section. 
 
 4. Bankers vs. Brokers. The leading bank- 
 ing houses were not always primarily bond 
 houses. Two generations ago financial busi- 
 ness of all kinds was transacted by "bankers 
 and brokers." Bond selling was an incident 
 to the general banking, exchange and broker- 
 age routine. It was all done "over the coun- 
 ter." There was comparatively little implied 
 responsibility on the part of the vendor. In 
 the age of Commodore Vanderbilt, the elder 
 Gould, Fisk and Drew the "caveat emptor" 
 principle of exchange was accepted and the 
 devil took many beside the hindmost. But 
 now the speculative l)usiness in New York, 
 so far as it is reputable and consequential, is 
 done by "Members of the New York Stock 
 Exchange" and the investment business is
 
 12 FUNCTIONS OF BOND HOUSES 
 
 done by "Bankers, Dealers in Investment 
 Bonds." Of course, a house marketing invest- 
 ment securities may have a seat on one of the 
 exchanges, but it is accepted and understood 
 that the firm specializes in one or the other 
 of these two forms of business. The financial 
 atmosphere, the financial temper and the train- 
 ing necessary to superior service in either oc- 
 cupation have accomplished the severance of 
 stock dealing and bond selling. 
 
 5. The Functions of the Bond Houses. Of 
 course the primary function of the bond house 
 is to obtain capital for the creation of new en- 
 terprises or the enlargement of old. So far as 
 concerns these houses in their proper capacity 
 the capital obtained is in the form of loans. 
 The houses purchase the loans outright for 
 their own account and resell to their clients. 
 As in any sort of merchandising, there are few 
 wholesalers and many retailers. The promi- 
 nent "wholesale" bond dealers, numbering less 
 than a dozen, hitherto have confined themselves 
 for the most part (as far as American cor- 
 poration loans are concerned) to the great rail- 
 road systems. There are signs that the policy 
 will be broadened in the near future. These 
 houses have few, if any, traveling representa- 
 tives. Their sales, in this country, are effected 
 by public subscription, stimulated through ex- 
 tensive advertising, and by distribution to large
 
 FUNCTIONS OF BOND HOUSES 13 
 
 investment institutions, such as the insurance 
 companies, and to the smaller bond houses. 
 
 6. We are not justified in omitting to state 
 that the wholesale international bankers have 
 not been trained by the necessities of the per- 
 sonal relation between client and financial ad- 
 visor to accept and offer only such securities 
 as they would be willing to keep for their own 
 account. It is not necessary to illustrate, but 
 none of the typical American "retail" bond 
 houses could have the hold many of them do 
 have upon their customers if they had recom- 
 mended and sold a tithe of the bonds and stocks 
 that have been distributed by some of the in- 
 ternational bankers. Mere magnitude in the 
 capitalization of a bond house or of an obligor 
 corporation is still a thing to conjure with in 
 America. Financial history does not support the 
 view that there is safety in size, except with 
 respect to municipal corporations. Since the 
 international houses, with special spheres of 
 usefulness, do not best represent the things 
 for which the bond houses stand, and since 
 the contact of private investors is with repre- 
 sentatives of the retail houses, this work is 
 concerned only with the latter. 
 
 7. "Retail" is not a term properly descriptive 
 of the firms we have in mind, although it sug- 
 gests the relative size of the issues handled 
 and the relative volume of business. It mis-
 
 14 FUNCTIONS OF BOND HOUSES 
 
 leads if it suggests that the main business of 
 such houses is to distribute among small in- 
 vestors issues that originally were investigated 
 and purchased by "wholesale" houses. This 
 is not the case. For the most part each of 
 the American bond houses buys its issues in- 
 dependently, in accordance with its policy re- 
 garding investments, or it buys them "in joint 
 account" with other houses having similar 
 policies. These houses are autonomous ; their 
 prosperity is built on their ability to find and 
 obtain, on the one hand, funded obligations 
 that merit investment, and on the other, a 
 clientele that has faith in them and their busi- 
 ness judgment and probity. 
 
 8. The success of the bond houses in weath- 
 ering all sorts of financial storms while stock 
 exchange houses have gone down by the score, 
 is strong support of the contention that bond 
 investment rests on a basis of principles re- 
 ducible to a science. The writer knows of not 
 one important investment house that has failed 
 except through deliberate violation of perfectly 
 well-known investment principles or through 
 equally deliberate fraud. There is no business 
 in all the country that has placed itself on 
 more enduring foundations of business wis- 
 dom, or that is conducted on a higher plane of 
 business ethics. 
 
 9. Enough has been said to imply the great
 
 FUNCTIONS OF BOND HOUSES 15 
 
 services of the American bond houses. With- 
 out their help it would be impossible to finance 
 American enterprises upon equally favorable 
 terms. By their ultra-conservatism they are 
 establishing themselves in public confidence in 
 a w^ay to bring together with the greatest ex- 
 pedition and least middleman's cost the pro- 
 moters of our national resources and the credi- 
 tor classes from which must come the capital 
 necessary to municipal and industrial develop- 
 ment. They extend the boundaries of credit 
 and exercise a directive and steadying influence 
 upon enterprise. By preaching the principles 
 of bond buying in advertisements, pamphlets, 
 correspondence, and in personal interviews by 
 bond salesmen they are slowly but surely con- 
 verting the American people into a nation of 
 investors. When the rest of the country can 
 acquire, to a degree, the thrift of New Eng- 
 landers we shall be referred to the Dutch and 
 French less frequently, and our industrial 
 structure will be no longer in unstable equili- 
 brium. It will be worth while to examine in 
 greater detail the several functions these 
 houses perform. 
 
 10. The Purchasing Function. If a muni- 
 cipal loan is to be offered, the purchase is a 
 comparatively simple matter, provided the 
 municipality is well known to the fraternity. 
 Then no preliminary investigation is required ;
 
 16 FUNCTIONS OF BOND HOUSES 
 
 a bid is made for the loan at the current mar- 
 ket rates and acceptance on award is subject 
 to the approval of the bidder's attorney in all 
 respects affecting the validity of the obligation. 
 
 11. If the municipality is not well known to 
 the bidder a qualified representative will be, 
 or should be, sent to learn at first hand the 
 physical and financial condition of the city and 
 to form an estimate of its probable future 
 willingness and ability to meet its present and 
 future obligations. 
 
 12. If a corporation loan is offered probably 
 it will be submitted at the offices of the bankers 
 by a representative of the company or by a 
 promoter. If the applicant is of a social turn of 
 mind he is not likely to lack the company of 
 his kind in the ante-room. Competition, for- 
 tunately, is fairly active. 
 
 13. The first step in the process of elimi- 
 nation (there is more elimination than accept- 
 ance) is to discard the propositions of com- 
 panies that conduct a kind of business unfamil- 
 iar to the bankers. Except under unusually 
 favorable circumstances the highest grade of 
 bond houses will not purchase bonds of in- 
 dustrial corporations, mining or irrigation com- 
 panies, etc. 
 
 14. The next step is to discard loans that 
 have not a claim on property worth, under the 
 most unfavorable conditions, more than the
 
 FUNCTIONS OF BOND HOUSES 17 
 
 amount of the obligation secured. Most cor- 
 porations will bond themselves in as large a 
 sum as their bankers will permit. Loans are 
 continually being rejected because of insuffi- 
 cient equity in property values. 
 
 15. The third step is to discard those propo- 
 sitions which do not give reasonable assurance 
 of earning at all times at least 50 per cent more 
 than all fixed charges, after making extremely 
 liberal estimates for depreciation and future 
 increased operating expenses. 
 
 16. The fourth step is to decline loans to 
 companies conducted by men or with methods 
 that do not meet with approval. 
 
 If the banking house is satisfied by inter- 
 view and correspondence in matters of the 
 above nature, and if a suitable price can be 
 agreed upon, then engineers and accountants 
 may be sent to the plant and offices to make 
 a thorough examination ; and the members of 
 the firm, with counsel, meet officers of the com- 
 pany and their attorneys to settle the matters 
 of form. On acceptance of an issue a careful 
 banking house may demand representation on 
 the directorate of the company until such time 
 as the company shall have discharged its 
 bonded obligation. 
 
 17. Illustrative of the care with which prop- 
 erties are examined, the writer recently had 
 occasion to inspect an interurban line in Penn-
 
 18 FUNCTIONS OF BOND HOUSES 
 
 sylvania and incident to mileage cost of con- 
 struction inquired in jest the number of ties 
 between the terminal and a certain city some 
 miles distant. "We don't know," replied one 
 of the owners of the road, "ask your engineer, 
 
 Mr. . He has photographs of every 
 
 foot of the line and can count the ties for you, 
 but probably he has already counted them." 
 
 18. Of course there is a difference in the de- 
 gree of care exercised by various houses. The 
 ultra-conservative will not permit their names 
 to be associated with "construction proposi- 
 tions." They will consider for purchase the 
 obligations only of seasoned companies with 
 established earning power. 
 
 19. The reactionary effect of the stringent 
 requirements of bond houses is of inestimable 
 benefit to corporation finance, but its good in- 
 fluence has a wider sphere : it embraces 
 municipal corporations and municipal finance. 
 American bond houses have put municipal 
 bond buying on an entirely different plane from 
 what it was in 1875. In this they have been 
 helped by, and have helped, the development 
 of municipal bond law. In these days cities and 
 towns that have had much experience placing 
 bonds will be certain in advance of their ad- 
 vertisements for bids that the loan has been 
 issued in conformity with the exacting re- 
 quirements of the bond attorneys. Certain
 
 FUNCTIONS OF BOND HOUSES 19 
 
 strong Canadian houses command such respect 
 in their country that they have been able to 
 direct the legislation of the Western provinces 
 to the end that the Western loans may be 
 more acceptable to the investors in the Eastern 
 provinces and in England. 
 
 20. The Advisory Function. This advisory 
 and directive function, however, is more promi- 
 nently operative in bond selling than in bond 
 buying. It has its source in the statistical de- 
 partments which every house of quality must 
 maintain. It finds its chief expression, as al- 
 ready stated, in tabloid investment lessons, 
 printed in the advertising columns of newspa- 
 pers and periodicals, or with somewhat greater 
 fullness in pamphlets and monographs. If a 
 prospective client has an investment policy 
 that apparently is not suited to his particular 
 needs, the home ofhce may tactfully direct his 
 attention by letter or through their representa- 
 tive in his territory to a means by which he 
 may better his position. Some bond houses 
 maintain a daily news sheet for the benefit of 
 their salesmen in which are printed not only 
 pertinent items of current interest, but timely 
 discussions of diflferent problems. 
 
 21. Activities of this nature, developed to 
 their logical conclusion, can lead to only one 
 result, the establishment of the American bond 
 houses in the confidence of the public as their
 
 20 FUNCTIONS OF BOND HOUSES 
 
 chief advisers in financial matters, in some 
 such relation as the great banks of France and 
 Germany bear to investors in those countries. 
 Even now a few of the better houses can count 
 upon the absorption by their friends among 
 institutions and investors of a certain amount 
 of any issue they recommend and offer. 
 
 22. This advisory function can become gen- 
 eral and economically sound only as the bond 
 houses as a class recognize the scientific and 
 professional nature of their calling and guide 
 their movements and policies, as do the gov- 
 ernors of the Bank of England, let us say, 
 alive to the power of their position and their 
 responsibility as repositories of a nation's con- 
 fidence. 
 
 23. The Banking Function. Illustrative of 
 the confidential relation between house and 
 client, there has arisen the demand that bank- 
 ing departments be established for the safe 
 keeping of funds destined, upon enlargement, 
 to go into investment, and also to accommo- 
 date those who wish to purchase securities be- 
 fore they have sufficient funds to pay in full for 
 them. From the necessities of these two situ- 
 ations it is only a short step to the conduct on 
 a small scale of a bank of deposit subject to 
 check. But properly and ordinarily, the banking 
 department of a bond house is conducted as a 
 matter of accommodation to its customers, and
 
 FUNCTIONS OF BOND HOUSES 21 
 
 not primarily to do a general banking business. 
 From these beginnings it sometimes has hap- 
 pened that a full-fledged bank has been evolved, 
 in which the savings, deposit and trust 
 functions of the bank have balanced, nomin- 
 ally at least, the sales function of the bond 
 house, but an exception of this sort would only 
 prove the rule. Although bond houses are 
 banks, technically, and are entitled to their 
 common designation, "bankers," nevertheless, 
 on the principle that security selling is not best 
 undertaken by obligor companies but is prop- 
 erly left to the bond houses which make it a 
 profession, so the general banking business is 
 best left to banks proper. 
 
 24. The Bond Houses as Fiscal Agents. Be- 
 cause of their purchasing, advisory and bank- 
 ing functions the bond houses are called upon 
 to act as fiscal agents for corporations, muni- 
 cipalities and even states. The long standing, 
 friendly banking relations of the older firms 
 with the Western cities recall the fact that in- 
 terest, and sometimes the principal, of the loans 
 of these cities is payable at the offices of the 
 bond house. Here and there an Eastern in- 
 stitution is met that will not buy Western 
 municipals which are not payable in the East. 
 This is not so much to save the cost of con- 
 version into New York funds, for that might 
 be arranged in the price, as because of the
 
 22 FUNCTIONS OF BOND HOUSES 
 
 inconvenience and possible loss of interest in 
 shipping the bonds west for collection. Some 
 of the older bond houses act as depositaries for 
 Western cities. In general, the conduct of the 
 bond houses as fiscal agents has merited the 
 trust placed in them. 
 
 25. It is more to be expected that private 
 corporations will look to the bond houses as 
 their financial agents. The disposition of a 
 company's funded loans is not merely a matter 
 of merchandising; it is natural that the rela- 
 tionship begun, by the purchase of bonds and 
 banking representation on the directorate shall 
 be continued indefinitely in the thought of 
 future financial needs. Just as the great rail- 
 road systems have their long established finan- 
 cial connections with certain large houses, so 
 the public service and other private cor- 
 porations form alliances with the bond 
 houses. The continuance of such relations 
 implies conformity on the part of the obligor 
 corporations with the policy of the bond 
 houses. This also tends toward a betterment 
 of financial conditions throughout the country. 
 
 26. The Selling Function. American bank- 
 ing houses are not eleemosynary. Whatever 
 may be their usefulness in the community, it 
 is the result of that enlightened self-interest 
 which used to be expressed in the phrase 
 "Honesty is the best policy." Their reason
 
 FUNCTIONS OF BOND HOUSES 23 
 
 for being is to make money by selling bonds, 
 and the competition is getting keener every 
 day. Many of the ordinary effects of compe- 
 tition are noticeable in the bond business. 
 There is standardization of wares and policies, 
 there is diminution in ratio of profits. But 
 two ordinary effects of competition are con- 
 spicuously absent. There is no deterioration 
 of the product and no tendency toward con- 
 solidation among the vendors. 
 
 27. The relation of supply and demand for 
 securities is totally different with us from what 
 it is in England or France. Our industrial 
 development more than keeps pace with our 
 investment resources. We are less dependent 
 on foreign capital than ever before, but not 
 so rich that funds awaiting conservative em- 
 ployment have not a choice of excellent oppor- 
 tunities at home. 
 
 28. By reason of this very competitive bid- 
 ding by capital the quality of our loan product 
 offered by good bond houses is not cheapened. 
 In the process of soliciting business by adver- 
 tisement and interview, American investors 
 are becoming educated in investment prin- 
 ciples and reward with most patronage the 
 houses that give the best evidence of living 
 up to investment ideals. It is the same in this 
 as in the legal and medical professions. It 
 pays best in the long run to be technically 
 competent.
 
 24 FUNCTIONS OF BOND HOUSES 
 
 29. Since the principal point of contact be- 
 tween investors and banking houses is through 
 travelling representatives whose advice is fol- 
 lowed to a very material extent by the invest- 
 ors, the salesmen sent out are of more than 
 average intelligence and business ability. The 
 large majority of those representing the better 
 concerns are college bred men. The alert 
 sales manager will keep in touch with the col- 
 leges and universities and will seek to obtain 
 for his firm men of the graduate schools or of 
 the graduating class who give promise of 
 ability in salesmanship not only by their record 
 in college activities but by their appearance 
 and address. Most of these men will serve 
 office apprenticeships of length before they are 
 sent out on the road. 
 
 30. The other usual effect of competition 
 that we mentioned as lacking is the tendency 
 toward consolidation. The absence of it is 
 further evidence of the peculiarly professional 
 relation which subsists between the banking- 
 house in its advisory capacity and the client. 
 It raises bond selling from a business to a 
 profession. 
 
 31. There are some who profess to see in 
 the gradual evolution of the bond business a 
 tendency to relinquish direct selling from 
 house to client through travelling salesmen in 
 favor of distribution, on a commission basis,
 
 FUNCTIONS OF BOND HOUSES 25 
 
 through local independent bankers. This may 
 come. If it should, it would be one of the 
 evil effects of competition. It would relieve 
 the "retail" houses of a large part of that sense 
 of personal responsibility which they now feel. 
 They would be in a position analogous to that 
 of the wholesale houses at present. Investors 
 would have to accept offerings from those 
 who had no part in the investigation which 
 preceded the original purchase of the issue, 
 and who, presumably, would not have the 
 capital or organization of distribution to "pro- 
 tect the market" for the benefit of those who 
 might wish subsequently to sell their securi- 
 ties. 
 
 32. The Protective Function. There is a 
 radical difference in the attitude of different 
 bond houses in this matter of repurchasing 
 securities of clients to whom they have sold 
 them. Some take the stand that a sale is a 
 sale, and the responsibility of a house that has 
 acted in good faith ceases upon delivery of 
 the bond and the receipt of payment. This 
 position is logical and just, but again compe- 
 tition steps in to benefit the customer. Other 
 houses say: "We shall put out our issues as 
 nearly as possible on a plane of marketability 
 with active listed securities. We make no 
 promises, but, except in times of panic when 
 it may be impossible to raise money to satisfy
 
 26 FUNCTIONS OF BOND HOUSES 
 
 everybody, we hope and expect to be so situ- 
 ated as to buy back at the fair market price 
 the securities we have sold." The substance 
 of this statement is now occasionally seen in 
 advertisements over the signature of some of 
 the better and stronger houses. Few investors 
 realize the full significance of this protective 
 market policy. They are inclined to remem- 
 ber that they may buy most of the active listed 
 bonds on the exchange and sell them the same 
 day at an average total loss, due to the "higg- 
 ling of the market," of perhaps only 2 points 
 or so. They do not realize that on a declining 
 bond market they may have to take an addi- 
 tional loss, in listed bonds, of say 8 points, or 
 10 points in all, whereas in the same circum- 
 stance a bond house would think twice before 
 quoting a client a price 10 points below the 
 previous selling price. And, to say nothing 
 of investment guidance, nine times out of ten 
 the issue of the bond house is yielding at least 
 J^% more per annum than an equally sound 
 listed issue. 
 
 33. But the protective function of the bond 
 house is most important in respect to the 
 moral responsibility of "seeing clients through" 
 default, reorganization and rehabilitation in 
 the extremely rare cases in which trouble 
 arises. In some instances losses amounting 
 to hundreds of thousands of dollars have been
 
 FUNCTIONS OF BOND HOUSES 27 
 
 made good; in many instances the firms have 
 volunteered to pay interest which has been 
 suspended ; in every case a reputable bond 
 house will feel called upon to take active 
 leadership in upholding the mortgage rights 
 or other legal claims of the bondholders. 
 
 34. The creditor class will do well to take 
 as much pains in the investment of its wealth 
 as in the acquisition of it. Buyers of corpo- 
 ration bonds should exercise almost as much 
 care in the selection of a financial adviser as 
 in the choice of a security. They should seek 
 a bond house with a strong personality, strong 
 convictions on investment matters and the 
 capital and equipment to back them up. 
 
 The chapters following will discuss, in de- 
 tail, the several functions that have been 
 touched only briefly here in order to present, 
 at first, the bird's-eye view.
 
 CHAPTER 11. 
 THE PURCHASING FUNCTION. 
 
 35. Bond Investment as a Science. It is 
 
 only as one studies the purchasing function of 
 the bond houses, and the achievements and 
 possibilities of economic service through the 
 process of selection in purchases, that one real- 
 izes how rapidly bond investment is growing 
 into a well-defined and thoroughly developed 
 science. Then why not treat the principles of 
 bond investment in scholarly fashion and 
 credit the orderly study of them as the Science 
 of Bond Investment? We hear much these 
 days of scientific management in manufacture 
 and transportation. It is a wonderful and 
 profitable thing; witness the Standard Oil 
 Company and the Atchison, Topeka and Santa 
 Fe. The greater pity that below Fulton Street 
 a man who speaks of science and finance in 
 the same breath carries the reproach of being 
 theoretical. 
 
 36. However, the attitude of Wall Street is 
 changing toward those whose profession it is 
 to know securities. One of the greatest 
 houses on the street may still have no statis- 
 tical department, except that which is carried 
 home nights under one or two well-rounded 
 
 28
 
 THE PURCHASING FUNCTION 29 
 
 hats; but, on the other hand, a firm of national 
 reputation and esteem has recently admitted 
 into partnership a man whose claim to the 
 distinction is his profound railroad scholar- 
 ship. The traditions and methods of the dry- 
 goods and clothing merchants who founded 
 our financial institutions in New York, are 
 giving way as the younger college-bred gener- 
 ation, trained in, or at least in sympathy with 
 scientific methods, advances to influential ad- 
 ministrative positions. 
 
 37. Laboratory Methods. Scientific method 
 in bond buying presupposes well-equipped 
 laboratories and trained analysts. I have the 
 good fortune to be familiar with the organiza- 
 tion and work of one of the best financial 
 laboratories in New York. The nucleus from 
 v/hich it has developed is the statistical depart- 
 ment. This is in charge of a man who fattens 
 on income accounts and balance sheets. He 
 is prepared, if necessary, with a defensible ex 
 cathedra report and opinion on almost any 
 company or security that has a vogue in the 
 Street. He directs a group of assistants in the 
 compilation and analysis of ten-year records 
 of all American corporations of note. So far as 
 these records relate to public service and in- 
 dustrial companies, they are not and cannot be 
 built up from any standard framework, but 
 each is shaped out of the characteristics of the
 
 30 THE PURCHASING FUNCTION 
 
 particular business and the nature of the 
 meagre material that usually offers. 
 
 38. In behalf of the statistician and his col- 
 laborators, the library shelves are weighted 
 with bound volumes of company mortgages, 
 corporation reports, gazettes, financial period- 
 icals and technical journals. The atlases, 
 annuals, institutional directories, current quo- 
 tation sheets and dividend notices of two con- 
 tinents are at his elbow. He has standing 
 orders with the second-hand book dealers for 
 works that are out of print — old railroad sur- 
 veys, special monographs — and all new publi- 
 cations that have even a collateral bearing on 
 his work, are submitted as soon as published. 
 
 39. Special Counsel. The firm that avails 
 itself of this systematic service also retains 
 special counsel, who give their entire time to 
 the legal problems that are constantly incident 
 to the prosecution of business affairs of scale. 
 Likewise an engineer is retained for consulta- 
 tion regarding the physical aspects of proper- 
 ties with which the firm has, or contemplates, 
 affiliation. The list of consultants and depart- 
 ment specialists by no means ends with these 
 advisers. Others, with experience in syndicate 
 association, accounting, and management, or 
 with developed sense of market values, or of 
 intrinsic investment values, are at hand for the 
 immediate help that their particular training 
 and aptitude makes possible.
 
 THE PURCHASING FUNCTION 31 
 
 40. One Man Buying. I happen to know 
 fairly well, also, the buying department of a 
 bond house that has not yet grown to the size 
 admitting this admirable specialization. In 
 this smaller house all enterprises requiring 
 new capital must be investigated by one man 
 with the slight statistical help obtainable from 
 a clerk or two. Any proposition that secures 
 his conditional approval is submitted in due 
 course to outside engineers and lawyers, and 
 ultimately lacks nothing in the nature of pro- 
 tection to investors that special facilities and 
 professional training can contribute. Not 
 because of the lawyers and engineers, primari- 
 ly, but because of the character of the investi- 
 gator himself, I would trust to the safety of 
 the bonds this firm oflFers as implicitly as to 
 that of similar bonds of any other house in the 
 Street. 
 
 This merely illustrates what we all know, 
 that elaborate specialization and scientific 
 methods are supplements of, not substitutes 
 for old-fashioned horse sense and business 
 judgment. 
 
 41. That this smaller house has no well- 
 articulated statistical department is not be- 
 cause of narrow unbelief — far from it — but 
 because it must perform all its functions ac- 
 cording to scale : its buying must bear definite 
 relation to its selling. The handicaps of such
 
 34 THE PURCHASING FUNCTION 
 
 stopped. About a year ago I was discussing 
 with the vice-president of one of the Wall 
 Street national banks the very intimate rela- 
 tion between the course of active listed bond 
 prices and the ratio of loans to deposits in the 
 national banks of the country — both expres- 
 sions of credit conditions — and suggested to 
 him the possibility of building an antecedent 
 chart from banking and other credit conditions 
 that would determine this ratio of loans to 
 deposits and therefore determine at any time 
 the advisability of entering the market to buy 
 bonds. The subject was of such importance 
 that I was encouraged with an ofifer of assist- 
 ance, and even collaboration, which I could 
 not accept at the time. Fortunately this labor 
 has now been saved and the object apparently 
 attained by others more competent and better 
 equipped than I for such work. 
 
 46. Let it be said for the benefit of business 
 men in general that studies into fundamental 
 conditions can be related to any business. 
 Certain sets of statistics will have more weight 
 in some activities than in others. Presumably 
 immigration figures are of more immediate 
 interest to steamship companies than to rail- 
 roads, and crop conditions of more interest to 
 railroads than to steamship companies; but 
 country-wide prosperity is of immediate in- 
 terest to all, and so also is the price-level.
 
 THE PURCHASING FUNCTION 35 
 
 In so far as success in any business is separated 
 from failure by the purchase of materials, 
 labor and capital when they are cheap and 
 the sale of them when they are dear, success 
 is to be won by deference to a reliable and 
 comprehensive system of financial service. 
 Bond buyers are only one among many classes 
 that may be benefited. 
 
 47. Railroads as Scientific Financiers. It is 
 natural that the railroads should first awake 
 to the possibility of really scientific financing. 
 Their association with bankers and banking 
 principles is so intimate and of such long 
 standing that they have become conversant 
 with the art of buying and selling capital. 
 They buy long-time credit far in excess 
 of immediate needs when money is plenty, 
 and short-time credit at higher rates when 
 money is scarce. The New Haven Road is 
 especially alert to take advantage of changing 
 interest conditions. Of late the example of the 
 railroads has been followed by other large 
 corporations. In either case the less sophis- 
 ticated investing public are willing to seize 
 the short end of the exchange. With the 
 growth in power to diagnose fundamental con- 
 ditions all business men at least will be on the 
 same plane of opportunity to profit by the 
 revolutions of the trade cycle. 
 
 48. Buying to Satisfy Clients. The buyer of
 
 36 THE PURCHASING FUNCTION 
 
 bonds for a banking house has other big gen- 
 eral problems besides these concerning the 
 proper time and price for making commit- 
 ments. The wares he offers for sale must be 
 suited to the needs of his clientele. To a cer- 
 tain extent he may modify these needs. He 
 may "educate the taste" of his patrons. To 
 a certain extent he may seek the patronage of 
 the class of investors who want the kind of 
 thing he is willing to sell. If he is a big man, 
 and his wares are not moving as rapidly as 
 they should, he may change his entire selling 
 program — he will do almost anything but take 
 a deliberate risk for which his customers, and 
 therefore his house, must ultimately pay. 
 
 49. The Professional Standard. Perhaps 
 many, whether engaged in financial work or 
 not, will consider the investment standard too 
 idealistic — impossible of maintenance outside 
 of print. This is absolutely wrong. My own 
 bond associations have been largely with 
 houses that refuse to take what appear to be 
 speculative risks, and my experience is not 
 exceptional. To be sure, there is nothing il- 
 legitimate in the assumption of risk or in the 
 offer of speculative paper by firms engaged in 
 that kind of business ; but deliberate hazard 
 or avoidable speculation are foreign to the 
 better American retail bond houses. 
 
 50. There is a firm operating in the East, 
 whose senior members have grown gray in
 
 THE PURCHASING FUNCTION 37 
 
 the selling of savings bank bonds. In the past 
 this policy yielded adequate profits, an envi- 
 able reputation, and, not least, the satisfaction 
 of never having sold a security that occa- 
 sioned loss. But the profit in savings bank 
 bonds, always relatively narrow, has lessened 
 considerably in recent years by increased com- 
 petition. The patronage of a savings bank can 
 no more be monopolized than that of private 
 investors, for the nature of "legal" securities 
 makes almost superfluous the endorsement of 
 the vendor. So competition in savings banks 
 selling is of the freest kind, and a house that 
 specializes in it has no insuperable advantage 
 over a house that caters to more diversified 
 and profitable patronage. A change of bond- 
 buying policy is possible in this house and 
 others similarly situated, upon the retirement 
 of senior interests, but the problem is vital 
 and requires ultimate solution. 
 
 51. There is, on the other hand, a house not 
 confined to Eastern selling that some years 
 ago changed its major financial associations • 
 because of a difference of opinion as to what 
 constituted "legitimate" issues. For a while 
 it was reasonably successful in disposing of 
 a class of securities in which there was a very 
 wide margin of profit, but for which there was 
 no general market at all. This firm is now 
 confronted with a dissatisfied and diminished 
 clientele and the difficult task of rehabilitating 
 
 431741
 
 38 THE PURCHASING FUNCTION 
 
 a threadbare reputation by return to old-line 
 securities. 
 
 52. The Boston bond firms, as a whole, have 
 to meet a new and serious difficulty arising 
 from the increased activities of Massachusetts 
 assessors. The tax rate in Massachusetts 
 ranges close to 2 per cent. Undoubtedly 
 there is a greater amount of security invest- 
 ment per capita in Massachusetts than in any 
 other State in the Union. Consequently, tax- 
 exempt bonds seldom yield 3>4 per cent., and 
 yet a bond on which taxes are paid must yield 
 53^2 per cent. — in other words, must be at 
 least second grade, to suffer the tax and make 
 return equivalent to tax-exempt bonds. 
 
 53. It is well enough to deplore the short- 
 sightedness of legislation that handicaps in- 
 vestment and encourages speculation, but the 
 bond houses must meet conditions as well as 
 theories. As the result of this Massachusetts 
 situation the Boston bond houses are begin- 
 ning to handle the stocks of Massachusetts 
 corporations, which are tax-exempt within the 
 State. In some cases these stocks are not 
 mentioned in the general circulars of the bond 
 houses, but are sold entirely by personal soli- 
 citation. In New York, as we all know, one or 
 two bond houses of high repute publicly adver- 
 tise for sale the preferred stocks of industrial 
 companies. Will this practice become general, 
 and if so, will it alter the confidential relation
 
 THE PURCHASING FUNCTION 39 
 
 between firm and client that has been estab- 
 lished at such pains? 
 
 54. The Effect of Interest Rates on Bond 
 Buying. A cause more general than the ac- 
 tivity of tax assessors has been at work for the 
 past few years compelling a shift of sentiment 
 and policy in bond buying, namely, the rise in 
 interest rates. This is a phenomenon that 
 Moody's Magazine has the distinction of first 
 bringing to public attention in this country. 
 Elsewhere I take issue with the extreme stand 
 of some of Moody's contributors who see little 
 in the advance of rates except the effect of an 
 increased annual production of gold.* There 
 is not space here to rehearse the controversy, 
 but it is of importance to bond houses in 
 shaping their buying policy and their methods 
 of financing corporations to know whether this 
 advance in rates is founded on permanent con- 
 ditions that must be recognized and met, or 
 on transitory circumstances such as an exces- 
 sive tariff and congestion of population, that 
 may disappear before it is necessary to adopt 
 radical changes in selling policy to meet them. 
 
 55. If the good railroad refunding issues 
 are permanently headed from a 4 per cent, to a 
 4J^ per cent, basis it may mean that inactive 
 public service bonds hitherto worth a 5'>4 per 
 cent, basis, will be worth only a 6 per 
 
 •Note. The Principles of Bond Investment, chapter on "The 
 Future of Bond Prices."
 
 40 THE PURCHASING FUNCTION 
 
 cent, basis. This in turn may mean the vogue 
 of 6 per cent, bonds selling at about par rather 
 than 5 per cent, bonds selling at a discount ; or 
 it may mean a 5 per cent, bond with a stock 
 bonus. Apart from the unholiness of stock 
 in general, once the investor gets the bonus 
 habit he is hard to cure. It is still a sign of 
 transition in interest rates, not a sign of be- 
 nevolence or necessity, when stock is "given 
 away" with bonds. When trading stamps are 
 of economic benefit to trade, stock bonuses 
 will be to finance. 
 
 56. Stock Bonuses. Yet this in turn, is 
 hardly a fair statement. Stock bonuses come 
 to the bond house in part payment for the 
 capital loaned, and the offer of these bonuses 
 to clients is merely the offer to share pros- 
 pective profits from future operations of the 
 obligated company. It is sounder financing, 
 however, for the bond house to charge less 
 for the capital it loans, when it buys the bonds, 
 and to offer the bonds to its clients at a corre- 
 spondingly lower figure. I believe that, in the 
 long run, more is lost than gained by encour- 
 aging speculative interest from the ultimate 
 furnishers of investment capital. 
 
 57. Enough has been said to outline the 
 gravity of general bond buying problems. 
 The succeeding chapter will deal with the 
 purchasing function in relation to particular 
 types of public and private corporation loans.
 
 CHAPTER III. 
 BUYING MUNICIPALS. 
 
 58. The previous chapters outlined some of 
 the principal problems and kinds of assistance, 
 statistical and advisory, that are met in the 
 routine of bond buying. It is left to differenti- 
 ate the problems and helps that apply to par- 
 ticular types of bonds. 
 
 59. The Ten Investment Elements. In 
 the first place, we must come to some con- 
 clusions regarding the investment qualities 
 we seek in examining the loans submitted for 
 purchase. A careful survey of all possible ex- 
 cellences yields us ten elements for the ideal 
 investment.' 
 
 Security of principal. 
 
 Stability of income (or security of interest). 
 
 A fair return. 
 
 Marketability. ~| ^ ., .,. 
 
 ,, , ,, , y Convertibility. 
 
 Value as collateral, j 
 
 Tax exemption. 
 
 Freedom from care. 
 
 Acceptable duration. 
 
 Acceptable denomination. 
 
 Possil)ility of appreciation. 
 
 60. Whether the possibility of appreciation 
 is not purely a speculative quality may be open 
 
 I The Elements of an Iflcal Investment, Chapter III of The 
 Principles of Bond Investment. 
 
 41
 
 42 BUYING MUNICIPALS 
 
 to discussion, but otherwise the list is prob- 
 ably unquestionable and comprehensive. We 
 may say then that if a bond house can obtain 
 for its clients an issue with (1) principal 
 reasonably secure, (2) interest payments regu- 
 lar and certain, (3) a fair return in income, 
 (4) a fairly responsive market, (5) hypothe- 
 cary value at the banks — an issue, (6) that is 
 free from direct tax, and (7) requires merely 
 semi-annual coupon clipping, and (8) matures 
 after a satisfactory lapse of time, and (9) comes 
 in convenient units of denomination (small for 
 the frugal poor, and large for the rich, so as 
 not to crowd the strong box), and (10) has 
 as good a chance of appreciating as of depre- 
 ciating when its qualities become more gener- 
 ally recognized — well, a bond house cannot 
 furnish such an issue, for it does not exist.* 
 
 61. Evidently, then, there is plenty of room 
 for discrimination and selective judgment in 
 bond buying. Incidentally, however, is there 
 any other kind of investment that will so 
 nearly meet these ten requirements? Will 
 mortgages? 
 
 62. The three investment qualities that re- 
 ceive the most consideration are security, 
 income, and marketability. Obviously all three 
 cannot exist in a high degree in the same 
 
 •Note. The Principles of Bond Investment, Chapter on "The 
 Elements of an Ideal Investment."
 
 BUYING MUNICIPALS 43 
 
 paper. If the investment is safe it cannot re- 
 turn a high rate of interest and at the same 
 time have a broad and active market, for such 
 a market implies competitive demand, and the 
 competition for a security that was at once of 
 safe and high yield would immediately bid up 
 the price and thus lower the yield. 
 
 63. Therefore, assuming a good security, 
 the first problem of the bond house is the 
 choice it must make for its specialization be- 
 tween large transactions with small profits in 
 issues with broad markets, and small trans- 
 actions with much larger profits in issues with- 
 out vogue or reputation. 
 
 64. The Principal Function of the Bond 
 Houses. If, because of prejudice, or want of 
 knowledge concerning its qualities, an issue 
 is without vogue, and has to be sold painstak- 
 ingly by personal solicitation, it may be both 
 safe and of high return. // is the principal and 
 thoroughly commendable function of the better 
 American bond houses to sell to their clients is- 
 sues of bonds which have unimpeachable security 
 and yet an income considerably higher than would 
 be the case zvere the issues well knoivn to the in- 
 vesting public. 
 
 65. Setting aside United States bonds, which 
 (with the possible exception of the insular 
 issues) are not truly investment paper, we 
 have as representative of security, vogue and
 
 44 BUYING MUNICIPALS 
 
 market, at the expense of income, the great 
 body of American Civil Loans, viz., state, 
 county, city and town, and tax district bonds. 
 
 66. At the opposite extreme, representative 
 of reasonable security and greater income, at 
 the expense of vogue or market, we have pub- 
 lic service corporation bonds, and some "in- 
 dustrials." 
 
 67. In the middle ground are railroad bonds, 
 offering, as a class, less security than civil 
 loans, more than public utility loans, and in- 
 clining toward marketability rather than in- 
 come. Let us consider each of these classes 
 in turn. 
 
 68. Municipal Buying, History makes rap- 
 idly in civil bond law. If it were not for the 
 Riddlebergers, the Tennessee Settlements, and 
 a few others. Wall Street would have forgot- 
 ten before this that nine states repudiated their 
 debts between 1870 and 1884. The constitu- 
 tions and statutes of so many commonwealths 
 now forbid the incurrence of more than nomi- 
 nal state debt, and the loans that do issue are 
 of such special market, that these, as well as 
 the governments, may be omitted from this 
 brief discussion. 
 
 69. The problem of buying the other civil 
 loans, the municipals proper and the quasi- 
 municipals such as county and tax district 
 bonds, may be divided according to the charac-
 
 BUYING MUNICIPALS 45 
 
 ter of their investment destination. From the 
 business point of view municipals are broadly 
 either "legals" or "general market" bonds. 
 
 70. The Buying of "Legals." By "legals," 
 of course, are meant municipals that conform 
 to the high requirements of the older, richer 
 states governing the investment of savings 
 bank deposits and trust funds. In the nature 
 of the case the legals are, in general, superior 
 to the general market municipals. 
 
 71. In purchasing legals the question of 
 security is almost nil. No banking house, for 
 instance, would or could be held morally re- 
 sponsible for the default of any municipal issue 
 that is a legal investment for the savings banks 
 of Massachusetts or New York. Legality for 
 savings bank investment and legality of issu- 
 ance by the municipality are entirely distinct 
 matters. The questions of legality of issuance 
 and validity are quite apart from those of the 
 financial competency or the good faith of a 
 city. It is not a function of the bond houses 
 to establish legality of issuance but that of 
 their attorneys. It may astonish many to 
 learn that a record of sales I kept in 1907, of 
 the more important municipal issues of that 
 year, shows that of a total of $200,000,000 of 
 municipal and state bonds issued, some $4,- 
 000,000 or 2 per cent., divided among 65 loans, 
 were finally declined by those who had pur-
 
 46 BUYING MUNICIPALS 
 
 chased them subject to approval of counsel ; 
 and usually, but not always, declined on the 
 ground that the issue was invalid because of 
 some lack of compliance with minor require- 
 ments of law. This $4,000,000 does not take 
 into account a very much larger amount of 
 issues that the attorney of the purchaser found 
 insufficiently protected by law, but that by 
 further acts at his suggestion, the issuing com- 
 munity was able to validate completely with- 
 out formal resale. 
 
 72. The Bond Attorney. Not all bond attor- 
 neys, however, are competent. Even an ap- 
 parently "legal" municipal may be unsafe if 
 its validity has been passed upon by a lawyer 
 who is more interested in making immediate 
 profits for his client the bond house, than con- 
 siderate for his reputation and its future wel- 
 fare. Any bond house dealing in municipals 
 can name certain attorneys whose "legal opin- 
 ion" is worthless in its eyes because of in- 
 competence or lack of scruple. Not long ago 
 one such attorney in New York State accepted 
 as valid an issue of bonds signed by a man 
 who had never been appointed or elected to 
 the ofiice designated under his signature. 
 
 It is the business of the bond house to pro- 
 tect its clients against the work of these char- 
 latans. They are very few and far between, 
 and lower but little the high plane of legal
 
 BUYING MUNICIPALS 47 
 
 skill and ethics that are devoted to safeguard- 
 ing American bond issues. 
 
 73. The SelHng Cost and Price of Legals. 
 The buying of legals as a mercantile rather 
 than legal problem narrows down to technical 
 skill in sensing the current demand and steer- 
 ing the bid in that very narrow channel of 
 profit that lies between the Scylla of com- 
 petitive bids and the Charybdis of too high 
 an asking price. 
 
 It is easier to guess what price the bonds 
 will bring when sold to the public, than what 
 price the other houses will bid at the public 
 sale ; but conceding the municipal buyer could 
 be fairly certain of both, he is not yet saved. 
 He must compute the selling cost to him per 
 bond, and be sure, humanly speaking, of a 
 margin of profit. How many houses do this? 
 How many of the two thousand bond firms 
 in the United States have any intelligent 
 cost accounting? It may be interesting to 
 know that a certain house that does a large 
 and very general bond business throughout 
 the country computes the selling cost at nearly 
 $14 a $1,000 bond. This includes the cost of 
 the slow moving "specialties," but also the 
 cost of mere brokerage transactions on which 
 the profit may be only 1-32, or 31 cents a bond. 
 
 74. At the present time the gross profit in 
 selling legal municipals surely docs not exceed
 
 48 BUYING MUNICIPALS 
 
 $10 a bond or one per cent. I believe it is not 
 over $7.50 a bond. If these statements of costs 
 and profits are approximately correct, are the 
 bond houses charging too much for the serv- 
 ices they perform? If these statements are 
 correct, are institutions and individuals ordi- 
 narily wise in bidding direct for bonds at pub- 
 lic sale, rather than accepting the established 
 market after the sale? The answer will be 
 found by study of the list of bidders, and the 
 amounts bid, in any sale of New York City 
 bonds. If these statements are correct, are 
 municipalities wise in trying to sell their loans, 
 bond by bond, "over the counter," rather than 
 by paying, as a matter of economy, the middle- 
 man's profit? 
 
 75. Carrying Charges. It would not be pos- 
 sible for houses to live on such small profits if 
 the bonds did not in the long run "carry them- 
 selves," i. e., produce a suflficient coupon in- 
 come to oflfset the interest charges of their 
 hypothecation at the banks. A diamond or 
 wool merchant, it is to be observed, or a 
 merchant in any other commodity, has not 
 this advantage of a self-supporting collateral. 
 
 76. With a gross one per cent, profit, that 
 may be wiped out by a change in the market 
 conditions, it is essential that the bidding for 
 legal municipals should be most circumspe(;t. 
 With this in view a properly equipped house
 
 BUYING MUNICIPALS 49 
 
 will keep on its books a record of past bidding 
 for all municipal issues of consequence. This 
 record will show the amount of the flotation, 
 the face or coupon interest rate, the duration, 
 the purpose of the issue, the date of sale, the 
 price the bonds brought at the sale, the net 
 yield at this price, the name of the purchaser, 
 and, when possible, the basis price or net 
 yield that the bonds brought when retailed. 
 Every one of these facts is of prime importance 
 in gauging the price to pay for municipals, for 
 one should never, or almost never, bid with a 
 first thought on competitive bids, but rather 
 with heed first to the price that the market 
 will bear, and next to the margin of profit that 
 is acceptable under the conditions. 
 
 One house has just recompiled such a sales 
 record, which consumed the time of two men 
 for six months. 
 
 77. The application of these details of issue 
 to prospective bidding becomes instinctive to 
 a professional bond buyer. He will run 
 through a few pages of proposals for bids and 
 check ofT with almost unerring accuracy the 
 cases in which no bids will be received. Usu- 
 ally he will err only when a local bank, for 
 advertising or jjolitical purposes, bids above 
 the market. 
 
 78. We will say that the rural County of 
 X in New York State proposes at the
 
 50 BUYING MUNICIPALS 
 
 present time to issue $20,000 4%% bonds 
 maturing serially from date $2,000 each year. 
 This item may not interest the experienced 
 buyer. In the first place, the issue is a small 
 one — hardly worth printing circulars for. Sec- 
 ondly, bonds in New York State may not be 
 sold by municipalities below par: in this case 
 a 4.25 per cent, basis. The best basis that a 
 bond house can possibly expect to get for this 
 bond in this market is 4.15 per cent. But the 
 difference in a 4^4% bond of this duration be- 
 tween a 4.25 and a 4.15 per cent, basis is .474 
 or $4.74. This gross profit is or should be 
 too narrow to draw out any bids. 
 
 79. Unintelligent Proposals for Municipals. 
 Another aspect of the unintelligent offering of 
 municipal loans is presented in the following 
 illustration. Some time ago a municipality 
 within gunshot of New York awarded an issue 
 of bonds to various bidders at a price several 
 hundred dollars less than the offer of another 
 house for "all or none." Their action caused 
 some comment at the time, although it was 
 perfectly legal and apparently in good faith. 
 In the light of that experience what shall we 
 say of the stewardship of their officials when 
 a year or so later the same mistake was re- 
 peated? The municipality made three awards 
 at the sale, amounting to $153,262.76, whereas 
 if the bonds had been awarded in one lot to
 
 BUYING MUNICIPALS 51 
 
 the highest bidder the citizens would have re- 
 ceived $153,589.96. Was not this $327.20 dif- 
 ference worth saving? A sHghtly different 
 method of advertising the sale would have 
 accomplished the result. 
 
 80. Municipal Bond Bureaus. I have already- 
 mentioned financial service bureaus that make 
 relatively easy the statistical work of bond 
 houses. There are at present two daily publi- 
 cations that keep bond concerns well posted 
 on forthcoming municipal sales and the terms 
 and forms in which proposals may or must be 
 couched. They also publish lists of bidders 
 at recent sales, with the prices obtained. 
 Through the services of these bureaus the 
 necessary data for intelligent buying of 
 "legals" may be collected by merely clerical 
 effort. 
 
 81. General Market Municipals. The prob- 
 lem of buying "general market" municipals is 
 no such simple matter. In these bonds security 
 may seldom be taken for granted. It is taken 
 for granted much more generally than proper. 
 The financial memory (to repeat) is proverbi- 
 ally short. Each generation forgets the fiscal 
 follies and disasters of the preceding. History 
 in finance makes so rapidly : When in 1839, 
 during that long business depression in Amer- 
 ica that produced the first repudiation period, 
 Raring Brothers of London inquired of Daniel
 
 52 BUYING MUNICIPALS 
 
 Webster concerning "the measure of security 
 which the purchasers of bond issues by the 
 states of the American Union would have for 
 their investment," he wrote in reply : 
 
 "I believe there is no country upon earth — 
 not even that of the injured creditor — in which 
 such a proceeding (repudiation) would meet 
 with less countenance or indulgence than it 
 would receive from the great mass of American 
 people." 
 
 Yet within two years Governor McNutt of 
 Mississippi had recommended, and within 
 three years the legislatures of Mississippi and 
 Florida had voted the repudiation of nearly 
 $9,000,000 of bonds. 
 
 82. Municipal Defaults. Did the default of 
 these or of five other states in the forties deter 
 European or American investors from further 
 purchases? Not at all. Instead of using busi- 
 ness sense, they continued trusting and buying, 
 and losing. Nothing daunted they bought 
 after the War, overlooking the war time de- 
 fault of three states ; they bought in the eigh- 
 ties and nineties in spite of the repudiation of 
 nine states in almost as many years. If the 
 men of Lombard and Wall Streets and count- 
 less other bond buyers had taken the same 
 pains in 1870 or thereafter to acquaint them- 
 selves with the factors of state credit, and of 
 the errors of the legislatures and investing
 
 BUYING MUNICIPALS 53 
 
 public in the preceding generation, as they now 
 do in the purchase of railroad securities, fewer 
 bonds would have been floated at that time 
 and less state paper would now repose in an- 
 cient pigeon holes. 
 
 83. The story of municipal loans is the same, 
 only worse. How many men now active in the 
 financial district realize that thirty years ago 
 the Mississippi Valley gave up a long list of 
 defaulting cities, among which were Duluth, 
 Keokuk, McGregor, Quincy, Cairo, St. Joseph, 
 Cape Girardeau, Lawrence, Topeka, Nebraska 
 City, Little Rock, Helena in Arkansas, Mem- 
 phis, Shreveport, New Orleans, Mobile and 
 Houston? "Of one hundred counties, town- 
 ships and cities issuing bonds in Missouri, 
 nine-tenths have defaulted," says the North 
 American Review in August, 1884. 
 
 84. The point is not, of course, that this 
 country will ever again see a repetition of this 
 wholesale breach of faith, but that the pro- 
 posed debts of the weaker communities, such 
 as rural counties, small towns and taxing dis- 
 tricts, should receive the same expert investi- 
 gation that is given the debts of private cor- 
 porations. Although it is true that not for 
 some years has an American municipality of 
 importance failed to meet its valid (obligations, 
 nevertheless numbers of small communities in 
 all parts of the country except New England
 
 54 BUYING MUNICIPALS 
 
 are at the present time failing to keep their 
 pledges. In some cases it is through no obli- 
 quity on the part of the community ; in most 
 it is the result of official incompetency and 
 political unwisdom ; but whatever the causes, 
 they should be studied by bond buyers that 
 loans produced under improper conditions may 
 be avoided. 
 
 85. There are millions of dollars of "Gravel 
 Road" bonds issued under the Indiana High- 
 way Act of 1905 (Chapter 167) that have hung 
 in the balance between payment and non-pay- 
 ment for some years because they were issued 
 under local and special authority. Originally 
 declared unconstitutional, they have been fully 
 validated by a review of the case in the Su- 
 preme Court of the State. But they illustrate 
 the need of special fitness and professional 
 training in the purchasing function, even in 
 this day, and even for municipal loans. 
 
 86. What knowledge and experience may 
 have been accumulated hitherto by the bond- 
 houses has only recently found its way into 
 print. The principles of municipal bond in- 
 vestment may be thoroughly explored, but only 
 within the year have they been codified and 
 published. We have at least reached this 
 stage, that the bond buyers of the big New 
 York banking houses will refuse municipal 
 loans they believe unsound. They have com-
 
 BUYING MUNICIPALS 55 
 
 mon grounds for their faith. About three 
 years ago a community that is ahiiost 
 within rifle shot of the city olTered a loan in 
 New York without success. It was finally 
 placed with a Western house that has since 
 failed. The bonds have defaulted, but never- 
 theless the community has just offered another 
 loan. It would have been interesting to note 
 what house would dare to purchase the bonds. 
 It is reassuring to state that no bids were 
 received. 
 
 87. The true financial competency of a com- 
 munity to issue, support and acquit bonded ob- 
 ligations is not so easy to ascertain as most 
 people suppose. I venture the assertion that 
 there are more bond men who can analyze an 
 annual report of the United States Steel Cor- 
 poration than who can analyze the financial 
 statement of the City of New York. It is not 
 important to seek the reason for this condition 
 of things. But let us not underestimate the 
 importance of the purchasing function of the 
 bond houses as related to municipal issues. 
 That the huge machinery of municipal debt 
 creation and investment exchange runs so 
 smoothly and with such exceedingly infrccjuent 
 and unimportant casualties is sufficient testi- 
 mony to the financial health of our bodies 
 politic and of our investment houses.
 
 CHAPTER IV. 
 BUYING RAILROAD BONDS. 
 
 88. In the preceding two chapters we dis- 
 cussed in as much detail as circumstances per- 
 mitted the purchasing function of the bond 
 houses, in its broad aspects of public and firm 
 policy, and as related particularly to municipal 
 issues. There remain to be considered the 
 special principles that govern the buying of 
 railroad and other private corporation bonds. 
 This paper will be devoted to the railroad 
 issues. 
 
 89. Common Characteristics of Railroad and 
 Municipal Bonds. Railroad and municipal 
 bond buying have some phases in common. 
 Perhaps in both it is fair to say that an investi- 
 gation of the ability of the obligor corporation 
 to meet its engagements is not usually the 
 chief consideration at the time of purchase. 
 In other words the equities are usually suf- 
 ficient to be accepted without that degree of 
 exhaustive scrutiny which must be given to 
 the equities of public service and industrial 
 corporations. Secondly, the ultimate destina- 
 tion of a large part of both municipal and 
 railroad debt is institutional, therefore the 
 rapidity and capacity of absorption or "diges- 
 tion" is relatively great, and these two types 
 
 56
 
 BUYING RAILROAD BONDS 57 
 
 may be handled on a relatively narrow margin 
 of profit. The margin for railroad bonds is not 
 the scant three-quarters to one per cent. 
 ($7.50 to $10.00 per $1,000 bond) we assumed 
 for municipals of the "legal for savings banks" 
 type, but let us say four or five per cent. 
 Moreover, the market for railroad bonds (so 
 large a part of which is listed) is self-regulat- 
 ing, even to a greater extent than the market 
 for municipals, therefore the initial sale profit 
 does not have to contain provision for subse- 
 quent cost of market support — a generally un- 
 considered expense of floating "specialty" cor- 
 poration bonds by houses that take care of 
 their customers. 
 
 90. A third point of likeness between these 
 types is their division into two broad classes, 
 the one in which security, in the ordinary 
 sense, may be taken for granted almost abso- 
 lutely, so that current money rates, and profits, 
 determine the purchase, and the other in which 
 the degree of security, marketability, etc., are 
 determining price factors. 
 
 91. On the whole, however, the purchase 
 of railroad bonds is more closely associated 
 with that of corporations generally than with 
 that of municipals, because of the very char- 
 acter of the debt and of the issuer. 
 
 92. Railroad Bond Underwriting. The buy- 
 er of railroad bonds of the prominent systems
 
 58 BUYING RAILROAD BONDS 
 
 faces a more difficult situation than the buyer 
 of legal municipals. At present all the great 
 American railroad systems are dominated by 
 one or another of, say, half-a-dozen great banks 
 or banking houses. It is therefore practically 
 impossible for the "retail" bond houses (the 
 kind described in these pages) to purchase 
 large issues at first hand from these railroads, 
 and therefore to obtain the profits indicated 
 above. Indeed, in a recent interview, a promi- 
 nent Wall Street corporation lawyer went so 
 far as to declare that it was next to impossible 
 for any corporation in this country to raise 
 $10,000,000, outside the great banking groups 
 provided the subscription would be inimical 
 to the interest of any of them. 
 
 93. Underwriting by Retail Houses. How- 
 ever that may be, if a "retail" bond house 
 chooses to specialize in the better railroad 
 flotations it must align itself with those 
 houses that are willing to act as secondary 
 underwriters. It is then expected to partici- 
 pate in the sub-underwriting or actual pur- 
 chase of the majority of issues fathered by the 
 wholesale banker with which it is affiliated, 
 almost irrespective of the quality and price of 
 the issue, or the condition of the bond market. 
 A railroad bond buyer needs tact as well as 
 professional skill, to seize the horns of this 
 dilemma, and keep his house in line for what
 
 BUYING RAILROAD BONDS 59 
 
 is safe and profitable, without giving offense 
 in declining what is either unsafe or unprof- 
 itable. 
 
 94. This dilemma is by no means imaginary 
 or occasional ; it is an ever present difficulty. 
 On the one hand (as to safety), there is con- 
 stant temptation to relax in critical caution 
 and to follow the crowd into some new sub- 
 scription to an uninvestigated security that 
 promises profits overnight. If one could only 
 know the amount, how startling would be the 
 sum annually committed to subscription bond 
 purchases for purely speculative objects, with- 
 out any thought of regular merchandizing or 
 investment, because of telephone tips, news- 
 paper gossip, and neighborly hearsay ! The 
 bond houses make their share of these blind 
 purchases. 
 
 95. If you ask for a copy of the mortgage 
 it isn't yet ready for distribution, and you are 
 a squeamish obstructionist. Yet one of the 
 largest railroad systems in America, which 
 issues many millions of bonds almost every 
 year, through the usual New York banking 
 channels, in the usual subscription manner, 
 has had a net income for the past three years 
 that has averaged less than 2)4 per cent, of the 
 gross earnings! Another system, operating 
 about 10,000 miles, during the year 1910 con- 
 sumed 94^ per cent, of its gross earnings in
 
 60 BUYING RAILROAD BONDS 
 
 mandatory charges. During the year of the 
 last panic almost 99 per cent, of all it earned 
 was eaten up in charges. Yet instead of lay- 
 ing by for the next panic this road is again 
 paying dividends on many millions of stock. 
 
 96. On the other hand (as to profits), cur- 
 rent railroad subscription prices are put as high 
 as the market will possibly bear/ and the 
 eighth, quarter, half, or one per cent., or more, 
 that goes to the retail houses for sub-under- 
 writing from the big wholesalers is likely to 
 be wiped out before the bonds are disposed of 
 in such a sagging bond market as we have 
 become thoroughly familiar with in the past 
 two or three years. 
 
 97. The Profits of Underwriting. The public 
 may not seem to be as directly concerned with 
 the distribution, as with the total amount, of 
 middlemen's profits when great railroad cor- 
 porations borrow, but perhaps a warrantable 
 interest can be made to appear; moreover, we 
 are considering the work of the bond houses 
 as such rather than the economics of finance, 
 primarily. Well, let us assume for argument's 
 sake that 6 points (or per cent, on par) repre- 
 sent the difference between what the railroad 
 gets and the public pays at the initial sale, and 
 that prior, or possibly subsequent, to public 
 
 I There has been one notable exception during the year 
 1911-12.
 
 BUYING RAILROAD BONDS 61 
 
 flotation the big wholesaler assigns to three 
 retail houses at 1^ points concession all bonds 
 of the issue on hand soon after the public sale. 
 The three retail houses in turn permit associate 
 houses a discount of 34 from established prices. 
 These associate houses, however, act merely as 
 brokers, whereas the three retailers mentioned 
 have bought, paid for, and taken up the bonds 
 or temporary certificates. 
 
 98. The question arises: Are the profits of 
 the wholesalers, the secondary underwriters, 
 and the brokers, respectively, proportionate to 
 the services performed? Perhaps the interest 
 of the brokers in the transaction may be omit- 
 ted. They take no risk unless they choose to 
 speculate for their own account; the bonds 
 they buy are usually sold for the account and 
 risk of others; therefore their profits are and 
 should be nominal. 
 
 99. But should the wholesaler, who may own 
 the bonds for a week, who is reasonably cer- 
 tain of their disposition, and has little direct 
 future moral responsibility to the public, and 
 who is under small direct selling expense, be 
 entitled to four times the profits of the re- 
 tailers on whom falls the real burden of selling 
 and the real risk of loss through sagging 
 prices? Whether the ratio is 4 to 1 or less, 
 is it an evidence of sound economic conditions 
 in any business when wholesale profits are 
 greater than retail?
 
 62 BUYING RAILROAD BONDS 
 
 100. It may be argued that the great whole- 
 salers have at command the immense capital 
 necessary for the exploitation of steam trans- 
 portation systems and are entitled to rewards 
 commensurate with the advantage of their 
 capitalistic entrenchment. There are dozens 
 of retail houses that, under an unsubsidized 
 banking system, and in "joint account," would 
 be capable of handling the largest corpora- 
 tion loans that find ultimate placement on this 
 side of the water — indeed the same houses 
 that now are the immediate repositories of the 
 loans until ultimate public absorption. Their 
 federated banking resources are drawn upon 
 almost as extensively, under present circum- 
 stances, as if the wholesalers were not in- 
 volved. 
 
 101. A Pennsylvania Railroad Flotation. 
 Two or three years ago when the Pennsyl- 
 vania Railroad contemplated the issuance of a 
 loan of many millions one of my good Boston 
 friends (you may remember the newspaper 
 story) ofifered with perfectly good financial 
 warrant to bid for the bonds at public sale an 
 amount in excess of the price reputed to have 
 been arranged with the usual wholesale under- 
 writers. This offer was not accepted, although 
 he was courteously given interview with the 
 president and other officials of the road. The 
 publicity of the case made this much recog-
 
 BUYING RAILROAD BONDS 63 
 
 nition advisable. The reason the offer was not 
 accepted may perhaps be found in the state- 
 ment of the corporation attorney, already 
 quoted, concerning the impossibility of ob- 
 taining large loans without the acquiescence 
 of financial autocracy. 
 
 102. Direct buying of railroad debts by the 
 retail bond houses would tend, more than at 
 present, to separate the banking interests from 
 the proprietary interests and more closely to 
 associate the banking interests with the invest- 
 ment interests, — both movements highly to be 
 desired. 
 
 103. There is no opprobrium to be attached 
 to the centralization of banking power. It is 
 an inevitable phase of the industrial evolution 
 of the past decade. It seems possible now 
 that centralization may be followed by disin- 
 tegration, but more probably by governmental 
 regulation, built on any convenient legal prin- 
 ciple that comes to hand when the time is 
 ripe. I believe that, whatever the event, pres- 
 ent artificial conditions cannot continue indef- 
 initely, and that it will soon again be possible 
 for the American bond houses to bid freely for 
 the big railway loans as they now bid for legal 
 municipals. 
 
 104. Railroad Blanket Refunding Issues. 
 Even under present conditions the proper pur- 
 chase of big railroad loans by the retail house
 
 64 BUYING RAILROAD BONDS 
 
 implies technical qualifications of a high order 
 in the bond buyer. Opportunities (in street 
 trading or otherwise) for the quick purchase 
 of current issues at advantageous prices, de- 
 mand a thorough working knowledge of all 
 the big general and refunding issues, of which 
 there are about forty — all but three or four 
 of which are listed — and a knowledge of two 
 or three dozen more of the important under- 
 lying and miscellaneous loans. 
 
 105. The preponderance of transactions in 
 the refunding issues may not be appreciated 
 by everybody. Convertibility (that is, market- 
 ability and hypothecary value), is of such 
 tremendous advantage to certain types of in- 
 vestors, particularly institutions like national 
 banks, that much higher prices may be ob- 
 tained for issues of such magnitude and vogue 
 as to assure a future fairly steady demand at 
 current interest rates. Therefore, on the in- 
 sistence of bankers, the railroads for the past 
 decade have been satisfying their wants for 
 new capital less and less by means of new first 
 mortgage divisional issues, or the like, and 
 more and more by new long term, virtually 
 "open end" blanket mortgages covering the 
 entire property and of sufficient amount, re- 
 served in escrow, to retire at or before matur- 
 ity the senior and miscellaneous issues of the 
 road.
 
 BUYING RAILROAD BONDS 65 
 
 106. The provisions of these blanket refund- 
 ing mortgages are becoming standardized, to 
 the great benefit of railroad finance. By grad- 
 ual retirement of miscellaneous mortgages 
 and issuance, in substitute, of escrow refund- 
 ing bonds, not only is the tendency of railroad 
 debt to become simplified and easier of ap- 
 praisal, but to become more negotiable, as the 
 escrow bonds of a refunding mortgage take 
 the place of smaller loans. Hence the fact 
 that there are now outstanding over $1,500,- 
 000,000 of these refunding bonds and forty or 
 more issues a good railroad bond buyer should 
 know in all essentials respecting security and 
 price, gives us some notion of what is required 
 of the buyer of the big issues. If a buyer has 
 the responsibility of shaping up for the accept- 
 ance of his house a new issue, that is another 
 matter. Railroad scholarship then is only a 
 small part of his equipment. Even to skirt 
 about his problem here would usurp space. 
 But to resume: 
 
 107. The average profit in "turning over" 
 these current issues is small — less even than 
 in handling legal municipals — therefore a nice 
 sense of market values and of the price trend 
 is essential to success. Some of the best 
 young aggressive houses on the Street have 
 found it impossible to make enough money in 
 current listed railroad issues to support a body
 
 66 BUYING RAILROAD BONDS 
 
 of bond salesmen. Ordinarily selling of this 
 sort must be incidental to the distribution of 
 other more profitable securities. Such profit 
 as there is must be obtained very largely by a 
 study of the course of bond prices in general 
 and of the range of movement in the issue in 
 question. It is easier to sell than to buy these 
 bonds right. A table of monthly and annual 
 price fluctuations of the securities (they are 
 listed, remember) is an excellent index of rel- 
 ative cheapness and dearness. The number 
 of sales on the Exchange and the volume of 
 sales per annum, w^ill also have significance. 
 
 108. One must not gain the impression from 
 what has been said that the retail bond houses 
 have no opportunity for direct and profitable 
 relations with the railroads. The bonds they 
 can buy and sell direct are usually of the sec- 
 ond class. The big systems have subsidiaries 
 which from time to time must put their name 
 to paper, some of it very excellent indeed. 
 Let us remember that the number of operating 
 corporations with a mileage of 1,000 is about 
 50, but not very much over 50; that there are 
 over 1,000 railways reporting to the Inter- 
 state Commerce Commission that have a mile- 
 age of under 250; that the number of carriers 
 of the switching and terminal class is about 
 500; that the total number of industrial (as 
 distinguished from commercial) railways is
 
 BUYING RAILROAD BONDS 67 
 
 not far from 2,500, exceeding in mileage 25,000. 
 Although not all these transportation agencies 
 are direct obligors and emitting funded debt, 
 nevertheless the sum of their annual output of 
 bond issues is very large, and their debts are 
 well v^rorth the solicitation of banking houses 
 that are equipped to handle them. 
 
 109. Equipment Bonds. Perhaps the most 
 satisfactory form of railroad loan for these 
 houses is equipment trust obligations. Inas- 
 much as the average life of the average issue 
 is 5^ years the opportunities to profit from 
 the reinvestment of funds thus placed is re- 
 current. It is the very general impression that 
 "not a dollar of money invested in equipment 
 bonds has ever been lost." This is not true. 
 However, I have examined the history of every 
 equipment issue of every road that has passed 
 through reorganization or receivership since 
 1872, when equipment bonds were "invented," 
 and state with conviction that the record and 
 the present legal characteristics of the stand- 
 ard ten year serial equipment bond (of any 
 of the three current types) is without parallel 
 as respects security, except first mortgage gas 
 bonds in metropolitan cities. 
 
 110. Equipment issues of some of the best 
 systems are still to be l)ought direct by the 
 bondhouse; also terminal, divisional and mis- 
 cellaneous issues. All classes of railroad bonds
 
 68 BUYING RAILROAD BONDS 
 
 of the smaller roads are to be had. The vari- 
 ous kinds included here form the second divi- 
 sion of railroad bonds corresponding, in some 
 respects, as already stated, to the non-legal, 
 or general market municipals. 
 
 111. Railroad Bond Investment Principles. 
 The investment principles governing the pur- 
 chase of the big refunding and of the miscel- 
 laneous railroad bonds are of course the same. 
 In distinction from the principles of municipal 
 bond investment, they are thoroughly estab- 
 lished and recognized. Therefore an attempt 
 to detail them is superfluous. Still a few com- 
 ments of a general nature may not be amiss. 
 
 In approaching railroad investment study the 
 general problems will be found to be definite 
 in number, orderly in sequence, and now, with 
 the jurisdiction of the Interstate Commerce 
 Commission, of certain application at least to 
 all roads that do an interstate business. 
 
 112. Proprietorship and Management. The 
 first considerations, of Proprietorship and 
 Management, are not the less important be- 
 cause irreducible to figures. The first thought 
 of the investigator is, or should be, to the char- 
 acter and credit of the dominant proprietors. 
 Financial heredity, in this matter, counts for 
 more than most people realize. In Carl Sny- 
 der's excellent book on American Railways as 
 Investments, 1907, he has this to say :
 
 BUYING RAILROAD BONDS 69 
 
 "It is one of the most curious facts of rail- 
 way history, but one exemplified fully enough, 
 that careful and conservative conduct of a 
 road tends in some sense to perpetuate itself. 
 .... It is not for nothing that the Pennsyl- 
 vania has never failed to pay a dividend for 
 more than fifty years. It is not for nothing 
 that roads like the Reading, the Erie, the 
 Union Pacific, have been the footballs of stock- 
 jobbing speculators, and dishonest directors. 
 The ownership of a road, the personnel of its 
 management, may change absolutely, yet it is 
 curious to note how amid all these changes 
 its character for good or evil will sometimes 
 survive." 
 
 It is a matter not of years but of decades 
 to change the nature of a railroad. A 
 knowledge of the conduct of a railroad stock 
 on the Exchange, over a period of years, and 
 of its dividend record, its history in receiver- 
 ship, will be a crude but reasonably safe guide 
 to the general health of the road. 
 
 113. There is much to be learned from the 
 history of any proprietorship or control. The 
 holders of the underlying bonds of one of the 
 Western systems have equities in earnings 
 and securities that make the obligations appear 
 of a very high type. But an analysis of the 
 methods by which a comparatively small out- 
 lay of money obtained control of this property,
 
 70 BUYING RAILROAD BONDS 
 
 by means of a system of holding companies 
 and stock pyramiding, will not reassure a care- 
 ful bond buyer that his interest will be con- 
 served. When only a few millions of cash 
 were necessary to control a property bonded 
 for some hundreds of millions, the market 
 price of the best of its bonds was sure to 
 suffer severely when it appeared that the sys- 
 tem might not be able to meet all of its obli- 
 gations. 
 
 114. Where there is a truly dominating in- 
 terest, such as Mofifat in the Denver, North- 
 western, and Pacific; Flagler in the Florida 
 East Coast; Atkinson in the Atlantic and 
 Birmingham ; Stilwell in the Kansas City, 
 Mexico and Orient, or Hill in the Great North- 
 ern, the inevitable questions are: Is this a cap- 
 able railroad man ; is he constructive, and does 
 he conserve minority interests ; who are his 
 bankers; in what other roads is he interested, 
 and what other connections has he? The same 
 questions hold good for a dominating group 
 of men. 
 
 115. Community of Interest. No railroad 
 development of the past ten years has greater 
 significance to bond buyers than the general 
 recognition of the necessity for that entente 
 cordiale among the companies which arises 
 from a "community of interest." The young- 
 est of those who have interest in financial
 
 BUYING RAILROAD BONDS 71 
 
 matters remembers the days of rate wars which 
 drove so many roads into bankruptcy. When 
 freight tariffs could not be maintained legally 
 by competing carriers, through the agency of 
 a pool, the desired result was obtained by the 
 creation and recognition of a community of 
 interest. The ownership by one road of the 
 stock of another, with consequent dovetailing 
 of directorates, led to amicable understanding 
 and concert in action, when otherwise there 
 might have been costly warfare. 
 
 116. But traffic alliances may exist without 
 stock control by any party. Then the visible 
 evidence of co-operation is to be found in the 
 duplication of officers or directors. It is espe- 
 cially important that the smaller independent 
 roads which do not originate sufficient traffic 
 to make them self-sustaining should have the 
 benefit of friendly connections with a power- 
 ful system to relieve them of the possibility of 
 destructive competition. In thfe case of an 
 aggressive independent road thia possibility 
 may be an impending probability. There are 
 well known small roads that today have great- 
 er difficulty in maintaining their corporate 
 independence against the aggressions of larger 
 .systems than they do in maintaining^ the 
 standard of their service or the sufficiency of 
 their earnings. The recognition of the com- 
 munity of railroad interest has done more than 
 anything else, except the general development
 
 72 BUYING RAILROAD BONDS 
 
 of the country and of the railroads themselves, 
 to place railroad finance upon its present 
 stable footing. 
 
 117. Management. Management, as distin- 
 guished from proprietorship and control, may 
 be looked upon as relating to the internal 
 railroad policies governing the machinery of 
 transportation. Subordinate in public interest 
 to the financial heads and affiliations, the rail- 
 road managers and their work will be best 
 known to the investigator by the records of 
 physical and operating efficiency. 
 
 118. Physical Characteristics. The main 
 physical characteristics to be subjected to the 
 analytics of the bond buyer are the location of 
 the railroad, the size or mileage, the character 
 and condition of the equipment, and the oper- 
 ating efficiency. The uses to which informa- 
 tion of this nature may be put will readily 
 suggest themselves. It may not be so obvious, 
 however, that a reliable source for this infor- 
 mation exists. It is due to the uniform statis- 
 tical requirements of the Interstate Commerce 
 Commission that reliable data of this nature 
 is available. Unfortunately their supervision 
 does not extend back over a sufficient number 
 of years to validate much historical compari- 
 son. 
 
 119. Earning Power and Capitalization. 
 Besides the personnel and the physical charac-
 
 BUYING RAILROAD BONDS 73 
 
 teristics, the studies of the railroad bond buyer 
 will cover the company's earning power and 
 the valuation and capitalization to which it is 
 related. In these subjects also he is indebted 
 to the Commission for thoroughly reliable and 
 thoroughly detailed figures such as ordinarily 
 may not be obtained regarding any other class 
 of private corporations, and only with the 
 greatest difficulty from municipal corporations. 
 Earning power, or more broadly and techni- 
 cally the Income Account, and valuation, or 
 the Capital Account, are elaborately and logic- 
 ally dissected by the Commission in such 
 manner that no competent bond buyer can fail 
 to comprehend the true financial condition of 
 the obligor. 
 
 120. Publicity makes possible to any investor 
 who is capable of it the same sort of statistical 
 investigation that any banking house ought 
 to give a railroad security it buys or recom- 
 mends. But in want of ability, inclination or 
 opportunity to study, the investor may accept 
 the dictum of his bankers on railroad bonds, 
 if ever, for a house that cannot give a compe- 
 tent opinion on an American railroad bond is 
 not qualified to advise on any type of security. 
 Not that such judgments are easily arrived at, 
 but that the investment principles are of com- 
 mon acceptance and the material facts indis- 
 putable.
 
 CHAPTER V. 
 BUYING CORPORATION BONDS. 
 
 121. Students can buy municipal or railroad 
 bonds, but it takes business men to buy cor- 
 poration bonds. In other words, we have now 
 come to that point in the bond business where 
 mere theory (with no reproach in the term) 
 must be subordinated to special experience 
 and native endowment to perform the purchas- 
 ing function without inviting regrets. There 
 is more here, also, of the spirit of the market 
 place where Greek meets Greek in trade, and 
 the firm with the shrewdest instinct for barter 
 stands the best chance of success. Less capi- 
 tal is needed for corporation bond buying, for 
 the average issue is smaller; therefore the field 
 is open to a wider range of talent and a display 
 of greater individual ingenuity in financing. 
 But before considering the problems of this 
 kind of buying we must come to some conclu- 
 sion as to what are corporation bonds. 
 
 122. What Corporation Bonds Are. One 
 who is at all sensitive to nice distinctions in 
 terminology will object to a division of funded 
 debt that excludes railroad loans from the class 
 'called corporation bonds. If railroad bonds 
 are not corporation bonds none are. On the 
 other hand, if one is going to be academic, 
 
 74
 
 BUYING CORPORATION BONDS 75 
 
 cities and towns and some other municipalities 
 are corporations — public corporations — and 
 their bonds must therefore be corporation 
 bonds, 
 
 123. Classification of Bonds. To show the 
 difficulty of establishing a good nomenclature 
 I give on the following page a rough classifica- 
 tion of bonded debt according to the character 
 of the issuer, or obligor.* 
 
 From this classification it will be seen there 
 is no word or phrase, now current, that is 
 properly descriptive of the transportation, 
 public utility, industrial and miscellaneous is- 
 sues that are not civil loans and are not rail- 
 road loans. Moreover, it will probably tax the 
 ingenuity of any one to discover or coin such 
 a word or phrase. Even as this classification 
 stands, many will object to the separation of 
 street railway and interurban railway securi- 
 ties and will wish to associate irrigation dis- 
 trict bonds with municipals or quasi-muni- 
 cipals. 
 
 124. In want of logic a safe guide is custom, 
 and custom loosely speaks of government, 
 municipal, railroad, and corporation bonds, 
 meaning by the last phrase, in a very general 
 way, the issues that are classified in this 
 
 • There are three other logical anil comprehensive classifica- 
 tions: according to the security for the hoiuis, according to the 
 purpose or function of this issue, and according to conditions 
 attending payment of interest and principal.
 
 CO 
 CO w 
 
 a bo 
 
 o::: 
 H> 
 
 <-< ii 
 o o 
 
 o o o 
 
 -OTD 
 >>C C 
 
 .ti o o 
 OfQpq 
 
 fflfq 
 
 -4-* f— « 
 
 C " 
 
 O rt 
 CJPL, 
 
 o 
 
 tn 
 
 .2* 
 'S 
 
 3 
 
 en o C 
 
 •a 
 
 ■? J3 ^-. 
 
 5 o D 
 
 > Ui dj 
 
 O O u. 
 
 g o 
 
 Em 
 
 aj o 
 
 < 
 
 C9 
 CU 
 
 
 n 
 
 C/3 
 
 C5 
 
 •^§ 
 
 CO 
 
 pq 
 
 •O 03 
 C > 
 
 OX 
 
 om-a d^ 
 
 C^ £/) 1/3 ^ 
 
 O p ^ O 3 
 
 «) 
 
 O CO 
 
 < O <^ 
 
 O .. 
 
 be O i>^ u 
 T CQ ^ C CI, 
 
 c o 
 
 .2 m 
 
 C3 <U 
 
 bo « 
 
 11 
 be 
 
 C 
 
 .!:^JQ 
 
 c 
 
 (U 
 
 a 
 
 G 
 u 
 
 CO 
 
 C 
 n) 
 O 
 
 Hi 
 
 3 
 
 Ns! 
 
 CO 
 
 •o 
 c 
 o 
 
 PQ 
 
 c 
 o 
 
 ■♦J 
 ii 
 
 o 
 ca. 
 
 CO 
 
 a 
 
 c4 
 Ii 
 
 H 
 
 o 
 pq 
 
 o3 "O 
 (V C 
 
 C/20 
 
 c 
 o 
 CQ 
 
 O to 
 
 00*0 
 
 c 
 
 ■Ji en u O 
 
 ^m;S§ 
 
 tj "^ o 
 
 cj -*-'-*-' 
 4; c^ c^ •— ' 
 
 CO 
 
 c 
 o 
 PQ 
 
 3 
 
 
 
 
 CO 
 
 
 
 
 "O 
 
 
 
 
 C 
 
 
 (O 
 
 
 o 
 
 <n 
 
 "O 
 
 
 PQ 
 
 <U 
 
 c 
 
 
 
 3 
 
 o 
 
 'U 
 
 >i 
 
 (/J 
 
 PQ 
 
 u 
 o 
 
 c 
 
 
 •n 
 
 m 
 
 o. 
 
 C 
 
 C 
 
 1> 
 
 h 
 
 o 
 
 d 
 
 +-* 
 
 o 
 
 •*-» 
 
 H-l 
 
 rt 
 
 U 
 
 0! 
 
 
 
 
 s 
 
 
 w 
 
 bo 
 
 c 
 
 OJ 
 
 ^ 
 
 
 <J 
 
 p 
 
 CTJ 
 
 c 
 
 p:iHP^ 
 
 ^ 
 
 
 
 CO 
 
 
 
 
 "O 
 
 
 
 
 C 
 
 
 
 
 o 
 
 
 
 C 
 
 PQ 
 
 
 
 c« 
 
 CO 
 
 
 
 "rt 
 
 § 
 
 
 
 
 9> 
 
 
 
 •♦J 
 
 C 
 cQ 
 
 
 
 3 
 
 ^5 
 
 
 
 •a 
 
 <u 
 
 
 CO 
 
 C 
 cs 
 O 
 h4 
 
 U 
 
 s 
 o 
 
 a to 
 
 O 03 
 0.0 
 
 u 
 
 76
 
 BUYING CORPORATION BONDS 77 
 
 scheme below railroad bonds. Hence the cap- 
 tion of this article, although it contradicts the 
 very classification in question. 
 
 125. Nothing- more than a glance at the clas- 
 sification is necessary to establish in any one's 
 mind the fact that the professional bond buyer 
 faces more difficult and varied problems in this 
 type than in any of the security types we have 
 dealt with previously. It will be conceded 
 at sight that in corporation bonds security is 
 first, last, and always the prime consideration. 
 Literally, on the fingers of two hands may be 
 counted the bonds of which the security may 
 be taken for granted, relatively speaking, and 
 attention be devoted to the intensity of the 
 investment demand and future advantages 
 from the fiscal relationship. 
 
 126. Corporation Bond Investment Prin- 
 ciples. If security is the main problem and so 
 many very unlike species come under the ge- 
 nus corporation bonds, it is correspondingly 
 difficult to sum up the investment principles 
 governing their purchase. This much may be 
 said at the outset : to buy intelligently any 
 type of corporation bond one must know the 
 kind of business the corporation is engaged in. 
 
 127. Knowing the Business of the Corpora- 
 tion. If a house is c(jnsidering the bonds of 
 an independent telephone company in Kansas 
 or Nebraska, it is not sufficient to analyze with
 
 78 BUYING CORPORATION BONDS 
 
 the utmost care the credit and earning power 
 of this company, and the general physical effi- 
 ciency of its plant ; it is necessary to study the 
 character of Western telephony as related to 
 Western social conditions, and the place of 
 this company's particular kind of service in the 
 scheme of telephonic communication the 
 country over; it is necessary to come to some 
 conclusion as to the likelihood of later cordial 
 affiliation with some large system with long- 
 distance, interstate activities ; it is necessary 
 to understand the policy of the Bell system 
 and the Bell attitude toward independents in 
 general. In a word, one must learn the tele- 
 phone business. 
 
 128. Water Companies. It is surprising how 
 much material for thoroughly practical indi- 
 vidualistic study is offered in any of the fields 
 of commercial endeavor covered by the obli- 
 gations that have been classified. Water com- 
 panies, perhaps, operate under conditions that 
 approximate simplicity and uniformity more 
 closely than most other obligors of corporation 
 bonds. Yet the amount of labor that certain 
 bond houses have put into purely statistical 
 study of these companies is incredible. Have 
 you, for instance, any notion as to whether 
 there is a known relation between the per 
 capita debt of these companies and the size 
 of the community served? Or what propor-
 
 BUYING CORPORATION BONDS 79 
 
 tion of gross earnings is properly applicable 
 for maintenance and renewals in this as com- 
 pared with other public utility corporations? 
 129. Gas Companies. The operation of gas 
 companies also seems fairly simple; that is, 
 so far as manufacturing and distribution prob- 
 lems have any direct relation to investment 
 in gas bonds. Yet we must consider, must we 
 not, what danger manufacturing plants run of 
 being supplanted by the discovery of new 
 sources of natural gas, which can be piped a 
 great distance? We must know whether elec- 
 tricity threatens to overthrow gas as an illu- 
 minant, as gas to a large extent took the place 
 of oil, and oil of candles. To know this we 
 must follow the history of improvements in 
 gas and electric lighting to Welsbach and tung- 
 sten incandescence. If gas is being supplanted 
 to any appreciable degree we must appraise 
 the other outlets for its consumption, as heat 
 and power. Then there is the danger of reduc- 
 tion in rates. As rates have been reduced in 
 the past, have earnings decreased or has 
 growth in per capita use and in population, 
 and has the utilization or residuals offset the 
 decline in price? Is there any relation be- 
 tween equitable rates and the population 
 served? To know gas bonds, then, one must 
 know something more than the mere outlines 
 of the gas business.
 
 80 BUYING CORPORATION BONDS 
 
 130. Perhaps it is more evident now than in 
 the earlier papers of this series what estimable 
 service may be rendered a banking house by a 
 competent statistical force in gathering ma- 
 terial which shall be the basis of sound busi- 
 ness judgments. Unfortunately, but quite 
 naturally, most material that is gathered in 
 this way never appears in print. It is personal 
 or firm property and is too valuable to be 
 given away. 
 
 131. Street Railways. A representative of 
 one of the big down-town banks came to me 
 recently to be directed to a trustworthy source 
 of printed information concerning street rail- 
 ways, by means of which to learn the essen- 
 tials of security in street railway stocks and 
 bonds. I gave him what platitudes I had 
 written on the subject and all the others I 
 knew about, but told him his quest was hope- 
 less ; he would have to learn street railroading 
 to be sure of his ground. What he wanted was 
 not for publication. 
 
 132. The Income of Public Service Corpora- 
 tions. Public institutions can afford to be less 
 niggardly of their data. An earnest of what 
 may be done in a statistical way that is of 
 immense practical value to banking houses 
 and investors is furnished by the Tuck School 
 of Finance, Dartmouth College. Prof. W. H. 
 Lyon is setting several of the Tuck School
 
 BUYING CORPORATION BONDS 81 
 
 men at work on theses that are designed to 
 show the effect of changing commercial and 
 financial conditions on the earning power of 
 various industries. Something distinctive and 
 valuable will be gained, when we know what 
 effect a short panic or a longer commercial 
 depression has on the gross and net income of 
 all the leading types of public service corpor- 
 ations. 
 
 133. The point of all this, so far as it con- 
 cerns the public, is to know what houses do 
 and what houses do not identify with them- 
 selves engineers and other specialists compe- 
 tent to pass upon the technical problems that 
 each class of bonds gives rise to. But the 
 public doesn't know and cannot know. All 
 the public can do is to patronize the houses 
 that among the fraternity have the reputation 
 for technical competence. Is it strange that 
 as a rule the same houses that are considered 
 technically competent have a reputation for 
 conservatism — much abused word? Banking 
 houses, like servants, have "characters," and 
 there isn't much disagreement in the profession 
 as to which are good, which bad, and which 
 indifferent. 
 
 134. Bond Houses as Specialists. Some 
 houses make a specialty of one type of bond: 
 Electric light and power, water, real estate, or 
 it may be irrigation. In this case it is quite
 
 82 BUYING CORPORATION BONDS 
 
 probable that they are reconstructors, opera- 
 tors, and managers in their specialty, and 
 therefore competent appraisers of property 
 values. Per contra, the presumption is that 
 because of their very specialization they may 
 be weak in banking experience, and in the 
 many excellent business qualities that charac- 
 terize the better American bond house. Yet 
 all bond men w^ill recall one or two notable ex- 
 ceptions to both rules. 
 
 135. The Newness of Corporation Bonds. 
 The most eminent characteristic of corpora- 
 tion bond dealings is the newness of them. 
 Take up a copy of "Poor's Industrial Manual" 
 and open at random. The chances are that five 
 times running your eye will light on bond is- 
 sues dated within ten years — even apart from 
 refunding loans. This newness, rather than in- 
 sufficient earning power, is the source of much 
 public aloofness from corporation loans. There 
 is basis for the feeling. Water supply is im- 
 memorial ; the gas business nearly a century 
 old ; but street and interurban railroading, 
 electric lighting, hydro-electric service, tele- 
 phony and irrigation have not attained their 
 majority. Furthermore, although the steam- 
 ship business is of long standing, and the lum- 
 ber business and real estate operations are 
 antediluvian in origin, the principles of bond 
 investment have been commonly applied to
 
 BUYING CORPORATION BONDS 83 
 
 them only very recently. It takes years to 
 establish speculative and investment principles 
 on a basis of experience that will warrant the 
 invitation of cautious, responsible funds. 
 
 136. Time will remedy youthfulness; and 
 in any case youthfulness is not quite the car- 
 dinal difficulty, but inexperience. Types of 
 business service that are common to all com- 
 munities, particularly perhaps to Eastern com- 
 munities and to cities, generally attain their 
 experience most rapidly. They become "stand- 
 ardized." Kinds of service that are univer- 
 sally required in settled communities — water, 
 light, power, and communication — are most 
 rapidly attaining fiscal maturity. Therefore 
 public utility bonds have until very recently 
 held a rank in common esteem midway be- 
 tween railroad and the "industrial and mis- 
 cellaneous" loans. 
 
 137. Industrial Issues. One of the big ques- 
 tions that the buyer for the bond house must 
 decide is whether his firm shall lend its name 
 to any industrial issues. It is a question of 
 policy rather than of relative security. The 
 public utility field, intrinsically, is safer be- 
 cause earnings are more definitely predicable. 
 But the competition for good public utility 
 bonds is so keen, and for good industrials so 
 slight, that it is easier to find loans of the latter 
 type that have the necessary intrinsic merit.
 
 84 BUYING CORPORATION BONDS 
 
 138. The Competition for Public Utility 
 Bonds. I say the competition for public utili- 
 ties, i. e., public service corporation bonds, is 
 keen. In the first chapter I said that the com- 
 petition among promoters to obtain place- 
 ment for their loans was keen. The two 
 statements are not contradictory. So far as 
 offerings by promoters are concerned, they are 
 innumerable. Many of them have merit. But 
 the bond buyer has not only merit to consider 
 but the policy of the firm and the character of 
 the firm's clientele. To get a loan that is both 
 good in itself and suitable to the nature of the 
 demand — that is the difficulty. Many proposi- 
 tions are offered, but few are chosen. Hence 
 a bond house that will handle corporation loans 
 cannot reach any great distributive power 
 without maintaining at least one competent 
 investigator or buyer on the road. Sometimes 
 this man is an engineer. At others he is a 
 member of the firm. In either case the judg- 
 ment of the man in the field looking for pos- 
 sible corporations and loans will be supple- 
 mented by others with different qualifications: 
 those who look at the purchase from a different 
 angle. 
 
 139. In the engineer's mind will be empha- 
 sized the value of the physical properties, the 
 strategy of their location, and the future dura- 
 tion of their serviceableness pitted against
 
 BUYING CORPORATION BONDS 85 
 
 wear and tear, improvements and new inven- 
 tions. The auditor will seek to read from the 
 company's books an immaterial expression of 
 the company's character, the truth concerning 
 its earning power, and the uses to which the 
 earnings have been put. The statistical expert 
 will interpret the report of engineer and audi- 
 tor in terms with investment meanings. The 
 sales manager will consider the attractiveness 
 of the security thus interpreted to the kind of 
 investment demand the hrm is prepared to 
 satisfy. The bankers themselves, fully ap- 
 prised by these specialists of the various 
 qualities of the proposed issue, will determine 
 the feasibility of "carrying" the securities 
 under the present condition of the firm's credit 
 at the banks, and the condition of credit in 
 general. 
 
 140. The Preference for Public Utilities. 
 The feeling against industrial loans is not so 
 strong as it was five years ago, or three years 
 ago. There are several reasons. The growth 
 of the scientific spirit in business increases 
 the stability of the large industrial corporations 
 that seek to emit funded debt through banking 
 channels. The decreased purchasing power of 
 money stimulates interest in loans of higher 
 yield than offered by public service bonds. 
 The very difficulty of tlic public service pur- 
 chase problem and the greater profits in indus-
 
 86 BUYING CORPORATION BONDS 
 
 trial flotations, influence the bond houses to 
 attempt to widen the legitimate investment 
 interest of their patrons by a campaign of 
 education regarding what is essential and what 
 is desirable in investments. 
 
 141. If any readers of this book are skeptical 
 regarding the reputed profits of municipal and 
 railroad bond selling, it must be because they 
 do not believe business can be successfully con- 
 ducted on such narrow margins as these pages 
 have declared. They overlook two things : the 
 self-supporting nature of the goods dealt in, 
 and the consequent immense volume of busi- 
 ness done per unit of capital. Incredulity is 
 misplaced. If there has been any error it has 
 been in overstating, not understating the 
 profits. 
 
 142. The Profit in Corporation Bonds. But 
 when we come to corporation bonds it is 
 another story. The gross profit in corporation 
 bond selling is very substantial. It will run 
 from 5 to 15 per cent; and if the loans are 
 wisely chosen this will be only a part of the 
 ultimate profit, for it is indeed a fairly easily 
 sold loan that will be bought without a sub- 
 stantial bonus of stock that eventually should 
 pay handsome dividends. 
 
 143. There is no need of concealment or 
 apology for these profits. There is no material 
 here for the over-acute critic with senses whet-
 
 BUYING CORPORATION BONDS 87 
 
 ted for evil in anything that comes out of 
 Wall Street. 
 
 144. No firm or group of firms has a mono- 
 poly of the corporation bond business. The 
 market for the loans is perfectly free. The 
 capital requirements of few companies in the 
 country are too heavy for satisfaction by any 
 one of many banking houses. In so far at least 
 as public service corporations are concerned, 
 the offerings of thoroughly meritorious issues 
 are not so numerous that any have to go beg' 
 ging from saturation of the investment mar- 
 kets. Therefore the price of, or profits from, 
 handling corporation loans is adjusted to the 
 cost of distribution. 
 
 145. Costly Distribution. If there is any 
 good basis at all for criticism of the gross 
 profit in distribution — and maybe there is — • 
 it lies not in the residual profits that remain 
 with the retail bond houses, but in the unscien- 
 tific, costly method of distribution. Let me 
 repeat an important statement made previous- 
 ly: the science of bond buying has developed 
 more rapidly than the science of bond selling, 
 or distribution. The cost of distribution, and 
 possible remedies, belong more properly to 
 another chapter. If this undue cost could be 
 ascertained and subtracted from the gross 
 profit the resulting net would appear not more 
 than a fair reward for the fiscal service ren- 
 dered.
 
 88 BUYING CORPORATION BONDS 
 
 146. Construction Propositions. Properties 
 that are in the construction stage do not meet 
 with banking favor. They are speculations 
 pure and simple, and properly require specula- 
 tive financing, w^ith v^hich the bond houses in 
 their proper functions have nothing to do. 
 
 147. Demonstrated plant value and demon- 
 strated earning power are pre-requisites of an 
 investment interest. When a company doing 
 a kind of business that the public knows some- 
 thing about has this value and earning power 
 but needs to enlarge its facilities more rapidly 
 than it can pay for out of surplus income, its 
 natural recourse is the bond house. In this 
 case the service of the house is principally, if 
 not solely, fiscal, and its compensation for 
 financing the needed enlargements may come 
 largely, if not wholly, from the bond selling 
 profits. 
 
 148. This country is developing too rapidly, 
 however, for normal business growth by accre- 
 tion alone. Small enterprises are forced into 
 large or driven to the wall. Industries here, 
 there, and everywhere engulf or are engulfed. 
 Distances and time are disregarded in the 
 struggle for control. 
 
 149. The Bond Houses as Reorganizers. 
 The bond houses, therefore, are receiving more 
 and more frequent appeals to finance plans of 
 amalgamation and reorganization. This fiscal
 
 BUYING CORPORATION BONDS 89 
 
 service is more speculative than the former, 
 and requires for satisfactory results a higher 
 degree of administrative capacity. Henceforth 
 no house may expect to become identified in a 
 large way with corporation finance that is not 
 equipped to direct in part the policies of the 
 companies it assists. As time goes on the line 
 of separation will disappear between the engi- 
 neering corporations with banking subsidiaries 
 having security outlets and the banking houses 
 with engineering and operating departments. 
 
 150 In line with this thought there is no 
 reason why a firm that adheres most scrupu- 
 lously to investment ideals should not promote 
 and support through the construction stage 
 any enterprise the firm is technically qualified 
 to further, provided it does not put out securi- 
 ties to the public until they are ripe. It will 
 be seen, however, that to the extent firms pur- 
 sue this policy they are disqualifying them- 
 selves, as firms, from developing the purely 
 banking function ; and the banking function is 
 more closely kin to their main business — the 
 selling of investment bonds. 
 
 151. Although this mutual attraction of the 
 banking and operating elements of modern 
 industry may cause misgivings on the part of 
 those purists who, if they could, would insist 
 at all costs on the distinction between invest- 
 ment aloofness and speculative participation
 
 90 BUYING CORPORATION BONDS 
 
 in active affairs, nevertheless it may prove the 
 best thing that could happen to business gener- 
 ally. A smaller percentage of bond houses, 
 perhaps, may close a quarter century of honor- 
 able business without loss to any client, but a 
 larger percentage of those who entrust their 
 funds to corporate enterprise may receive com- 
 mensurate returns.
 
 CHAPTER VI. 
 THE ADVISORY FUNCTION. 
 
 152. Advising a Woman. I was once as- 
 sociated with "the buying side" of a banking 
 house that is widely known for the upright- 
 ness of its dealings with clients. A lady un- 
 known to us came into the office one day bent 
 on buying a certain listed industrial preferred 
 stock, but reluctant to do so without first talk- 
 ing the matter over. In the absence of the 
 sales manager I discussed with her the merits 
 of this stock, but advised her to purchase, in 
 preference, the best unlisted public utility bond 
 we then had to ofifer. The income from these 
 two investments was practically the same — 
 something over five per cent., but the security 
 for the bond would be considered by most 
 people superior. At least the marketable value 
 would be more stable, and also the periodicity 
 and amount of the income, presumably. 
 Furthermore (without meaning to reflect on 
 the highly valuable services of the stock ex- 
 changes) it is my experience that the evil 
 genius of widely posted quotations has even 
 a mrjre baneful effect on women than on men. 
 
 153. At this point in the interview the sales 
 manager appeared, and after explanations all 
 round asked me in the presence of the pros- 
 
 91
 
 92 THE ADVISORY FUNCTION 
 
 pective customer if I didn't thinP a certain 
 underlying divisional railroad issue more suit- 
 able for her. To be sure. But I knew that 
 it would be impossible to sell her any of these, 
 quite irrespective of the fact that there was no 
 profit in them to speak of, for a scant 4 per 
 cent, has no attractions to people who look 
 takingly at high-yield industrial preferred 
 stocks. 
 
 So we — or rather the manager — did as one 
 would like to be done by, hewed square to the 
 line, stated unwelcome investment truths, gave 
 entirely disinterested advice, and the lady went 
 elsewhere to make her purchase, whatever it 
 may have been, evidently deficient in acquaint- 
 snce with human nature as well as with invest- 
 ments. 
 
 154. The Ethics of Salesmanship. It would 
 be idle to affirm that an incident like this il- 
 lustrates the general temper of bond salesman- 
 ship. The millennium has not yet come to the 
 security houses, nor have many of them more 
 than bowing acquaintance with the golden 
 rule. They are not in business to save a client 
 in spite of himself or herself. But the most 
 successful bond salesman I know is un- 
 equivocally honest in the advice he gives his 
 customers, and of the many salesmen who 
 have worked with me and under me I have 
 never known one who I believe would de-
 
 THE ADVISORY FUNCTION 93 
 
 liberately play upon the business ignorance of 
 tvomen or other dependent persons. 
 
 155. Perhaps the close of the preceding 
 ocntence looks like an anti-climax; but is it? 
 In how many lines of business is there a dis- 
 tinct, recognized ethical code that transcends 
 the law and even the broader consideration of 
 business expediency? One looks to some of 
 the professions, like medicine, to find an 
 analogy. This thought leads to another that 
 I like to emphasize as frequently as may be. 
 When the bond business is conducted as ef- 
 ficiently as possible from the standpoint of the 
 investor, when the advisory function is de- 
 veloped to its proper proportions, the bond 
 business has become a profession. To the ex- 
 tent that now a bond house or its traveling 
 representatives can be consulted as a man con- 
 sults his physician or his attorney, relying not 
 altogether on the personal integrity of his con- 
 sultee (to coin a word), but also on the recog- 
 nized code of ethics in the fraternity — to that 
 extent the bond business has become a pro- 
 fession entitled to the respect and confidence 
 we have for and in professional men who value 
 service above compensation. 
 
 156. Financial Jackals. Would that it were 
 not necessary, in fidelity to truth, to note ex- 
 ceptions. Nevertheless, I can now recall only 
 one New York bond house, and only one
 
 94 THE ADVISORY FUNCTION - 
 
 Boston house, that I have reason to believe, 
 from occasional contact, to be virtually want- 
 ing in ordinary business integrity. There may 
 well be others, for my experience is limited. 
 However, is this testimony not a little out of 
 the ordinary? 
 
 157. The time was when so much could 
 not be said for the security bankers. Not 
 very many years ago there was a house of 
 almost national reputation that, taken out of 
 the hands of its founder but carried on in his 
 name, laid waste many a fortune. The 
 plundering was open and shameless. The 
 piratical character of the salesmanship was 
 even the subject of jest in doggerel verse, cir- 
 culated from the home office among the em- 
 ployees. 
 
 158. I remember calling in those times on 
 a lady who was among the prominent bond- 
 buyers of Salem. One day she excused her- 
 self from doing business with me on the 
 ground that she had just sold to a salesman 
 of this house an old, seasoned, underlying rail- 
 road 5 per cent, bond at par, in exchange for 
 the bond (sold at a discount) of a railroad in 
 New Mexico, on which I knew the ties were 
 never laid. She was felicitating herself on 
 this exchange because her old bond, when due, 
 would be worth only par, the salesman said, 
 and he very generously ofifered to pay her the
 
 THE ADVISORY FUNCTION 95 
 
 amount now, in advance of maturity, and not 
 only that, but he was to sell her another 5 per 
 cent, railroad bond, a first mortgage railroad 
 bond, too, for which she would have to pay 
 only $950. So she was to gain $50. 
 
 159. That is the sad side of bond selling. 
 I tried very hard in the days of my apprentice- 
 ship to do business with the widow of a Boston 
 physician. Her husband had left her a modest 
 house with its furnishings, and $20,000 of life 
 insurance. The life insurance she could have 
 lived on very nicely in well-chosen, well- 
 scattered 5 per cent, bonds. The money finally 
 went into 9 per cent. California oil bonds. She 
 liked my appearance, she said, and would like 
 to do business with me. But why should she 
 buy 5 per cent, bonds when she could buy 9 
 per cent, bonds at the same price? May that 
 oil company prosper! In this case no bond 
 house was to blame. 
 
 160. Naturally, the damage done legitimate 
 bond selling by financial jackals is very great. 
 Every sales manager, even of the most favor- 
 ably known houses, realizes how much busi- 
 ness is lost because of them. Let a bond man 
 leave the beaten paths for a day, even in such 
 a "well-combed" State as Connecticut, and he 
 will be liable to a greeting that should have 
 been given his more successful swindling 
 predecessor, who called with worthless stock
 
 96 THE ADVISORY FUNCTION 
 
 for sale. How few, relatively speaking, are 
 the places whence he will be turned away be- 
 cause of regretted visitations from his com- 
 petitors in the bond business ! 
 
 161. Ethically, the advice of the bond 
 houses is excellent, whether coming direct 
 from the ofifice or through salesmen. Tech- 
 nically, its value is highly variable in this 
 country, due to the fact that our financial 
 houses are still, primarily, merchants of se- 
 curities rather than counselors. It is hard to 
 be fair as between two securities carrying 
 very unequal profits. That is one reason why, 
 in the previous chapter I intimated that the 
 merging of banking and operating functions 
 in a bond house has its drawbacks. It im- 
 pairs the value of the advisory function. 
 
 162. As merchants, rather than counselors, 
 the major efifort is still to "move the goods," 
 and, as I have stated in the introduction to 
 "The Principles of Bond Investment," the 
 salesman goes upon the road trained in ad- 
 dress, primed with the latest gossip of new 
 ore-bodies and melon-cutting, and with the 
 talking points of his leading bonds — the bonds 
 he wants the most to sell, — really sincere and 
 frank in interpreting the information on his 
 circulars, but for the most part inconsiderate 
 of the wants of his clients, quite unable to 
 comprehend or explain the essential invest-
 
 THE ADVISORY FUNCTION 97 
 
 ment qualities in the bonds he offers — unable, 
 for instance, to tell whether there is a differ- 
 ence between a bond and a note, or between a 
 car-trust certificate and an equipment bond. 
 Salesmanship, so represented, is not a profes- 
 sion but a trade. It will be surprising if a 
 decade does not improve this condition of 
 things. Business, in self-interest, is becoming 
 reconciled to scientific management. Some 
 day, in self-interest, it will become reconciled 
 to scientific salesmanship. 
 
 163. English Selling Methods. Capital, in 
 England, may not, with propriety, seek its re- 
 quirements from strangers. Introductions are 
 necessary for immediate contact. The cus- 
 tomary communication with private persons is 
 through solicitors or through brokers ; with in^ 
 stitutions like insurance companies it is 
 through company brokers. It is not good 
 form, in turn, for the brokers to advertise, or 
 to circularize any except people to whom they 
 are known in a personal way. The distinction 
 between banking and brokerage houses is care- 
 fully preserved, and business regulations, gen- 
 erally, tend to recognize the difference between 
 merchants of securities and counsellors regard- 
 ing their sale. Therefore, it is far more dif- 
 ficult to rob the unsophisticated part of the 
 British public than Americans who are un- 
 familiar with securities.
 
 98 THE ADVISORY FUNCTION 
 
 164. Just as Easterners believe that West- 
 ern business men more highly esteem optimism 
 and debonair aggressiveness as business vir- 
 tues, than accuracy and unbiassed judgment, 
 so the British rightly regard us as a nation of 
 special pleaders in matters of industry. 
 
 165. Financial Advisory Systems. Never- 
 theless, the change in this respect that has 
 taken place among us during the past decade 
 has been very remarkable indeed. In response 
 to a real demand a number of investment ad- 
 visory systems have sprung up, v^hich, with 
 nothing but financial information for sale, en- 
 deavor to work with bond houses and other 
 banking institutions in disseminating reliable 
 news and opinions. I have already referred 
 to some of these advisory systems in mention- 
 ing the statistical helps that are available to 
 the professional buyers in bond houses. How- 
 ever, in our country every now and again one 
 of these systems will lapse from its good call- 
 ing to deal in securities, directly and frankly, 
 or by subterfuge. It is then in the category of 
 a physician who prescribes to a patient nos- 
 trums in which he has a pecuniary interest. 
 The time will come when such a state of things 
 will be as inconceivable in securities as in 
 medicine. Surely, it is very short-sighted 
 policy thus to invite distrust and disrepute 
 from the public at large, as well as to alienate
 
 THE ADVISORY FUNCTION 99 
 
 the bond houses which are still the principal 
 sustenance of these systems. 
 
 166. The greatest single influence affecting 
 security purchases in America is probably the 
 press in its narrative and editorial capacity. 
 The next greatest influence, perhaps, is the 
 American custom of personal solicitation by 
 security salesmen. Solicitation is the apt 
 word — unfortunately shall we say? The third 
 influence may be the press in its advertising 
 capacity. 
 
 167. Bond Advertising. Until very recently 
 there were only two kinds of advertising a kid 
 glove bond house might do. The first was to 
 insert a "card" with the firm name (and mem- 
 bership maybe), and with the briefest possible 
 statement of the various banking functions. 
 To this might be added, parenthetically as it 
 were, the fact that securities were bought and 
 sold — of course for the accommodation of cli- 
 ents. The second was to print a broadside, 
 offering an issue of bonds with particulars re- 
 garding the form, interest rate, price, dura- 
 tion, etc., but, for the sake of dignity, with all 
 arguments to prove the issue a desirable in- 
 vestment couched in a letter purporting to 
 come from the president of the obligor com- 
 pany. 
 
 168. General Publicity. Roth of these 
 forms of advertising are useful and proper.
 
 100 THE ADVISORY FUNCTION 
 
 The cost of the first must be charged to "Gen- 
 eral Publicity," a most unsatisfactory, if neces- 
 sary, account. The cost of the second may be 
 charged to the account of a definite series of 
 transactions, namely, the purchase and subse- 
 quent sale of the issue advertised; but very 
 much less business than most people suppose 
 directly results from this kind of expenditure. 
 It is now not unusual for a bond house to 
 make such a public offering and calmly state 
 at the bottom that all the bonds are sold and 
 the advertisement is "merely a matter of rec- 
 ord." But more commonly, if the issue is of 
 such a nature as to sell itself out of the hands 
 of the underwriters into the hands of the sec- 
 ondary purchasers, the public offering is sup- 
 posed to be good for a time from 5 minutes to 
 a day after the opening of the books for orders. 
 169. Advertising Investment Principles. A 
 third, more recent form of advertisement, de- 
 serves all the encouragement in resultant busi- 
 ness that it can get, for when properly con- 
 ducted it is a very influential expression of 
 the bond houses in their advisory capacity. 
 This form discusses the nature and the es- 
 sential elements of investment with the ap^ 
 plication of this nature and these elements to 
 the needs of some class of investors or to the 
 characteristics of some bond issue. A glance 
 at the financial page of the principal New York
 
 THE ADVISORY FUNCTION 101 
 
 daily papers will recall just which high-grade 
 houses use this method of advertisement, and 
 how "Advisory advertisment" ought to pay 
 best. Perhaps it does, because it gives a 
 reader the impression that the signatory house 
 has a full sense of its duty as counsellor of 
 investments. 
 
 170. It is not easy to write such advertise- 
 ments. Any series of notices on the same 
 theme becomes monotonous after a while. De- 
 liberate repetition is less hum-drum than un- 
 skilful variation. Space is costly, and nothing 
 but broad generalization is possible in two 
 inches of single column. But if advertise- 
 ments are meant to be read, this third class is 
 useful as well as significant of a growing pro- 
 fessional sense among the bond houses. 
 
 171. Special Circulars. Less recent in origin 
 and of greater vogue is the special circular con- 
 taining investment truths. Usually it is truth, 
 if not wholly sincere. One should not expect 
 too much, and the difiference between truth- 
 fulness and entire sincerity is the difference 
 between the best spirit in modern business and 
 the spirit of the millennium. In other words, 
 the statements on the bond house circular are 
 facts. They can be relied on. They are as 
 exact as brains and care can make them. What 
 one must look twice for, however, are the 
 omissions. These remarks apply not only to
 
 102 THE ADVISORY FUNCTION 
 
 the brochures on general investment topics, 
 but to the circular offerings as well. 
 
 172. Investment by Correspondence. Lastly, 
 the bond houses have opportunity to direct 
 investments wisely by means of correspond- 
 ence. Very little of this correspondence origi- 
 nates with the investor. Most of it is the 
 "confirmation" in writing of offers made by 
 salesmen. The confirmation is the excuse for 
 a more direct and personal presentation of the 
 merits of the issue or issues that have been 
 offered. Not being of public knowledge it is 
 more likely to express the true character of 
 the house. 
 
 173. If, therefore, you wish to test the 
 quality of half-a-dozen banking houses, send 
 each of them a letter of the following purport : 
 "Brown, Jones & Robinson. 
 
 Gentlemen : — My husband has recently died 
 leaving me with $25,000 which is distributed in 
 the savings banks of the neighborhood. 
 Would you advise that I keep some or all of 
 it there, or put it into bonds or mortgages? 
 If in bonds, what kind of bonds should I buy, 
 and have you any to suggest. 
 
 Thanking you for your attention, etc." 
 The gentle feminine reader will do well to 
 insert some little fib about being too delicate 
 to receive strangers, or in twenty-four hours
 
 THE ADVISORY FUNCTION 103 
 
 the neighborhood will think she has advertised 
 for another husband. 
 
 Seriously, it is no fault to see business large 
 in such a letter and to set hot foot after it, but 
 whether reply is first by letter, as it should be, 
 or by visitation, a keen person will appreciate 
 which banking houses are true to their proper 
 advisory function and which are mere pedlers 
 of paper.
 
 CHAPTER VII. 
 
 THE PROTECTIVE AND BANKING 
 FUNCTIONS. 
 
 174. The Mercantile vs. the Protective 
 Policy. The work of the bond house, as 
 trustee for its clients, is closely associated with 
 its advisory function, which we have just con- 
 sidered. Again attention is called to the 
 alternatives it faces. It may have inherited 
 and accepted the purely mercantile policy. It 
 may consider itself merely a merchant of se- 
 curities, with cessation of all responsibility to 
 its customers on fulfillment of the selling con- 
 tract, written or implied. Or on the other 
 hand it may assume the protective function 
 without criticism or demur from any source, 
 and feel a moral responsibility concerning 
 every bond it has placed with persons or in- 
 vestment institutions. Of course it will never, 
 under any circumstances, feel bound, except 
 as a matter of policy, to make good any kind 
 of loss, that ensues from issues it has handled 
 that originally were investigated and bought 
 by brokers or other banking houses; nor will 
 it feel bound with respect to persons or insti- 
 tutions that have made their purchases of its 
 own specialties indirectly, through other 
 
 104
 
 THE BANKING FUNCTION 105 
 
 houses. Indeed, some bond houses will deal 
 on the street and among houses of other cities 
 in securities they would not offer to clients. 
 
 175. The Spirit of Trusteeship. The sense 
 of obligation, the spirit of "trusteeship" may 
 find expression in a binding contract, or in a 
 deliberately advertised policy, or it may be 
 known only when put to the test of financial 
 trouble. 
 
 176. Bond Guaranty. One cannot with good 
 grace criticize the spirit of obligation that ex- 
 presses itself in a guaranty of bond issues, 
 whether this guaranty is of a banking house 
 direct, as rarely, or of a trust company^ or of 
 a guaranty company. Such criticism, more- 
 over, is likely to meet with little sympathy in 
 most quarters. The conspicuous success of 
 certain guaranty companies will rise up and 
 overshadow the numerous obscure failures. 
 Guaranties can be made sound. There is no 
 doubt of that. They have been made sound 
 in notable instances. But there are certain 
 postulates to soundness that seem to preclude 
 the guaranty principle from being generally 
 sound. The securities guaranteed must be of 
 a high order of safety in themselves, and the 
 guarantor company must have assets far in ex- 
 cess of any probable demand of contingent lia- 
 bilities. But securities of the sort that are 
 appropriately guaranteed hardly need the pro-
 
 106 THE PROTECTIVE FUNCTION 
 
 tection, and directly or indirectly, a part of the 
 profits from their sales must, through long 
 years go to the upbuilding of the equity in as- 
 sets that gives the guaranty value. 
 
 177. Furthermore, the principle back of the 
 guaranty is an insurance principle, not an in- 
 vestment principle. Insurance must be paid 
 for. It is paid for by the insured. The in- 
 sured has to pay not only for indemnity but 
 for the cost of clearing the insurance, i. e., the 
 guaranty company's operations. 
 
 178. The Cost of the Guaranty. The intelli- 
 gent investor, who can choose a safe invest- 
 ment, yet pays for a guaranty, assumes the bur- 
 den of the unintelligent investor. What is the 
 price? Well, in real estate mortgages, v^here 
 the guaranty principle has been developed 
 most fully, the customary cost to the intelli- 
 gent investors of his weaker brethren's lia- 
 bilities of loss equals one-ninth of his income ; 
 rather costly charity, is it not? It is only fair, 
 however, to state that this one-ninth covers 
 not only the cost of certainty of payment, but 
 the cost of promptness of payment, and relief 
 from all details of investment management. 
 
 179. In bonds, this one-ninth (assuming one- 
 ninth of income to be the cost) could not be 
 made to cover promptness and relief from de- 
 tails as well as certainty, because in bonds the 
 former two of these three investment elements
 
 THE BANKING FUNCTION 107 
 
 exist in a far higher degree and are part com- 
 pensation for a possible less income, other 
 things being equal. 
 
 180. It is to be observed, and quite naturally 
 enough — that the guaranty is more commonly 
 used to reinforce real estate bonds than any 
 other kind ; and of real estate bonds, those se- 
 cured by farm mortgages. Farm mortgage 
 real estate bonds are now invading the East 
 as never before. One or two well-known Wall 
 Street houses built up their business on this 
 paper in days gone by. But now Tom, Dick 
 and Harry are in the field selling securities 
 that have been dug up and guaranteed in Texas 
 and Oklahoma by local trust and mortgage 
 companies. 
 
 181. Oklahoma, by the way, has had to learn 
 by costly experience the insurance principle 
 that underlies the guaranty. It is to be ques- 
 tioned whether, in the long run, bond guar- 
 anties will prove any more economically sound 
 than bank deposit guaranties, in Oklahoma or 
 anywhere else. One must not forget that 
 there is a distinct difference between the dis- 
 tribution of risk, as in fire and life insurance, 
 where accidents and loss are inevitable, un- 
 foreseeable, and in investment where one can 
 choose the degree of risk he is willing to as- 
 sume. 
 
 182. The Protective Function Applied to
 
 108 THE PROTECTIVE FUNCTION 
 
 Marketability. The protective function, as an 
 advertised moral obligation, is usually con- 
 fined to matters of negotiability. It is not 
 good form and it certainly would be poor busi- 
 ness to advertise that one w^ould make good 
 all losses due to suspension of interest or prin- 
 cipal payments. A house that w^ill create a 
 market for its issues has burden enough to 
 carry to fulfill its pledge. The truth of this 
 has been strikingly evident these past three 
 years cf declining bond prices. Nevertheless, 
 in the face of the decline the policy of creating 
 a market for "specialties" is steadily growing 
 and advertisements to this efifect are coming 
 to be looked upon as a matter of course. 
 
 183. The amount of "protection" afforded by 
 the creation of a specialty market depends, of 
 course, upon the price at which a bond house 
 is willing to buy back the issues it has fathered. 
 We are likely to forget that the "security" of 
 a bond is a very complex thing. Security of 
 principal and security of interest, for example, 
 are, or may be, quite distinct and almost un- 
 related investment elements. This fact is most 
 appreciable in income bonds. Likewise se- 
 curity of principal, as determined by the prob- 
 ability of the payment of the face of the bond 
 at maturity, and security of principal as de- 
 termined by the probability of conversion in 
 cash without loss during the life of the loan
 
 THE BANKING FUNCTION 109 
 
 are two distinct and almost unrelated invest- 
 ment elements, 
 
 184. To make practical application of this 
 thought to the bond business, — I have much 
 greater confidence that New York City 43/2's 
 of 1956 will be paid when due than I have that 
 the Blank Electric Company First Mortgage 
 5's of 1949 will be redeemed at maturity. But 
 if I may need to cash my investment five years 
 from now I have greater confidence that 
 Brown, Jones & Robinson will pay me within 
 two points of what the Blank Electric 5's cost 
 than that the open market for New York City 
 4^'s of 1956 will be within two points of the 
 present market. Thus by exercising the pro- 
 tective function marketwise Brown, Jones & 
 Robinson are strengthening the securit3^-in- 
 liquidation of my investment quite apart from 
 security-in-redemption. 
 
 185. The Cost to Clients of Artificial Mar- 
 ketability. In the previous paragraph a two 
 point difference was suggested as a possible 
 "expectation of loss" due to liquidation of 
 specialties, under normal conditions when the 
 specialties were protected by the sponsoring 
 bond house. I think that two points is a fair 
 figure. If there has been a substantial appreci- 
 ation in any given bond these may be no loss 
 but in fact a gain. Conversely if the whole 
 bond market is "off" the loss in liquidation
 
 no THE PROTECTIVE FUNCTION 
 
 may be more than two points. If the issue 
 has become "digested" like the Aurora, Elgin 
 and Chicago First 5's, the Union Electric Light 
 and Power Co. (St. Louis) First 5's or the Mil- 
 waukee Gas Co. First 4's, then the margin be- 
 tween selling price and subsequent buying 
 price will be narrower than if the issuing 
 house has still a large unsold block on its 
 hands. 
 
 186. As you stop to think of it, what a re- 
 markable situation you face when a body of 
 merchants (security merchants) have so de- 
 veloped the paternalistic function that they 
 can adopt a policy of buying back at a fair 
 price what they have once sold you, after years 
 of alien ownership. Fortunately securities, 
 like wine and friends do not become second 
 hand and are likely to improve with age. 
 
 187. Bonds as Collateral. No other type of 
 investment security has developed this kind 
 of convertibility to such an extent as bonds. 
 The loan value of bonds exceeds that of all 
 other kinds of pure investment. As I have 
 said previously, the highly desirable hypothe- 
 cary value of bonds is largely overlooked by 
 professional men who seek a channel for their 
 surplus; it is overlooked by most people who 
 have little dealing with banks. The great sys- 
 tem of American bond houses is built and 
 financed on the superior hypothecary value of 
 bonds.
 
 THE BANKING FUNCTION 111 
 
 188. Then do I make myself clear when I 
 say that the bond houses, in protecting to the 
 full the convertibility, or negotiability, of their 
 securities, stand ready to act in the double ca- 
 pacity of buyers and bankers? To accommo- 
 date you, so that you need not lose money, 
 they will buy of you or loan to you. 
 
 189. The Banking Function of Bond Houses. 
 This, therefore, is the genesis of the banking 
 function, to protect clients who need only 
 temporary realization on their securities. But 
 the bond houses are fully equipped with men, 
 methods, and machinery, to say nothing of 
 temper, for the conduct of any sort of bank- 
 ing, in so far as it relates to the personal affairs 
 of their clients. They do not make good com- 
 mercial banks to be sure; they are not good 
 banks of discount; but as banks of deposit, for 
 checking accounts, or for savings or for per- 
 sonal loans, they do as well as any, and I have 
 no question the good ones are as safe as the 
 average "institutional" bank, if not safer. 
 
 190. The Cost to Bond Houses of Artificial 
 Marketability. It is evident' that there is no 
 profit in repurchasing bonds to protect clients. 
 Two points is a low cost of liquidation. If 
 five to fifteen points, plus a stock bonus, rep- 
 resents the initial selling cost plus a fair profit, 
 two points cannot represent any profit over 
 the cost of a second sale of inactive securities,
 
 112 THE PROTECTIVE FUNCTION 
 
 even conceding that the selling cost becomes 
 less as the issue becomes assimilated and the 
 "campaign of education" begins to bring its 
 results. Moreover, in the majority of cases 
 Ihe resale of the old security with a two point 
 gross profit prevents the initial sale of a like 
 "undigested" security with its five to fifteen 
 point profit. 
 
 191. If, on the other hand, we deal in a bond 
 that will resell itself, then the repurchase price 
 will not be a fixed difiference from the original 
 sale price but will be determined by the public 
 market. Therefore, although the cost to the 
 bond house of finding a second purchaser will 
 be nominal, its profit will also be purely nom- 
 inal because it must bid for the bond approxi- 
 mately at the market. 
 
 192. Thus far we have considered the pro- 
 tective function in relation to guaranty and 
 marketability. 
 
 Marketability, you remember, is only one of 
 the two sides of negotiability ; only one of the 
 forms of convertibility. Bonds do not have to 
 be sold to be converted. They may be con- 
 verted temporarily by hypothecation. 
 
 193. The Bond Houses as Banks of Deposit. 
 We of the profession are inclined to take good 
 humoredly, if not quite seriously, the efiforts of 
 the younger and therefore, perhaps, more am- 
 bitious bond houses to build up their business
 
 THE BANKING FUNCTION 113 
 
 by the opening of interest-bearing deposit ac- 
 counts — or whatever you would call them. 
 The underlying motive is the same as that 
 back of $100 pieces of bonds. Selfishly, to 
 widen the clientele and educate to bond buy- 
 ing; unselfishly to encourage thrift in this very 
 extravagant nation. Interest-bearing deposit 
 accounts, subject to check, and bonds of $100 
 denomination are not in the same category as 
 bonds bought on the instalment plan. Instal- 
 ment bond buying has some of the same 
 strength and weakness as ordinary insurance. 
 It encourages "saving" to be sure, but it com- 
 mits one to engagements one may not be able 
 to fulfill. It is not investment, except when 
 it has "paid up" value. But a deposit ac- 
 count with a bond house leaves you a free 
 agent as to further transactions. 
 
 194. The other aspects of the banking func- 
 tion are not of sufficient importance to retail 
 here, and they have little or no relation to the 
 protective functions, about which we do well 
 to center our attentifjn. 
 
 195. The Protective Function Applied to All 
 Bond Qualities. Up to this point the present 
 paper has not dealt with that phase of the 
 business which comes most quickly to mind 
 when one speaks of the protective function. 
 Broadly considered the protective function can 
 be exercised — should be exercised — in the in-
 
 114 THE PROTECTIVE FUNCTION 
 
 terest of any of the ten elements or good 
 qualities that go to the making of an ideal in- 
 vestment. Those qualities, you will remem- 
 ber, were distinguished as follows: 
 
 Security of principal 
 
 Security (or stability) of income 
 
 Fair income return 
 
 Marketability ) ^ .•.•,•. 
 
 ,, , „ , J- Convertibility 
 
 Value as collateral J 
 
 Tax-exemption 
 
 Freedom from care 
 
 Acceptable duration 
 
 Acceptable denomination 
 
 Potential appreciation. 
 
 196. The action and interaction of these 
 qualities, one upon another, and the part of 
 the bond house in assisting the work, has just 
 been fully illustrated. We have deliberated 
 over the quality called marketability, and over 
 the quality called hypothecary value (or value 
 as collateral) and perhaps have convinced our- 
 selves that in furthering these virtues in any 
 investment a house is furthering the security 
 of that investment. 
 
 197. So, also, the protective function may 
 be extended over the whole elements or 
 qualities, over some in greater degree than 
 over others. As to the second of these, for 
 instance : Stability of income — banking houses 
 frequently pay the interest of railroad obliga-
 
 THE BANKING FUNCTION 115 
 
 tions during a season of duress until reor- 
 ganization plans perfect the ultimate adjust- 
 ment of the loan. There may, of course, be 
 an ulterior motive to the payment, such as to 
 gain control of the issue in question, but again 
 control is probably desired for concerted ac- 
 tion for the benefit of the security holders. 
 Bond houses are generally back of bond- 
 holders' protective committees. In the pres- 
 ent difficulties of the Wabash there are oper- 
 ative just such measures protective of the 
 coupons of the First Refunding and Extension 
 4s. 
 
 198. Protecting Security, bat w^hen all is 
 said and done the protective function is most 
 important in relation to the security of the 
 invested principal. An ounce of prevention 
 should have been applied in purchasing the 
 issue to oflfer to clients. In want of the ounce, 
 a pound of cure may be available. There are 
 certain bond houses that for a few years past 
 have yielded little or no return to their 
 proprietors. The profits from merchandising 
 have been devoted to the payment of losses 
 for which these houses are not legally re- 
 sponsible, but which they voluntarily assume 
 in the interest of their clients, 
 
 199. Assuming Losses. A member of one 
 of the better New York houses illustrates the 
 point as follows: "A group of bankers
 
 116 THE PROTECTIVE FUNCTION 
 
 handled the bonds of a hydro-electric com- 
 pany. The company had been in operation 
 but a comparatively short time when a ter- 
 rific flood carried away the dam and did other 
 damage which virtually destroyed the power 
 plant. The bankers came forward and recon- 
 structed the dam and the power houses at a 
 cost of about three-quarters of a million dol- 
 lars. For their advances to the company they 
 took junior securities, which have a very ques- 
 tionable value. It will be a great many years 
 before the bankers will get back the money 
 they advanced, if, in fact, they ever do. They 
 took this action with a view only of protect- 
 ing the interests of their clients, who had pur- 
 chased the first mortgage bonds of the com- 
 pany. Had they not provided the funds for 
 the reconstruction of the dam and plant their 
 bondholders would have suffered heavy losses. 
 The bankers, although they were not legally 
 liable, preferred to make a heavy sacrifice 
 rather than have their bondholders suffer." 
 
 200. Protection in Reorganization. The 
 Street was agog last winter over an extraor- 
 dinary Christmas gift voted the president of 
 one of the big trust companies. This gift was 
 the tribute of the board of directors to a 
 talent for protecting distressed security hold- 
 ers and rehabilitating depleted properties. 
 Reconstruction is almost as important as con-
 
 THE BANKING FUNCTION 117 
 
 struction. Few of our great railroads have 
 attained an investment level for their securi- 
 ties until they have been through one or two 
 receiverships. The record of street railways 
 is no better. As a class public utility com- 
 panies have fared better than railroads be- 
 cause they came later and were developd (i. e., 
 refinanced) by investment houses, not by 
 speculative cliques; by institutions that had 
 either a conscience or a sense that honesty is 
 the best policy, not by buccaneers of finance 
 who are in business for what they can get 
 out of it — nothing more. 
 
 201. As I read the proof of this text be- 
 fore it goes to press a letter comes to me from 
 a Connecticut investor containing the follow- 
 ing: 
 
 *T could tell you of one dealer in securities 
 who in the course of a dozen years or so has 
 built up his business from practically nothing 
 to a turnover of two or three millions a year, 
 partly because he ascertained values, partly 
 because he never misrepresented, and partly 
 because he did his best to stand between his 
 clients and loss. There are better ways of get- 
 ting money out of people than by fleecing 
 them and better ways of getting the value out 
 of life." 
 
 202. The old and the new modes of Amer- 
 ican finance are very properly signalized by
 
 118 THE PROTECTIVE FUNCTION 
 
 the black death's head on the red field and 
 the red cross on the white field, respectively. 
 The supremacy of the latter emblem we owe 
 to the highly developed protective function 
 of the bond houses, and to the caution, among 
 them, that the protective policy fosters.
 
 CHAPTER VIII. 
 
 SELLING BONDS— THE BANKER'S 
 VIEWPOINT. 
 
 203. However much we may emphasize the 
 importance of various other bond house func- 
 tions, it must be confessed that they are trib- 
 utary to and exist by grace of the selling 
 function. Bond firms are merchants of se- 
 curities ; they are in business to make money, 
 not by trading in interest but by selling paper. 
 
 The Development of Bond Selling. If suc- 
 cessful selling is the goal, then we should ex- 
 pect in the selling end of the business an ex- 
 penditure of energy and attention, money and 
 men, a concentration of vital force, out of 
 all proportion to the other activities of the 
 firm ; and we find it. We should also expect 
 well-established, generally accepted selling 
 principles, that, when conscientiously fol- 
 lowed, would lead to reasonably assured 
 profits; but we don't find them. 
 
 204. There can be no question, now, that 
 there is a science of bond investment, viz., of 
 bond buying. The principles of bond invest- 
 ment, or bond buying, arc the corpus of a new 
 science: a branch of applied economics in the 
 family tree of the sciences. There is not yet 
 
 119
 
 120 SELLING BONDS— 
 
 a science of bond selling, in spite of the im- 
 mense importance, and need, and money profit 
 when that is developed. 
 
 205. It will not do to waive the matter aside 
 by saying that salesmanship is an art. To be 
 sure it is. So is conduct. But because con- 
 duct is an art there is no reason for overlook- 
 ing the study of ethics, which is the branch 
 of philosophy that forms the scientific basis 
 for conduct. The verve, the force, the fire 
 of successful salesmanship are not hindered 
 but helped by cool calculation of the sources 
 and efforts of enthusiasm, of the cost of com- 
 petitive representation and of the most ef- 
 fective methods of publicity. What better 
 proof can you have that salesmanship has 
 principles, ergo, is a science, than the fact that 
 good salesmanship is perpetuated in certain 
 well-known industrial organizations after the 
 brains that built the selling departments were 
 transferred to other fields of activity? The 
 cash register and automobile industries illus- 
 trate the point I am making. 
 
 206. The Trouble with Bond Selling. What 
 then, it will be asked, is the trouble with bond 
 selling? In what specific features does it fall 
 short of reasonable efficacy? I believe 
 thoughtful bond men will agree with me as to 
 the weakness of the present system, although 
 there may be no agreement regarding rem- 
 edies.
 
 THE BANKER'S VIEWPOINT 121 
 
 207. The Cost of Selling. The greatest 
 weakness is the cost of selling securities, — the 
 cost of distribution. The enlargement of or- 
 ganization and concentration of capital that 
 are the chief characteristics of modern in- 
 dustry are permitted to exist, in spite of the 
 evils engendered, because of the resulting less- 
 ened costs of producing and distributing com- 
 modities. It has been estimated — with what 
 correctness I do not know — that the actual 
 cost of producing and distributing the com- 
 mon articles of consumption has been less- 
 ened by about 2^^ per cent, a year for the 
 last few years. Parenthetically, if this be the 
 case so much more glaring are the counter- 
 acting forces : an absurd tariff, congestion of 
 population, a plethora of gold, and national 
 extravagances, — that are steadily forcing up- 
 ward prices the consumer has to pay. It is 
 improbable that the cost of selling securities 
 is lessening, for the number of small com- 
 petitive houses is rapidly increasing and there 
 is yet no tendency toward amalgamation. 
 
 208. The Profit in Specialty Selling. In 
 speaking of the gross profit of from 5 to 15 
 points plus stock bonus made by the bond 
 houses in their specialties, I contended that 
 the amount was not excessive, considering the 
 cost of distribution. T suppose in this case 
 the cost of manufacture or production may be
 
 122 SELLING BONDS— 
 
 considered to be the salaries and expenses of 
 the buying and statistical force and a portion 
 of the overhead charge. The cost of manu- 
 facture, so to speak, is small, relative to the 
 selling cost, and therefore, negligible in this 
 study. 
 
 209. However, a gross profit of 5 to 15 per 
 cent, (more commonly 5 than 15) would be 
 excessive under a modern, enlightened selling 
 plan. No words then should be needed to 
 convince the investing public that they have 
 as vital an interest in the vending methods 
 of the bond houses as they have in the way 
 coal, oil, meat and milk are obtained and 
 brought to their doors. 
 
 210. Probably most of those who read this 
 article have some notion of the way bonds are 
 sold — particularly high-yield bonds of little 
 vogue or market, destined largely for the pri- 
 vate investor. Each new issue means the cir- 
 cularization of almost the entire list of the 
 issuing house, extensive advertising, the sub- 
 mission of offers by travelling salesmen who 
 put up at the best hotels and cover an ex- 
 tensive territory, and the confirmation of these 
 offers by correspondence. The number of cir- 
 culars sent, miles travelled and days consumed 
 by representatives, and letters written per 
 $1,000 bond sold of profitable paper, would, 
 however, probably open the eyes of the most
 
 THE BANKER'S VIEWPOINT 123 
 
 sophisticated investor. So much for present 
 costs. 
 
 211. I state with confidence born of observa- 
 tion that very, very few selling departments 
 have at present, or have outlined for ultimate 
 development, a selling- program that intelli- 
 gently seeks relief from excessive costs or in 
 other ways evidences the result of constructive 
 thinking. It is a hit or miss, catch-as-catch 
 can game, won by those with the shrewdest 
 instincts or backed by the most ample and pa- 
 tient capital. Future conditions in their en- 
 tirety are unforeseeable to be sure, and the 
 best laid plans go awry ; you can't anchor even 
 a time-defying educational institution to the 
 purposes of its founders; but no business in 
 these transitional days has a mortgage on the 
 prosperity of the future that is not giving 
 thought to present selling costs and is not 
 receptive to changes in its sales policy, how- 
 ever radical, if they assure abatement of ex- 
 penses with consequent betterment of strategic 
 position with respect to other houses. 
 
 212. Failures from Competition and Miscar- 
 riage of Issues, The number of bond organ- 
 izations is growing so rapidly, and the com- 
 petition is becoming so keen, that the next ten 
 years will probably see the downfall of a con- 
 siderable number at least of the Eastern or- 
 ganizations, where the crowding is most no-
 
 124 SELLING BONDS— 
 
 ticeable, — particularly of organizations that 
 have succumbed to the temptation to take 
 profitable turnovers rather than unquestion- 
 able paper. The intention may be of the 
 best, — but then we all know of a place said 
 to be paved with good intentions. If a few 
 issues "go wrong on a house" some of the 
 clients may be willing to forgive and forget, 
 but human nature is human nature, and the 
 recollection of mishaps outlives the memory 
 of splendid successes. 
 
 213. Until the weeding out process is ac- 
 complished by miscarriage of bond issues or 
 inability to make expenses over a series of 
 lean investment years we may expect an ag- 
 gravation of the state of things recently 
 described to me by an Albany salesman. You 
 know every salesman considers his territory is 
 the worst in the world from a selling point of 
 view. In Boston, to be sure, every third man 
 buys bonds, but then, every second man sells 
 them. In northern Pennsylvania there are 
 fewer bond men but nobody buys bonds. So 
 it goes. Well, to get back to Albany: I said, 
 "Jones, how's the competition these days up 
 at the capital?" "Competition!" he replied, 
 grieved at the question. "There is none. We 
 all walk up State street lock step and toss up 
 to see who goes in to brace our man and find 
 out there's nothing doing."
 
 THE BANKER'S VIEWPOINT 125 
 
 214. Selling Economies: Consolidation of 
 Houses. A first move to better security dis- 
 tribution is suggested quite naturally by the 
 evolution of industry: a consolidation of bond 
 houses. We have seen the consolidation of 
 manufacturers, of middlemen, and of producers 
 of raw material. Later the manufacturers ab- 
 sorbed the middlemen, and still later, many 
 of the producers. It has taken strenuous Fed- 
 eral activity to keep the agencies of transpor- 
 tation out of the same encompassment. Most 
 recently, and as rapidly as ever before in in- 
 dustry, there has been coagulation among the 
 banks, particularly of course in New York. 
 Why not then a union of bond houses, which 
 are middlemen between the coalescing produ- 
 cers of securities and the coalescing financial 
 institutions that consume securities? 
 
 215. There are very obvious advantages in 
 any possible union of the agencies of security 
 distribution, not the least of which is the 
 greater range in choice of issues made possible 
 by the augmented capital, resources, and dis- 
 tributing power. Moreover, duplicate repre- 
 sentation in selling would cease. Equally im- 
 portant, perhaps, overhead economies are 
 possible just as in non-financial industry. 
 
 216. There is no need to go into particulars; 
 the advantages will be conceded. Why then 
 is no tcndencv observable toward the con-
 
 126 SELLING BONDS— 
 
 solidation of bond houses? Is it not for the 
 same reason that Massachusetts "Tech" and 
 Harvard did not consolidate a few years ago; 
 for the same reason that physicians do not 
 usually practise as firms? I admit neither 
 analogy is perfect. Property considerations 
 influenced the two Massachusetts universities, 
 and physicians have relatively unimportant 
 "over-heads" to curtail. But nevertheless, 
 there is a point to be made. In a greater or 
 less degree, according to the quality of each 
 firm, the bond houses stand in that pro- 
 fessional relation to their clients which I have 
 emphasized, so that the selling value of their 
 sponsorship of issues would be impaired by 
 partial loss of identity and personality oc- 
 casioned by consolidation. A firm is slow to 
 relinquish, in the interest of economy, a pro- 
 fessional relationship and standing that have 
 taken years of the hardest kind of effort to 
 achieve. The two strongest influences affect- 
 ing bond sales are the character of the house 
 and liking for the salesman. Amalgamation 
 would mean serious impairment of at least 
 half their claim upon clients. 
 
 217. Local Representation. There has been 
 a development in bond selling that is away 
 from direct competitive representation, namely 
 the representation of one or more houses by 
 a local dealer. Many New York houses have
 
 THE BANKER'S VIEWPOINT 127 
 
 tried this experiment in territory that appar- 
 ently could not support a travelling salesman. 
 The result has been unsatisfactory. The local 
 dealer is seldom trained to the profession. If 
 trained the chances are he is not in special 
 sympathy with the policies of the home office. 
 He can hardly serve two or more masters. 
 Even when he represents one house, if he is 
 successful, his temptation is to cut loose as a 
 free agent and make void all the pains taken 
 to set him on his feet. 
 
 218. Bank Representation. Another form 
 of local representation yields more promise of 
 ultimate success. For some years past bond 
 departments have been springing up rapidly 
 in all kinds of banks and trust companies in all 
 parts of the country. At first the movement 
 was discredited as ephemeral, but the con- 
 tinued existence of many of the older depart- 
 ments and the multiplication of new depart- 
 ments indicates that they have a useful place 
 in security distribution. The bond houses, 
 therefore, must take them into consideration. 
 
 219. In the nature of things the majority of 
 these bank bond departments must act as se- 
 curity brokers. They may venture with 
 safety to buy local issues of municipals, and 
 the old line railroad paper in which there is 
 no profit ; but they are not technically equipped 
 to investigate, buy and sell entire issues of
 
 128 SELLING BONDS— 
 
 corporation bonds. For the business that is 
 most worth while they must look to the bond 
 houses proper. Perhaps, therefore, in time, a 
 group of bond houses can coalesce, territori- 
 ally, if they cannot amalgamate corporately, 
 and eliminate some of the waste in competitive 
 representation, by selling through the banks. 
 
 220. This method of security distribution 
 through local banks has foreign precedent and 
 practice to recommend it. But it is not the 
 solution of all our difficulties. Indirect rep- 
 resentation relieves the issuing house of a 
 large part of the selling cost, but also of a 
 large part of its responsibility. This is not a 
 theory but a fact, evidenced here and abroad, 
 now and in the past. The issuing house has 
 less sense of responsibility regarding the char- 
 acter of its loans and regarding the market for 
 them prior to maturity. Indirect representa- 
 tion also relieves the issuing house of a part 
 of its profits, thus defeating in part at least 
 the object it seeks. 
 
 221. I must confess, when all is said and 
 done, that the first relief from present condi- 
 tions will probably not come from any de- 
 liberate change in selling policy, but from the 
 slower and more certain working of economic 
 law. The fittest will survive the coming dec- 
 ade of debt-readjustment: those who have sold 
 bonds that do not go wrong.
 
 THE BANKER'S VIEWPOINT 129 
 
 222. The Economy of Selling Collateral 
 Trusts. At this point I wish to venture a sug- 
 gestion, for whatever it may be worth, that 
 may ultimately have a decided bearing on the 
 development of bond selling. Of recent years 
 certain houses have had a conspicuous success 
 in distributing collateral trust bonds, secured 
 by miscellaneous issues that are the first mort- 
 gage obligations of companies doing one kind 
 of business. One house specializes in what 
 might be called collateral trust water bonds, 
 several, in collateral trust lighting bonds (gas 
 and electric), several in collateral trust real 
 estate bonds, etc. 
 
 223. The principle of safety in these col- 
 lateral trust issues lies in a distributed risk 
 plus technical excellence in a particular in- 
 dustrial field through specialization on the part 
 of the issuing company. The income, from 
 which the interest is paid, may be derived in 
 two general ways : (a) through stock dividends 
 to the parent company by ownership of the 
 subsidiary companies which have pledged their 
 bonds, or (b) through bond interest, by pay- 
 ment of the interest of the pledged bonds to 
 the trustee of the collateral trust, to be ap- 
 plied to the payment of interest of the col- 
 lateral trust bonds. Obviously the second 
 method is the sounder, for it gives a more 
 direct and prior hold on the income of the 
 subsidiaries.
 
 130 SELLING BONDS— 
 
 224. The principle of marketability has not, 
 I believe, been given the attention it deserves, 
 in these bonds, largely because the collateral 
 trust houses (if I may so speak of them), are 
 not usually and primarily banking houses, but 
 the security-selling departments of engineering 
 houses, mortgage dealers, or what not. 
 
 225. Marketability usually implies quality 
 in the bond, demand for it, and a clearing 
 house or security exchange for the convenient, 
 recognized place of purchase and sale of it. I 
 am a hearty believer in the possibilities for 
 safety in a properly drazvn collateral trust 
 agreement, when the collateral widely dis- 
 tributes the risk : granting safety, the demand 
 for the collateral trust bond will be largely 
 determined by the size of the issue. Other 
 things being equal the larger the issue the 
 greater its vogue. This fact I emphasized in 
 the chapter on Buying Railroad Bonds. One 
 of the chief causes for the refunding of di- 
 visional railroad mortgages by big blanket 
 liens is the enhancement of investment value 
 by the increased marketability of the large 
 general and refunding loan. 
 
 226. If, now, true banking bond houses will 
 enter the field as sponsors for good open-end 
 collateral trust issues of sufficient quality and 
 ultimate size to develop a constantly grow- 
 ing investment demand, and will act openly
 
 THE BANKER'S VIEWPOINT 131 
 
 as the clearing house for transactions in the 
 issues, at least until they become listed on the 
 New York Stock Exchange, these houses may 
 find, as each new instalment of the loan is 
 floated, that the selling cost has been materi- 
 ally reduced without proportionate reduction 
 in profits. 
 
 227. Consolidation of Issues not Houses. 
 Indeed I should not be at all surprised if the 
 ultimate solution of the present cost of se- 
 curity distribution was not consolidation of 
 houses, but of issues under the collateral trust 
 form. And I am the more confident that this 
 is a sound position to take as I consider the 
 lessened cost of railroad security selling in this 
 country and of real estate security selling in 
 Western Europe, with increase of safety for 
 the investments. 
 
 228. This suggested broader application of 
 the collateral trust is not iconoclasm. Indeed 
 if it were, what of it? Severe ills require 
 heroic remedies. Whatever is is not neces- 
 sarily best in finance; witness our currency 
 system. One does not wish to appear a 
 prophet of evil ; but unless all signs fail there 
 will be drastic readjustment of security is- 
 suance and security selling long before the 
 mass of long term paper we are now dispos- 
 ing of is presented for redemption. The tide 
 of a ten-year prosperity has turned against us
 
 132 SELLING BONDS— 
 
 and it is high time the live fish start to swim 
 up against the stream. 
 
 229. The Selling Department of an Ideal 
 Bond House. However, taking things as we 
 find them, a word as to the selling department 
 of an ideal bond house. An ideal bond house, 
 by the way, is a financial Chateau en Espagne 
 that does its best work on paper. Some of 
 the unusual regulations of this house, I my- 
 self have tried with a share of success ; all of 
 them have been tried by somebody; but the 
 organization, as such, will be the first of its 
 kind all under one roof. 
 
 230. The Sales Manager. In the first place 
 you must have a sales manager, who must 
 manage, — on whom all responsibility must fall, 
 and also a fair share of the profits and losses. 
 We have not yet got beyond the one-man 
 power in the bond business, any more than in 
 any other business. Every man in the selling 
 end should be of his choosing from the office 
 boys to the territorial managers, or overseers, 
 for the office boys might just as well be fel- 
 lows just out of college who want to go on 
 the road later, and the territorial managers (of 
 whom there ought to be one to every six road 
 men) are responsible for the money made or 
 lost in their territory. The sales manager will 
 have a spirit and business policy that in time 
 will stamp his entire business family.
 
 THE BANKER'S VIEWPOINT 133 
 
 231. Territorial Managers. Your territorial 
 managers are men who have been advanced 
 from the road, — not necessarily because they 
 are the best salesmen, but because they are 
 built to get results out of others. They have 
 been advanced for the most part from your own 
 force, not imported from other houses to in- 
 trude an alien spirit and plan into an other- 
 wise cohesive organization. They know the 
 name and holdings and predilections of all the 
 clients in their particular territory. They 
 know who is in funds and when ; they remind 
 their men, and see that the proper kind and 
 amount of correspondence is circulating among 
 these clients. They go over each man's route 
 with him once a year at least and meet all his 
 business friends who appear worth while. 
 They correspond daily with each of their 
 salesmen, keeping him informed of all financial 
 happenings, inspiriting him, making sugges- 
 tions, and in general increasing his efficiency. 
 On his return to the office every two weeks, 
 they review the progress made, outline the 
 salient features of new issues to be sold and 
 in general revitalize spirits that for the first' 
 few years are likely to sag when business isn't 
 good. 
 
 232. The sales manager and his territorial 
 assistants will be a court of last resort to 
 which all "specialties" that have met the ap-
 
 134 SELLING BONDS— 
 
 proval of the buying department will be sub- 
 mitted for acceptance. The issue in some in- 
 stances may be carried a step further and be 
 submitted to a few or all of the salesmen for 
 discussion. The more responsibility you place 
 on a good man the more you can expect of 
 and get out of him. It is also well to stop in 
 advance the mouth of the man who is always 
 going to do something big, but never has the 
 right bond. 
 
 233. The Road Men. Now as to the road men 
 themselves, — a large number, perhaps most, 
 will be college men for several reasons. The 
 calling will bring them into contact with the 
 very best classes of people, men in positions of 
 trust, and men and women who have sufficient 
 talent to accumulate funds or who have had 
 the benefits of inherited means. College men 
 as a class are more acceptable and congenial 
 to such people than relatively inexperienced 
 men who are not college bred. Any bond 
 house can get all the college men it wants if 
 it goes after them, at very small expense, be- 
 cause they are not experienced. What you 
 want is the right raw material. All men not 
 bred to your policies are raw material. Men 
 not college bred, of the same age, are failures 
 already if they would accept the $5 or $10 a 
 week a green man in the bond business is given 
 by good houses.
 
 THE BANKER'S VIEWPOINT 135 
 
 234. As for myself I believe in seeking what 
 you are after along any line. For some years 
 I have visited one or more colleges and an- 
 nually have laid the advantages and disadvan- 
 tages of the bond business as a career before 
 25 to 100 seniors and graduates, discouraging 
 95 per cent, at sight and cautioning the other 
 5 per cent, not to come unless they would 
 rather sell than eat. Life is too short. 
 
 235. College Men as Salesmen. College 
 men have one distinct disadvantage. Educa- 
 tion induces reflection, and reflection often 
 saps the dynamic spontaneity that is a sales- 
 man's best asset. However, any house (there 
 are such) that is striving to elevate its serv- 
 ices for the community to the plane of the pro- 
 fessions, will recruit its forces largely out of 
 the college class, from which professional men 
 are recruited, trusting by superior organiza- 
 tion and esprit du corps to supply what may 
 be lacking in Yankee vending instinct. There 
 are salesmen and salesmen. One can sell col- 
 lar buttons, another horses, and still another 
 bonds. 
 
 236. The Training of Green Men. Turn 
 loose half-a-dozen to a dozen of these green 
 men in your main office. Let them run errands 
 and make deliveries so that they will imagine 
 themselves useful. Have them at once begin 
 reading the financial dailies and asking ever-
 
 136 SELLING BONDS— 
 
 lasting questions. In a few weeks, when their 
 heads have stopped swimming, start a class 
 and teach them the difference between finance 
 and the grocery business, between bonds and 
 stocks, between municipals and industrials. 
 Later have them study the house's issues and 
 the more important issues of other houses as 
 they appear from time to time. Later still 
 have them read some of the incoming and 
 outgoing mail that they may get some idea 
 of the investor's point of view, the salesman's 
 problems, and the gentle art of persuading 
 people to exchange what they have for what 
 you have. Above all (and generally most 
 neglected), develop a sense of current quota- 
 tions and intrinsic values. 
 
 237. If a salesmanager is a judge of charac- 
 ter and picks his men with discretion and 
 systematically trains them, in a year's time 
 he should turn out on the road a crew of which 
 one in three should make good. Any house 
 that can develop one loyal, successful sales- 
 man out of every three recruits can make 
 money if it buys the right kind of bonds to 
 sell.
 
 CHAPTER IX. 
 
 SELLING BONDS— THE INVESTOR'S 
 VIEWPOINT. 
 
 238. The Strength of the Investment De- 
 mand. It may be worth while, when consid- 
 ering the investor's interest in bond selling 
 principles and methods, first to take stock of 
 the investor himself, to gauge as accurately 
 as may be the volume and strength of his 
 investment requirements. No direct statistical 
 means are available for a correct estimate. 
 Only by collateral measurements can we justly 
 apprehend the demand. 
 
 239. There is food for reflection in the argu- 
 ment of the United States Steel Corporation 
 against the move for dissolution that its own- 
 ers number over 100,000. The very great 
 majority of these owners are American citizens 
 who have bought to invest, not to speculate. 
 
 240. Savings Banks as Bond Buyers. The 
 number of savings bank depositors in the 
 United States is nearly 10,000,000, or 12 per 
 cent, of the population, men, women and chil- 
 dren. The aggregate deposits are about 
 $4,250,000,000. 
 
 The spirit of saving, therefore of investment, 
 is rapidly growing. One year's increase in 
 
 137
 
 138 SELLING BONDS— 
 
 savings bank depositors is 650,000; of de- 
 posits, $142,000,000 ; the increase per depositor 
 is $13. 
 
 The indirect interest that American savings 
 bank depositors have in bond selling is this: 
 Of the $4,250,000,000 they have intrusted to 
 saving institutions to invest for them, about 
 $1,850,000,000, or 43 per cent., has been used 
 to buy bonds. 
 
 241. The Volume of Municipal Bond Sales. 
 Our powers of security absorption may be 
 apprehended somewhat when we observe that 
 during the past year there were recorded orig- 
 inal government and municipal bond sales 
 in the United States aggregating $636,000,000 
 and comprising 4,891 different issues. One 
 may say truly that only a very small part of 
 these issues will ever leave the country. 
 
 242. Annual Listings on the Exchange. 
 During the same year the new note issues of 
 record that reached the New York market 
 amounted to $310,000,000; and the new bond 
 listings on the New York Stock Exchange to 
 $580,000,000, of which $298,000,000 were rail- 
 road, $34,000,000 street railway, and $248,000,- 
 000 miscellaneous loans. The exchange listings 
 exceeded $1,000,000,000 in one year (1909). 
 
 243. The Obscure Issues. There is very 
 little duplication in these figures for 1911. 
 Very few millions of the civil loans or notes
 
 THE INVESTOR'S VIEWPOINT 139 
 
 were listed. In addition to this vast debt there 
 were the few municipal and the countless pri- 
 vate corporation loans that did not or could 
 not become matters of public record. But 
 whatever the true amount of funded debt 
 emitted that year the great bulk of it was sold, 
 or will ultimately be sold, to investors, in 
 blocks large and small, and in single bonds, by 
 the American bond houses. 
 
 244. If now we appreciate the genuine in- 
 terest and importance of sound bond buying 
 by the American people, whether this interest 
 is direct or indirect, we are prepared to con- 
 sider some suggestions regarding sound bond 
 selling by the bond houses to the American 
 people. These I shall take up in their natural 
 sequence. 
 
 245. The Investor Should Know his Own 
 Requirements. In the first place, however 
 conscientious your bankers may be, they sel- 
 dom appreciate to the full what are your own 
 particular investment needs. If the business 
 pace were not so fast, if the selling instinct 
 were not so strongly developed at the expense 
 of the advisory, the case might be different. 
 There is no reason, in the nature of things, 
 why a banker should not know what you want 
 better than you yourself, just as your physician 
 knows better than you what regimen is most 
 suited for your physical welfare. But we 
 have to accept the facts as we find them.
 
 140 SELLING BONDS— 
 
 246. Complex Nature of Security. It is not 
 
 sufficient, for perfect service, that you want a 
 good bond which yOu can sell again, or even 
 that you want an absolutely safe bond which 
 is readily marketable. Safety and marketabil- 
 ity in an investment are like goodness in 
 anything — purely relative terms. The Penn- 
 sylvania Convertible Debenture 3j4s of 1915 
 are safe and marketable, so are the Norfolk 
 and Western First Consolidated 4s of 1996 
 (to pick issues at random), but there is a wide 
 range of degrees in safety and marketability 
 between these two good bonds. 
 
 247. Safety itself is not a simple thing, but 
 (again like goodness) it is a very complex 
 quality. It is for you to realize what kind of 
 safety you most require. I have frequently 
 emphasized the various qualities of invest- 
 ment safety or security, labelling two to em- 
 phasize the fact of differences: security in 
 redemption, and security in liquidation. 'A 
 high degree of security in redemption means 
 an approximate certainty that at maturity the 
 principal of your investment will be paid. A 
 high degree of security in liquidation means 
 an approximate certainty that at any time you 
 may sell your investment at small loss, if any. 
 
 248. When the chances are slight that you 
 will want to sell before maturity then you are 
 more concerned with security in redemption.
 
 THE INVESTOR'S VIEWPOINT 141 
 
 When you are investing the deposits of a na- 
 tional bank and may be forced at any time to 
 realize to meet the demands of depositors, you 
 may be equally concerned with security in 
 liquidation. 
 
 249. The bonds of the United States illus- 
 trate well the various qualities of security. 
 As models of safety they are held up to the 
 point of weariness. They will be paid. Oh, 
 yes. Even in panics their fluctuation now is 
 slight, averaging not much over four points. 
 What more could be asked ? Well, to be quite 
 perfect, to convince us that security is an ab- 
 solute, not a relative, term, we should have to 
 forget that in Civil War times they sold on a 
 basis to yield from 6 to 12 per cent.; that in 
 the process of currency reform, it is possible, 
 though perhaps not probable, that their with- 
 drawal as the basis of circulation would do to 
 their quotations what a panic does to railroad 
 bond quotations. Possible, though not prob- 
 able, because the purpose of the Government 
 seems expressed in the Aldrich measure, which 
 provides for a gradual conversion of the Fed- 
 eral loans that secure note issues. But possi- 
 bility as well as probability are factors of the 
 unknown and undependable — factors of in- 
 security. Therefore, even the security for 
 "governments" is adapted to analysis and dis- 
 crimination.
 
 142 SELLING BONDS— 
 
 250. Complex Nature of Marketability. 
 
 Marketability is equally susceptible to study. 
 Here is an issue of listed railroad refunding 
 bonds. At present $13,000,000 are outstand- 
 ing. If well distributed but not permanently 
 locked in the strong boxes of savings banks 
 and insurance companies, they may be turned 
 over at the average rate of $120,000 a month, 
 let us say. But the authorization is $175,- 
 000,000, and next year they retire and take 
 the place of an underlying issue of $35,000,000. 
 Whatever detriment this impending flotation 
 may be to your security in liquidation, the 
 marketability is certainly bound to improve 
 unless the issue deteriorates through impair- 
 ment of the obligor's earning power. 
 
 251. Now for another aspect. If you may 
 be called upon to dispose, within a day or a 
 week, of a block of $100,000 bond's, you need 
 an entirely different kind of market for your 
 issue than if you have $5,000 bonds that never 
 would have to be sold on less than three 
 months' notice. It is very much easier to sell 
 without sacrifice $100,000 Pennsylvania Con- 
 vertible 3>^s in a hurry than $100,000 Norfolk 
 and Western First Consolidated 4s; but if 
 you own only one Norfolk and Western you 
 do not have this to consider. It is usually 
 easier to sell coupon than registered bonds, 
 railroad than municipal bonds, municipal than 
 corporation bonds.
 
 THE INVESTOR'S VIEWPOINT 143 
 
 252. You are concerned in knowing exactly 
 the kind and amount of safety and market- 
 ability you require because you have to pay 
 for them. You do not demand more safety 
 and marketability than you require because 
 then you are dissipating a part of your invest- 
 ment in paying for what you don't need; per- 
 haps you are sacrificing some security of 
 principal for superfluous marketability. To 
 pay $1,100 for an investment that gives you 
 only $1,050 worth of investment service is not 
 conservatism but extravagance. Nothing but 
 unfamiliarity with investment principles is an 
 excuse for private buying of United States 
 bonds to net 2>^ per cent. The Federal Gov- 
 ernment encourages this merely to prevent the 
 worse habit of hoarding. It does not seek or 
 want for its 2>^ per cent, funds the money of 
 investors. 
 
 253. Of the ten principal investment quali- 
 ties that I have mentioned repeatedly in these 
 articles, safety and marketability have been 
 chosen for amplification here, as those most 
 in the public mind. What has been said of 
 them applies, if with somewhat less force, to 
 security of income, hypothecary value, con- 
 venience of duration and denomination, free- 
 dom from taxation and care, possibility of 
 appreciation, and whatever other qualities you 
 may care to consider.
 
 144 SELLING BONDS— 
 
 254. Second Consideration: Form of the In- 
 vestment. Having taken this first and most im- 
 portant step of considering your investment 
 needs, it is next in order for you to consider 
 what form of investment is best to satisfy 
 these needs, mindful that investment, with 
 the advantages and disadvantages peculiar to 
 it, is a thing apart from speculation. If invest- 
 ment is the proper channel for your surplus, 
 and if you canvass your situation most thor- 
 oughly, you will probably find that bonds, 
 which have just served us for illustration of 
 the scope of investment qualities, are probably 
 the best form of investment for you. At least 
 it may be said in truth that the infinite vari- 
 eties of bonds cover more requirements than 
 any other investment form. 
 
 255. Third Consideration: Proper Type of 
 Bond. The third step is to find the type or 
 types of bonds that are best adapted to your 
 definitely predetermined needs ; the fourth, to 
 find the best issue of the type selected. 
 
 256. Here is the only thoroughly sound pro- 
 cedure for the selection and purchase of secur- 
 ities, yet how few advocate it, or pursue it ! 
 Some banks and insurance companies that buy 
 largely and constantly have a well developed 
 and consistent buying policy, as bond men 
 know, but they are exceptions to custom. 
 
 257. Many investors have definite rules
 
 THE INVESTOR'S VIEWPOINT 145 
 
 governing their purchases, but such rules ! 
 One of my good friends to whom I used to 
 sell will buy any Massachusetts municipals, 
 but will not go over the line into New York 
 or Connecticut. It is not taxation that troubles 
 him, either. Just an amiable insularity. An- 
 other friend will buy municipals anywhere, 
 but nothing else. A commission house that 
 buys many thousands a year looks for the best 
 issue that at the time yields 5 per cent. In the 
 panic it was Eastern municipals from banks 
 that had to disgorge. Now it may be mortgage 
 liens on the minor railroads. Some will buy 
 no paper from the South ; many will buy only 
 first mortgages. This is all wrong. As Dr. 
 Johnson would say, such rules are merely evi- 
 dences of temperamental anfractuosities. 
 
 258. As we stop to think of it, there is 
 something, though not much, to be said for 
 the man who narrowly and arbitrarily limits 
 the range of his investments. He can, and 
 probably does, become more familiar with the 
 channel he has chosen for his funds, and so 
 is able to avoid the seduction of "unusual op- 
 portunities." At the same time he limits the 
 chance to distribute his risk. This limit is 
 the more serious if his chosen channel is in 
 itself unsafe. The range of quality in bond 
 types is almost as great as the range of quality 
 in issues of any type.
 
 146 SELLING BONDS— 
 
 259. One of the most striking illustrations 
 of ill-considered bond-buying is the quick dis- 
 posal by subscription sale of immense corpora- 
 tion issues before the indentures securing the 
 issues ara made public. Truly we do business 
 on faith these days. To be sure, confidence 
 of this sort is not often misplaced, but how 
 would you like to put a considerable part of 
 your personal fortune into a bond, only to find, 
 when the deed of trust finally appeared in 
 print, that, the Court permitting, the owner of 
 a majority of the outstanding bonds could 
 compel acquiescence from the minority to any 
 change in the terms of the deed of trust? 
 
 260. The indenture of one of the bond issues 
 that has been most prominently before the 
 public this past year reads as follows : 
 
 "From time to time the holders of a majority 
 in amount of all the . . . bonds hereby se- 
 cured for the time being outstanding, by their 
 vote at a meeting of the holders of said . . . 
 bonds, . . . or by an instrument or instru- 
 ments in writing signed by such holders, shall 
 have the power (1) to assent to and authorize 
 any modification or compromise of the rights 
 of the holders of such class of bonds and of 
 the Trustee for the holders of such class of 
 bonds, against the . . . Company or against 
 any property subject to this indenture, whether 
 such rights shall arise under these presents or
 
 THE INVESTOR'S VIEWPOINT 147 
 
 otherwise, and (2) to assent to and authorize 
 any modification of any of the provisions of 
 this indenture that shall be proposed by the 
 . , . Company and recommended by the 
 Trustee. . . . Any action taken with the as- 
 sent or authority given as aforesaid of the 
 holders of a majority in amount of the . . . 
 bonds hereby secured, for the time being out- 
 standing, shall be binding upon the holders of 
 all the . . . bonds hereby secured and upon 
 the Trustee as fully as though such action was 
 specifically and expressly authorized by the 
 terms of this indenture." 
 
 261. It is customary, of course, for trust 
 deeds to contain waivers of certain specific 
 rights of the bondholders upon vote of a sub- 
 stantial majority, but observe in this clause 
 what might happen if the obligor should pur- 
 chase or otherwise control 51 per cent, of the 
 issue. Of course the moral is : Never buy a 
 bond without reading the mortgage and trust 
 deed. 
 
 Recent discussion of this issue, in and out 
 of the courts and the press, would fill volumes ; 
 yet nowhere have I seen comment on these 
 significant lines quoted above, which he who 
 runs may read. 
 
 262. Fourth Consideration: The Proper 
 Bond. The "average investor" may well feel 
 that, even if he has a definite idea of the
 
 148 SELLING BONDS— 
 
 qualities he needs in his bond, and even if he 
 reads with assiduity the mortgages and finan- 
 cial statements of various current issues, he is 
 still unprepared to do himself justice. He is 
 right. He cannot be expected to know his 
 own business, if he has any, and the bond 
 business also. Hence the need of establishing 
 clientelary relations with a bond house that 
 has a sense of professional responsibility, and 
 the equipment for superior service. 
 
 263. Choosing a Bond House. To find, then, 
 the best bond for his needs, the investor will 
 obtain the assistance of a good house that 
 handles as part of its regular business the type 
 of bond in question. If he does not know of 
 any such house, he will do well to consult the 
 local bank presidents and directors, who can 
 obtain the information from unprejudiced 
 sources if they do not have it at hand. A num- 
 ber of inquiries should be made to average 
 away incorrect information. Other things 
 being equal, it is better to align oneself with 
 a house or houses that have local or transient 
 representatives, for oral discussion, always 
 supplemented by home-office correspondence, 
 is much more satisfactory than the correspond- 
 ence alone. 
 
 264. With thorough knowledge of his own 
 requirements and a proper banking relation 
 established the investor can hardly go astray.
 
 THE INVESTOR'S VIEWPOINT 149 
 
 He has quite reversed the customary pro- 
 cedure, for instead of choosing a random 
 bond from a random house and trusting that 
 it will serve his purpose, he has first inquired 
 of himself what his purpose is and he has set 
 in motion in his behalf the highly intelligent 
 machinery of one of the best and most honor- 
 ably conducted kinds of business organization. 
 If anything, he will be rather skeptical about 
 a new loan (unless it be municipal) and 
 encourage his advisers to submit a consider- 
 able number of seasoned issues of the proper 
 type. 
 
 265. In closing these comments, let me ex- 
 press the hope that they will leave an impres- 
 sion on readers that may be summed up in a 
 remark made to me by the manager of a great 
 Canadian banking house, when I joined the 
 bond fraternity: "Chamberlain, this business, 
 like every other, has its disadvantages, but 
 one thing you may be sure of, you will never 
 have to make apologies for your profession."
 
 INDEX 
 
 Advertisement by bond houses of the marketabihty of 
 
 their bonds, 32. 
 Advertising, bond, 166-171; of investment principles, 
 
 169. 
 Advising a woman, 152. 
 Advisory advertisement, 169, 171. 
 Advisory function, 20-22, Chap. VI, 152 et seq. 
 Amount of municipal bond sales in the United States, 
 
 241. 
 Analyzing a municipal statement, diiiScuhy of, 87. 
 Annual bond listings on the Exchange, 242. 
 Artificial marketabiHty, cost of, to investors, 185; to 
 
 the bond houses, 190, 191. 
 Assuming losses, 199. 
 Attorneys for municipal bond houses, competency of, 
 
 12. 
 Auditor, the, in bond buying, 139. 
 
 Bank representation, local, in bond selhng, 218. 
 Bankers vs. Brokers, 4. 
 
 Banking function, 23; Chap. VII, 174 et seq; 189 et seq. 
 Bankruptcy, see Default, Receivership, Reorganization, 
 
 etc. 
 Banks, local, as bond distributors, 31. 
 Banks of deposit, the bond houses as, 193. 
 Bidding for bonds, see Buying, Municipal Bonds, etc. 
 Blanket railroad refunding issues, 104 et seq; amount 
 
 outstanding, 106. 
 Bond advertising, 166-171 ; attorneys, municipal, com- 
 petency of, 12; dealers vs. brokers, 4. 
 Bond business, ignorance of, 2; importance of, 1. 
 Bond guaranty, 176-181. 
 Bond houses as banks of deposit, 193; as constructors, 
 
 150; as fiscal agents, 24, 25; as reorganizers, 149; 
 
 as specialists, 134. 
 Bond houses, consolidation of, 26 ; functions of. Chap. I 
 
 and esp. 5; influence of, on municipal finance, 19; 
 
 American enterprise, 9. 
 Bond houses vs. brokers, stability of, 8; wholesale vs. 
 
 retail, 6, 7. 
 Bond investment as a science, 35 et seq. 
 
 150
 
 INDEX 151 
 
 Bond sales, municipal in the United States, 241. 
 
 Bonds, American, who buys them, 1 ; total annual issu- 
 ance in America, 1; as collateral, 187-189. 
 
 Brokers vs. Bankers, 4. 
 
 Bureaus of financial information, 42-44; 165; of muni- 
 cipal bond information, 80. 
 
 Business conditions, forecasting, 45, 46. 
 
 Buying bonds in New England, 3; bonds to satisfy 
 clients, 48; corporation bonds, 12 et seq; municipal 
 bonds, 10 et seq; railroad bonds, Chap. IX, 88 et seq. 
 
 Capitalization as affecting railroad bond security, 119. 
 
 Carrying charges in relation to bond selling profits, 75. 
 
 Census reports as a statistical help, 43. 
 
 Choosing a bond house, 34; 263. 
 
 Circulars of bond issues, special, 171. 
 
 Classification of bonds, 123 et seq. 
 
 Collateral, bonds as, 187-189; collateral trust issues, 
 
 economy of selling, 222 et seq. 
 College men as bond salesmen, 29; 235-237. 
 Common characteristics of railroad and municipal 
 
 bonds, 89. 
 Community of interest as affecting railroad bond 
 
 security, 115. 
 Competition among industries forcing amalgamation, 
 
 148, 149; in bond selling, 26 et seq: 212, 213. 
 Complex nature of marketability, 250; of security, 246 
 
 et seq. 
 Consolidation of bond houses, 26, 30 et seq; of bond 
 
 issues, 214 et seq. 
 Construction propositions, 18; bond house financing of, 
 
 150. 
 Corporation bond investment principles, 126. 
 Corporation bonds, newness of, 135 ; buying, 12 et seq. 
 Correspondence, investment by, 172, 173. 
 Cost of artificial marketability, to investors, 185 ; to 
 
 the bond houses, 190, 191; bond guaranty, 178, 179; 
 
 of bond selling, 207 et seq ; of distribution of bonds, 
 
 145; of marketability, 32, 33; of selling bonds, 73; 
 
 of supporting the market for municipal, railroad and 
 
 specialty bonds, 89. 
 
 Dartmouth College, Tuck School of Finance, studying 
 the effect of business conditions on corporation 
 earnings, 132.
 
 152 INDEX 
 
 Dealers vs. brokers, 4. 
 
 Declination of municipal issues on the score of legality, 
 etc., 71. 
 
 Default (see receivership, reorganization, etc.), atti- 
 tude of bond houses toward, 33. 
 
 Depositors in United States Savings Banks, number 
 of, 240. 
 
 Depositors in United States Savings Banks, amount 
 of, 240. 
 
 Development of bond selling, 203 et seq. 
 
 Directorate, bond house representation on, 16; 25. 
 
 Distribution of bonds, cost of, 145. 
 
 Domination of large corporations by wholesale houses, 
 92 et seq. 
 
 Earning power as affecting railroad bond security, 119. 
 Earnings in relation to fixed charges and safety, 15. 
 Economy of selling collateral trust issues, 222 et seq. 
 Effect of interest rates on bond buying, 54, 55. 
 Elements of an ideal investment, 59, 60; 253; three 
 
 most prominent, 62. 
 Engineer, the, in bond buying, 139. 
 English selling methods, 163. 
 Equipment bonds, 109, 110. 
 Ethics of salesmanship, 154-163. 
 
 Failures of bond houses from competition and miscar- 
 riage of issues, 212. 
 
 Financial agents, see fiscal agents. 
 
 Financial news and report agencies, 42-44 ; 165 ; for 
 municipal buying, 80. 
 
 Financial jackals, 156-160. 
 
 Fiscal agents, bond houses, as, 24, 25. 
 
 Forecasting business conditions, 45, 46. 
 
 Form of investment, must be considered bv buyers, 254. 
 
 French and German banks as advisers, 21. 
 
 Function of the bond houses, the principal, 64. 
 
 Functions of the bond houses. Chap. I and esp. 5. 
 
 Fundamental conditions, forecasting, 45, 46. 
 
 Gas companies, 129. 
 
 General market bonds vs. "legals," 69 et seq. 
 General market municipals, 81. 
 
 General publicity as a form of bond house advertise- 
 ment, 163.
 
 INDEX 153 
 
 German and French banks as advisers, 21. 
 Government bonds, 249; reports as statistical help, 43. 
 Gravel road bonds of Indiana, legality of, 85. 
 Guaranty, bond, 176-181. 
 
 History of bond dealers, 4. 
 
 Hypothecation of bonds in relation to bond selling 
 profits, 75. 
 
 Ideal bond house, selling department of, 229 et seq. 
 
 Illegitimate bond dealer, an, 51. 
 
 Importance of the bond business, 1. 
 
 Income of public service corporations, a study of, 132. 
 
 Indiana gravel road bonds, legality of, 85. 
 
 Industrial issues, easy for bankers to get good, 137. 
 
 Industrial corporation bonds, 13. 
 
 Insurance principle in bond guaranty, 177. 
 
 Influence of bondhouses on management of corpora- 
 tions, 25. 
 
 Interest rates, effect of rise in, on bond buying, 54, 55; 
 affected by general interest rates, 55. 
 
 Invalidity of municipal bonds, amount of, 71. 
 
 Investor should know his own requirements, 245. 
 
 Investment, bond dealers vs. brokers, 4 ; correspondence, 
 172, 173; in the United States, strength of, 238 et 
 seq; elements, the ten, 59, 60; 253; the three most 
 prominent, 62; in bonds of United States Savings 
 Banks, 240. 
 
 Irrigation bonds, 13. 
 
 Issues of bonds, total each year in America, 1. 
 
 Knowing the business of the corporation, 127 et seq. 
 
 Laboratory methods in bond buying, i7 et seq. 
 Legality of issuance and legality for savings bank in- 
 vestment, 71. 
 "Legals" vs. general market bonds, 69 et seq. 
 Libraries of bond houses, 37, etc. 
 
 Listings of bonds on the Exchange, annual amount, 242. 
 Local bank buying of municipals, 77. 
 Local bond representation, 217. 
 Losses, assumption of, by bond houses, 199. 
 
 Magnitude in relation to safety, 6, 7. 
 Management and proprietorship as affecting railroad 
 bond security, 112-117.
 
 154 INDEX 
 
 Management in relation to bond safety, 16; of corpor- 
 ations, influence of bond houses on, 25. 
 
 Managers, of the bond house, 230 et seq. 
 
 MarketabiHty, artificial, cost of, to investors, 185 ; to 
 the bond houses, 190, 191 ; as affected by the protective 
 function, 182-188; as part of the protective function, 
 32 et seq; complex nature of, 250; cost of, 32, 33; in 
 relation to big refunding issues, 105 ; of collateral 
 trusts, 225 et seq; specialty vs. listed bonds, 32, 33. 
 
 Massachusetts legals and bond house responsibility, 71. 
 
 Massachusetts taxation in relation to bond dealers, 
 52, 53. 
 
 Mercantile vs. the protective policy, 174. 
 
 Mining bonds, 13. 
 
 Moody's Magazine calls attention to the rise in interest 
 rates, 54. 
 
 Mortgages, reading, before bond buying, 95. 
 
 Municipal bond attorneys, competency of, 72 ; bond 
 bureaus, 80. 
 
 Municipal bonds, buying, 10 et seq; declined on score 
 of legality, etc., 71. 
 
 Municipal bond sales in the United States, amount of, 
 241. 
 
 Municipal default and repudiation, 83. 
 
 Municipal sale, an unintelligent, 79. 
 
 Municipal sales record as an aid to bidding, Id. 
 
 Municipalities selling bonds over the counter, 74. 
 
 New England, prevalence of bond buying in, 3. 
 
 New York legals and bond house responsibility, 71. 
 
 New York Stock Exchange, annual listings of bonds 
 
 on, 242 ; bonds first offered and sponsored by bond 
 
 houses, 1. 
 Newness of corporation bonds, 135. 
 Norfolk and Western First Consolidated 4s, 251. 
 
 Obscure issues of bonds, the, 243. 
 
 Oklahoma's experience with bank deposit guarantees, 
 
 181. 
 One man buying, 40, 41. 
 Output of American bonds each year, 1. 
 "Over-the-counter" selling of bonds by municipalities, 
 
 74. 
 Overcapitalization, 14.
 
 INDEX 155 
 
 Pennsylvania Convertible 3^5, 251. 
 
 Pennsylvania Railroad flotation, a, 101. 
 
 Per capita debt of water companies, 128. 
 
 Physical characteristics of railroads as affecting railroad 
 
 bond security, 118. 
 Physical condition, examination of, 17. 
 Preference for public utilities, 140. 
 Press as an influence in bond selling, 166. 
 Prevalence of bond buying in New England, 3. 
 Principal function of the bond houses, 64. 
 Profession, the bond business as a, 22; 28; 30; 35 
 
 et seq; 155; 162. 
 Professional Standard of bond houses, 49-53. 
 Profit in selling bonds in general, 141 ; in selling blanket 
 
 refunding issues, 107 ; in selling corporation bonds, 
 
 142-145; legal municipals, 74; in selling railroad bonds, 
 
 89; in selling specialty bonds, 208, 209. 
 Profits in railroad bond underwriting and selling, 96 
 
 et seq. 
 Protecting security, 198; the market when local banks 
 
 distribute, 31. 
 Protective function, 31 et seq; Chap. VII, 174; applied 
 
 to all bond qualities, 195 et seq; applied to market- 
 ability, 182-188. 
 Proper bond, the, for each individual, 261. 
 Proper type of bond must be considered by buyers, 254. 
 Proprietorship and management as affecting railroad 
 
 bond security, 112-117. 
 Public Utility bonds, banking competition for, 138. 
 Purchasing function, Chap. I, 10 et seq; Chap. II. 
 
 Quasi-municipals, the problem of buying, 69. 
 
 Railroad blanket refunding issues, 104 et seq; amount 
 outstanding, 106. 
 
 Railroad bond investment principles. 111 et seq. 
 
 Railroad bond underwriting, 92 et seq. 
 
 Railroads as scientific financiers, 47. 
 
 Real Estate bonds commonly guaranteed, 180. 
 
 Records of past municipal sales as an aid to bidding, 76. 
 
 Receivership (see Default, Reorganization, etc.) atti- 
 tude of bond houses toward, iZ. 
 
 Refunding issues, railroad, 104 et seq; amount outstand- 
 ing, 106; 
 
 Reorganization Csee Receivership, Default, etc.) atti- 
 tude of bond house toward, 33; importance of, 200.
 
 156 INDEX 
 
 Reorganizers, the bond houses as, 149. 
 
 Repudiation of State debts between 1870 and 1884, 68; 
 
 81, 82. 
 Retail vs. wholesale bond houses, 6, 7. 
 Riddlebergers, the, 68. 
 Rise in interest rates, 54. 
 Road men, of the bond house, 233 et seq. 
 
 Sales Manager, in bond buying, 139 ; of the bond house, 
 230; 232; 237. 
 
 Sales of municipal bonds in the United States, 241. 
 
 Salesmanship, ethics of, 154-163. 
 
 Salesmen, bond, 29; of wholesale houses, 5. 
 
 Savings bank bonds, see "legals." 
 
 Savings bank bonds, small profit in selling, 50; United 
 States, amount of deposits, number of depositors, 
 investments of, 240. 
 
 Science, as applied to bond selling, a thing of the future, 
 204; bond investment as, 35 et seq; in railroad 
 finance, 47. 
 
 Security, as affecting "legals," 71 ; complex nature of, 
 246 et seq. 
 
 Selling bonds, cost of, IZ. 
 
 Selling department of an ideal bond house, 229 et seq. 
 
 Selling function, 26 et seq; Chap. VIII, 203 et seq; 
 Chap. IX, 238 et seq. 
 
 Selling legal municipals, profit in, 74 ; of bonds by muni- 
 cipalities "over the counter," 74; profits in railroad 
 bonds, 89. 
 
 "Services," financial news, etc., 42-44; 165; for muni- 
 cipal buying, 80. 
 
 Size, importance of in municipal bonds, 84. 
 
 Special census reports as statistical help, 43. 
 
 Special counsel in bond buying, 39. 
 
 "Special circulars" of bond issues, 171. 
 
 Specialists, bond houses as, 134. 
 
 Specialty selling, the profit in, 208, 209. 
 
 Spirit of trusteeship, 175 et seq. 
 
 Stability of bond houses vs. brokers, 8. 
 
 Standardization, in the bond business, 26; of business 
 service, 136; of the railroad refunding issues, 106. 
 
 Statistical material as a help to bond buying, 130; 132, 
 133. 
 
 Statistician, the, in bond buying, 139. 
 
 Statistics and statistical departments, 36 et seq. 
 
 Statistics of municipal sales as an aid to bidding, 76.
 
 INDEX 157 
 
 Stock bonuses, 56. 
 
 Stock Exchange, see New York Stock Exchange. 
 Street railways, printed information concerning, 131. 
 Strength of the investment demand in the United 
 
 States, 238 et seq. 
 Subscription to bond underwriting (see Underwriting), 
 
 259 et seq. 
 Sub-underwriting, 93 et seq. 
 
 Taxation in Massachusetts in relation to bond dealers, 
 52, 53. 
 
 Telephone business, 127. 
 
 Ten investment elements, the, 59, 60; 253. 
 
 Tennessee Settlements, the, 68. 
 
 Territorial managers, the, of the bond house, 231, 232. 
 
 Three most prominent investment qualities, 62. 
 
 Traveling salesmen, 29; 233 et seq; of wholesale 
 houses, 5. 
 
 Trouble with bond selling, 206. 
 
 Trusteeship, spirit of, 175 et seq. 
 
 Tuck School of Finance, Dartmouth College, studying 
 the effect of business conditions on corporation earn- 
 ings, 132. 
 
 Type of bond, proper, must be considered by buyers, 254. 
 
 Underwriting, 259 et seq; by retail houses, 93 et seq; 
 railroad bonds, 92 et seq. 
 
 Unintelligent proposals for municipals, 79. 
 
 United States bonds, 249. 
 
 United States Steel Corporation, character of owner- 
 ship, 239. 
 
 Volume of municipal bond sales in the United States, 
 71 ; 248. 
 
 Water companies, 128. 
 
 What corporation bonds are, 122 et seq. 
 
 Wholesale vs. retail bond houses, 6, 7.
 
 THE PRINCIPLES OF 
 BOND INVESTMENT 
 
 By LAWRENCE CHAMBERLAIN 
 
 WITH KOUNTZB BROTHERS, BANKERS, NlW YORK, N. Y. 
 Third edition in the Press in eight months. 
 
 C The extraordinary demand for Mr. 
 Chamberlain's book may be explained in 
 part by the following comments of the 
 press and of individuals. 
 
 The Boston Advertiser 
 
 "This is a monumental work, and one that will 
 remain an authority for years to come." 
 
 The New York Evening Post 
 
 "Prior to the appearance of this work, it would 
 have been difficult to point to one such treatise that 
 was complete in technical details, ample in historical 
 allusion, and satisfactory in its literary features. An 
 extended work possessing all these qualities is en- 
 titled to a very cordial reception." 
 
 The Philadelphia Public Ledger 
 
 "All classes of bonds are dealt with, and from 
 State bonds and the history of State debt to the 
 mathematics of bond values, the science of bond 
 investment is presented in a scholarly yet interesting 
 and absolutely practical manner." 
 
 Boston Transcript 
 
 "Rarely have the elements of investment been so 
 well presented. The classification and description of 
 securities is discriminating. The favored class, civil 
 loans, is elaborately discussed." 
 
 Trust Companies Magazine 
 
 "A contribution to economics and a literary produc- 
 tion that will rank the author with Walker, Adams, 
 and Scott."
 
 Boston Globe 
 
 "The man who makes himself familiar with the 
 text will have a liberal financial education." 
 
 Springfield Republican 
 
 "In preparing this volume the author spent five 
 years of such unremitting labor as steady occupation, 
 covering every side of the business, would permit. 
 The book was written from day to day out of the 
 market place. The facts of the market place have 
 been well digested, however, by the mind of a sound 
 scholar. They are analyzed and presented in such a 
 way as to show their significance clearly to the lay 
 reader. . . . Mr. Chamberlain's careful and broad 
 search has made his book the first authoritative state- 
 ment of the subject." 
 
 Journal of the American Bankers' Association 
 
 "Bankers to whom the comments on the prevailing 
 types of bonds, as bank investments, and the relation 
 of bond prices to credit, etc., were submitted, have 
 approved the statements made. The book forms a 
 desirable addition to the bond department of any 
 bank." 
 
 Investments 
 
 "The amount of concrete facts relating to securities 
 is amazing, as the index will show, and justifies the 
 term 'encyclopaedic,' that is being applied to the book." 
 
 United States Investor 
 
 "Mr. Chamberlain's book is voluminous and has an 
 immense amount of information on methods of bond 
 buying and on the peculiar merits of each class of 
 bonds." 
 
 The Boston News Bureau 
 
 "Information about bonds has in the past been divided 
 into four classes : the raw material in the statistical 
 manuals, a few elementary books on investments, 
 articles in financial periodicals, and financial adver- 
 tising. Obviously none of these have offered the 
 man with funds to invest an unprejudiced opinion, 
 to assist him in the principles of bond selection. In 
 'The Principles of Bond Investment' Lawrence Cham- 
 berlain has written a book clear enough to be easily 
 understood, and substantial enough to be of practical 
 value."
 
 Bankers* Magazine 
 
 "Mr. Chamberlain's work deals with the general 
 investment field, and while it is perhaps intended 
 primarily to meet the wants of the banks and invest- 
 ment houses and scientific students of investments, 
 it will, nevertheless, be found of great benefit to the 
 individual investor. As a contribution to the perma- 
 nent investment literature of the country, Mr. Cham- 
 berlain's book will be of the highest value." 
 
 A Bond Salesman 
 
 "I sold a water company bond the other day mainly 
 on the strength of the chapter on that subject." 
 
 The Manager of a New York Bond House 
 
 "Bond houses have every reason to be grateful 
 . . . for . . . 'The Principles of Bond Investment.' 
 In the short time since its publication I have consulted 
 it freely and have found just what I was looking for." 
 
 A Professor of Economics at Yale 
 
 "I have just finished reading The Principles of 
 Bond Investment,' by Mr. Chamberlain, and perhaps 
 I can best express my feelings by saying that I con- 
 sider it the best book on this subject which has been 
 written by an American." 
 
 The Dean of an Eastern University 
 
 "I shall be much surprised and disappointed if it 
 does not very quickly become recognized as the 
 standard treatise on bond investment." 
 
 551 pages. 19 charts. 8to. Cloth. Price, $5 net. 
 
 Moody's Magazine Book Department 
 35 Nassau Street : : New York, N. Y. 
 
 J. C. ft W. E Power! Print. New York
 
 UNIVERSITY OF CALIFORNIA LIBRARY 
 
 Los Angeles 
 
 This book is DUE on the last date stamped below. 
 
 JAN2 8 lEji 
 •IAN ? ^o:\\ 
 FEB 1 1957 
 
 .,r'--'" 
 
 f^XVSI 
 
 nl MAY 2i 
 
 MAY 191975 
 
 Form L9-25»H-9,'47(A5618)444 
 
 TJICn^- •■ S^TY &i CALIFORI^Lft. 
 
 AT 
 
 LOS ANGELES
 
 AA 000 558 531 
 
 ( 
 
 I 
 
 PLEA'='i: DO NOT REMOVE 
 THIS BOOK CARD J 
 
 ^lllBRARYQ^ 
 
 •SI 
 
 %ojnv3JO^ 
 
 University Research Library