delivered without authority, were held to be void, although in the hands of a bona fide holder.”

An Indiana case shows how far the taint of illegality can persist. The city of Jeffersonville had issued and sold bonds to obtain money to contest litigation changing the county seat. At a later time it desired to take up these bonds with a new issue. The issue was enjoined by a tax-payer, and the original issue was held to be void because made for an illegal purpose."

Out of this situation arises the need of a careful legal investigation before municipal bonds can be safely offered to the investor. The buyer of a municipal bond cannot be an innocent holder for value. Ignorance of the law cannot be urged in his favor. He is charged with constructive knowledge of any illegality in the procedure under which his bonds were issued. If every requirement laid down in the law to govern the issue of the bonds has not been complied with, his bonds are invalid.

This does not mean that the bond-holder will necessarily lose. He can still fall back on the good faith of the people, estimating this at its problematical value. But the trouble is that after bonds have been tainted with illegality, there is no legal way in which they can be paid, except

by popular subscription, until the law is changed. The city of Helena, Montana, through no fault of its own, is unable to pay certain bonds which, owing to a decline in the value of the city's property, are issued to an illegal amount. The city stands ready to pay these bonds whenever a legal method can be found. Meanwhile the holders suffer loss.

The bond-house purchasing an issue of municipals, therefore, centres its inquiry upon the legality of the issue. It takes into account other factorsthe productiveness of the assets, such as waterworks, which are to be constructed with the proceeds of the bonds; the population of the borrowing community, its record of good faith toward its creditors, the assessed value of the property, and any other factors which may bear upon the merits of the flotation as a business proposition.

The chief concern of the banking house is with the legality of the municipal bond issue. Municipal, school district, and county bonds are good, if they are legal. The margin of a security in the value of a town's property over the total amount which it is allowed to borrow is so great as to eliminate the element of business risk which the purchaser of railroad bonds, for example, must

consider. The bond-house, for this investigation, relies upon the advice of the best lawyers it can secure. In some cases the opinions of two firms are taken.

The lawyer's statement to the bond-house answers the following questions:

(1) Is the city permitted by its charter and by the State constitution and Acts of Assembly to issue bonds for the purposes proposed?

(2) Have the necessary formalities, such as passage of ordinances, approval by the mayor, etc., been taken by the city?

(3) If necessary, has the bond issue been approved at an election, and in that case, has the election been conducted according to the prescribed form?

(4) Have the legal stipulations concerning advertisement, secrecy of bids, and award to the highest bidder been complied with?

(5) Is the amount of the issue within the limits set by the statute?

(6) Is the form of the bond such that the city cannot escape responsibility by any technicality or slip in drawing up or wording the instrument?

(7) Have the present bonds, or the bonds which it is proposed to refund with this issue, ever been subject to litigation?

On the basis of these legal opinions, for which the bond-house must sometimes pay large fees, the bonds are offered to the investor, who may purchase them with absolute confidence in their validity. Mr. Lawrence Chamberlain, in his excellent work "The Principles of Bond Investment,"

states that in 1907, out of $200,000,000 of municipal and State bonds issued, some $4,000,000, of 2 per cent., divided among 65 municipal issues, were finally declined by those who had bought them subject to the approval of their attorneys, usually on the ground of their illegality.

To show the care exercised in this matter, I recall an instance where a New York house refused to purchase an issue of school-district bonds, because, while the law required that the notice of the election to authorize the bonds should be posted for a certain time on the front door of the school-house, it appeared that the notice had been posted on the side door.

In some States-New Jersey, North Dakota, Texas, Georgia and Kansas-the law now provides for a "State certificate of validity" usually endorsed on the bond by some State official. When this safeguard is provided, a legal investigation is not absolutely necessary, although it will usually be made as an extra precaution. Elsewhere, however, the investigation by the attorneys is indispensable to security.

VIII

HIGH-YIELD MUNICIPAL BONDS

It is not going too far to say that the bonds of American cities rank among the safest investments in the world. We find, however, that outside of institutions, especially savings-banks and the more conservative class of investors, municipal bonds are not popular. The reason is that in the section of the country where most of the funds available for investment are concentrated-the Northern States the bonds of municipalities sell at much higher figures, thus offering little inducement to the investor. In the State of New York, for example, we find the prevailing yield on municipal bonds to be from 4 to 4.20 per cent. In New Jersey the rate sometimes runs higher, although some of the bonds of Newark, at the last quotation, yielded no more than 3.95 per cent. to the investor. In the New England States, the yield on municipal bonds is very small. The bonds of Boston yield only 3.90 per cent. and the bonds of Connecticut, whose quotations are available, show from 4.05 to 4.10 per cent. When we pass outside