Tuesday, October 29, 2013

Historical problems with Municipal Bonds in the late 1800s

I was thinking whether we had ever had problems with Municipal Bonds in the past. I'm hopeful that the problems of the late 1800s have been dealt with now by regulations. However, in the Great Depression the problem was not cities going bankrupt trying to pay benefit packages because likely benefit packages of the kind we have now likely would have been considered "socialistic" at that time. However, now times have changed and without property values "ONLY" going up all the time, benefit packages in city and county retirements are not solvent and cannot be paid unless the Federal Government decides to cover such obligations which is unlikely for all the cities that have gone bankrupt or will go bankrupt into the future. However, this is what happened historically to Muni Bonds in the late 1800s during severe depressions.
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Years after the civil war, significant local debt was issued to build railroads. Railroads were private corporations and these bonds were very similar to today's industrial revenue bonds. Construction costs in 1873 for one of the largest transcontinental railroads, the northern pacific, closed down access to new capital.[3]
The largest bank of the country, which was owned by the same investor as by Northern Pacific, collapsed. Smaller firms followed suit as well as the stock market. The 1873 panic and years of depression that followed put an abrupt but temporary halt to the rapid growth of municipal debt.[4]
Responding to widespread defaults that jolted the municipal bond market of the day, new state statutes were passed that restricted the issuance of local debt. Several states wrote these restrictions into their constitutions. Railroad bonds and their legality were widely challenged; this gave rise to the market-wide demand that an opinion of qualified bond counsel accompany each new issue.
The U.S. economy began to move forward once again, municipal debt continued its momentum, this maintained well into the early part of the twentieth century. The great depression of the 1930s halted growth, although defaults were not as severe as in the 1870s.[5] Outstanding municipal debt then fell during World War II. Many American resources were devoted to the military. Prewar municipal debt burst into a new period of rapid growth for an ever-increasing variety of uses. After World War II, state and local debt was $145 per capita. In 1998, according to the U.S. census, state debt was $1,791 per capita. Local per capita debt in 1996, the most current Census data available, was $2,704. Federal debt was $20,374 per capita at the end of 1998.

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Municipal bond - Wikipedia, the free encyclopedia

A municipal bond is a bond issued by a local government, or their agencies. Potential issuers of municipal bonds include states, cities, counties, redevelopment ...
So, though the railroads caused the rapid development and money making capabilities all across the U.S.  in the long run, in the short run they caused many depressions and bankruptcies.

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