Archive:

A Short History of Municipal Bonds

If you’ve been following my blog, you have seen a lot of information about municipal bonds, including a few things that individual investors should talk to their financial advisors about if considering municipal bonds for their portfolios. But one thing may not know yet is where municipal bonds, as we know them today, originated in the first place.

The concept of municipal bonds was actually born several centuries ago, back during the early Renaissance period when Italian city-states borrowed money from some of the well-off families as a means of financing their deficits.

Municipal bonds that are more recognizable to us now, didn’t really pop up until the early 1800s in the United States of America. The first recorded U.S. municipal bond (a general obligation bond) was issued by the City of New York to construct canals from the Hudson River to Lake Erie and Lake Champlain. The canals, once complete, dramatically enhanced access to and from New York City and are in large part responsible for securing the city’s status as the U.S. financial hub, it’s known as today. The legislative act that allowed New York to sell the bonds in order to finance the canals’ construction specified a maximum interest rate of 6 percent, which ended up being the interest rates that the bonds actually paid.

By 1843, when U.S. cities had about 25 million in outstanding debt due to rapid urban development, so bonds grew in popularity to help finance both urban improvements and a growing system of free public education.

Since their Renaissance beginnings in Italy, municipal bonds have long been an important element to the economy on a regional, state and national level. Now, all 50 states and their local governments (including cities, counties, villages and school districts), the District of Columbia and U.S. territories and possessions (American Samoa, the commonwealth of Puerto Rico, Guam, the Northern Mariana Islands, and the U.S. Virgin Islands) issue municipal bonds. It’s amazing to me to see how municipal bonds have transformed over the years and, maybe even more so, how they’ve shaped history along the way.