Annuities and Government Bonds

This department is designed to help readers to a better understanding of the general business conditions which affect their investments. It is obviously impossible to give advice as to specific investments.

by OSCAR WHITELAW REXFORD

THE FINANCIAL COUNSELOR has been dormant tor a number of months. Now that investment opportunities begin to reappear, it is being resumed in an endeavor to explain what constitute high-grade and safe investments after the conditions through which we all have passed for the last four years. Investments must now be regarded with a different attitude from that by which they were formerly gauged. Conditions, both economic and financial as well as political, have changed and are changing. It is consequently of the utmost importance to supervise investment holdings continually, and to change them, if possible, with current events.

Investors may indeed be pardoned for the bewilderment which arises to-day in a world of paradoxes, where standards formerly accepted are now being uprooted, and the theories of experts contradicted. The amateurs are in no more of a maze than the professionals, who are constantly on the alert for tangible indications to justify their opinions and interpretations.

However, all conservative investors realize that the future of their capital is affected profoundly not only by local business conditions and the international aspects of trade, but also by the political and psychological set-up, both national and international. Let us consider these factors as they appear at the present time.

First, is the United States Government definitely in business? Of course, for a number of years regulatory powers have been exercised, in greater or lesser degree, over private business. We are all aware that the Post Office Department has sold envelopes; that the federal prisons have manufactured shoes, brushes, tents, automobile tags; that the Federal Farm Board was financing the operations of farm coöperatives; that the Post Office Department was receiving deposits from the public and paying interest thereon; and that municipalities were building and operating their own power plants. It has only been recently, however, that the government has directly entered the business field in competition with privately owned industrial, commercial, and financial enterprises.

Consider merely the Tennessee Valley Authority and its purposes, which include the building of power plants and transmission lines in order to generate and sell power; the developing of new processes for producing fertilizers at low prices; the establishment of inland waterway navigation, which in turn provides for the construction of dams and hydroelectric plants, such as Muscle Shoals; the mining of phosphate ore; the construction and renting of homes; the provision of free use of farm plots to tenants; and finally, through affiliated organizations, the financing of consumers in the purchase of electrical equipment and the organizing of coöperative associations. Are these projects temporary? Will they eventually revert to private initiative and capital, or will the government in time seize all public utilities?

Moreover, for the first time in history the United States Government has definitely invaded the field of private enterprise. It has taken over and is operating factories in certain states, and even a rum distillery in the Virgin Islands. Certainly the realm of finance has been forced to give up its independence to the Reconstruction Finance Corporation, the Farm Credit Administration, the Home Owners Loan Corporation, and even to sell stock in public banks to the government, which has in turn dictated what men should take active charge of the institutions (for example, the Continental Illinois National Bank and Trust Company of Chicago). President Roosevelt has definitely pledged himself against any infringement of the profit motive in private industry, but can he withstand the popular pressure of millions of unemployed clamoring for work? We need only to notice the sweeping victory of Upton Sinclair in California to understand the significance and strength of those votes.

Second, will inflation become uncontrolled? Experiments are being tried with the nation’s currency as well as with its budget. Secretary Morgenthau reports a ‘profit’ on the increase in value of the gold reserves. Many students concede him this mark-up. but sound-money economists maintain a profit is not a profit until it has been realized. Furthermore, would the government consider for a moment removing the guarantee of bank deposits? It would not be difficult to conceive of unprecedented runs arid panics if it did.

Third, the demands and power of the American Legion, the American Federation of Labor, and other minority groups must be weighed in comparison with the number of votes which they represent. Certainly here lies the importance of the political set-up, for if these organizations through votes can control Congress, the whole structure of business necessarily faces diminished profits.

Fourth, the tariff barriers are a factor. One must consider the resurgence of economic nationalism, due to political and psychological causes. Of this, Hitler’s régime is an outstanding example. Few would have believed, before the World War, that Germany, a peaceful, industrious, and thrifty nation, would in twenty years subject herself to the rule of a former sign painter with his extreme and radical ideas. The foreign trade of all nations has fallen drastically, and in our case the reduction has been from about five billion dollars annually to about one billion. It must be conceded that Roosevelt’s reciprocal tariffs are a sincere and worthy attempt to improve these conditions, but action is unfortunately slow. And while this continues to be true, all those who were formerly engaged in handling the marginal surplus that we exported will necessarily remain unemployed. Aral it must be remembered that an unemployed man’s vote is just as potent as that of an employed individual.

Consequently caution, above all other things, should ride an investor’s decision at the present time. Among a variety of possibilities are two media which can be selected, either one of which affords the maximum in safety. One is an annuity and the other a United States Government bond.

Annuities are purchased mainly by elderly individuals. If they happen to be issued by an old reliable company, certainly nothing could be better. They are a form of investment whereby a stated sum of money is paid to an insurance or annuity company, which, in turn, guarantees to repay a stated sum of money each month to the purchaser until his death, at which time, very often, the unpaid balance is paid to the heirs. Annuities are very scientifically computed by trained actuaries, and it is a comparatively easy task to find out what one’s income would be, beginning at one’s present age or at some time in the future, from a stated amount of money.

Caution must also be manifested in choosing the company from which the annuity is purchased, Most of the old established mutual or incorporated companies found in the East and in New England are perfectly reliable. However, with those which are not so well known, it is best to study their investment portfolio and make certain that the funds are well diversified. They should be invested in United States and Canadian Government bonds, state and municipal bonds, public utility, railroad, and industrial bonds, farm mortgages, residential and industrial mortgages, and policy loans. Beware of any company which has all or a large part of its assets in any one type of investment, unless of course it be cash and United States Government bonds.

United States Government bonds are suggested because they represent the highest-grade security in the world. Many individuals say that at the present time, under current conditions, they would not buy them. Regardless of prejudices of any and all types, it must be conceded that if our own government bonds are not sound, nothing in the country is. Certainly our currency, as well as our banking and business structure, is based upon them. What value would a dollar bill have if our government bonds were not secure? In addition certain individuals state that, with the prospects of inflation of the currency, they would not entertain for a moment the purchase of a government bond, particularly at the present high prices. In such case, purchase one of short maturity, and when it matures reinvest in a similar one. By that process you are at least retaining your principal. It may be true that not much interest will be received; if interest is an important consideration, consider then the annuity.

In conclusion, United States Government bonds possess the features which at the present time are most essential in a bond investment. These features are always indicative of a prime investment and are as follows; (1) security of principal — nothing within the United States can be more secure than the government; (2) stability of income — interest is as inviolable as the principal itself; (3) fair income return — considering the status of the money market, this factor must be conceded in relation to the maturity of the bond; (4) marketability — perhaps the only security which can be ‘sold on a Sunday’; (5) value as collateral — certainly nothing surpasses it except money itself; (6) tax exemption — all income received is net income unless, of course, a large amount is owned; (7) exemption from care — a factor indicative of this type of security more than of any other; (8) acceptable duration — the purchaser can practically choose the maturity date; (9) acceptable denomination — some are issued in denominations as low as $25 and $50, and all at least as low as $100, ranging as high as $100,000.