Bonds are “in” these days, perhaps with good reason. If we have a recession, interest rates could fall further (i.e., bonds will rise — it’s two ends of the same see-saw) and earnings could fall, which could be bad for stocks.
Normally, I shun bonds. Not enough excitement. And I certainly shun long-term bonds when interest rates are low. Too much interest-rate risk. But as I wrote in Worth a while back, there are some long-term bonds I’ve bought — very long-term bonds, backed by a very good credit (well, we’ll see about that), selling at an extraordinary discount.
Specifically, these bonds are the “fives of eighty.” Not the 5% bonds of 1980 or even 1880 but, verily, the fives of 1780, backed by the full faith and credit of the United States. By now, I have a whole bunch of these little suckers, many of them bought for the price of a nice dinner. That’s really about all they’re worth if they’re canceled, as, according to Alexander Hamilton’s report in 1795, all but $90,000 of the approximately $3 million issued were. Most of my bonds, however, issued in denominations between $1 and $20, are among the $90,000 that remained unredeemed. Arguably, they have been accruing interest for 218 years.
On a $20 bond — one of which I managed to buy from a dealer for $45 — the interest comes to $832,333.
“Hello, I’m here,” I have visions of myself saying to the teller at the Federal Reserve Bank in Washington, handing him one of my $20 bonds for redemption.
“Just a minute, Sir,” the teller would say, nonplussed. And while that “minute” would doubtless stretch into decades of litigation — look how long it took the Eskimos in Alaska — my little bonds would be accruing interest at 5% a year all the while.
Then again, they’re only worth what someone will pay for them, which these days is typically a few hundred dollars each.
To do this justice, I have to ask you to back up a second and picture it. There we were, this pathetic little fledgling country trying to fight the British Empire. Any little kid learns the basics — the shot heard round the world, George Washington and the terrible privations of the winter at Valley Forge. You know. But how did we finance all that? Who paid the soldiers? Who paid for the salt petre?
The answer, oversimplified to be sure, is that the Continental Congress printed paper money. It quickly lost value, as paper money printed to finance wars so often does. By 1780, Continental Currency was trading for about a fortieth of its initial value — about two and a half cents on the precious-metal dollar. At that point, Congress officially exchanged a couple hundred million dollars of the near worthless paper money for just a tiny fraction as much sound paper money, guaranteed both by whichever state issued them (each state issued a portion) and, for extra safety and to inspire extra confidence, by the United States of America, and hand-signed on the back by an authorized agent thereof.
Will the U.S. government ever make good on this obligation? I have no idea. Needless to say, I’m not holding my breath. But Hamilton does use words like “absolute obligation” on which “interest is due perpetually until paid” in his report, and the precedent of compound interest is fairly clear. So who knows. The scale of the thing is enormous, but not so enormous as to be impossible. If all $90,000 were presented at full accumulated value (and I like to think a lot of these bonds have been destroyed in fires or lost to floods or tossed out with old newspapers), Uncle Sam would have to fork over about $3 billion — $20 million of it to me — and then take back perhaps $1 billion in income tax on the interest. A lot of money, but not much to maintain the creditworthiness of the United States of America. Of course, at simple rather than compounded interest, I’d be getting about $5,000 instead of $20 million. And if I ever did get any meaningful portion of that $20 million (I don’t want to tip my hand here, but I just might be willing to settle for twenty cents on the dollar), I’d be consumed with guilt — the primary means by which bleeding hearts react to good fortune — and would presumably give most of it away. Still, it’s fun thinking I have $20 million for which I paid about $30,000.
salt petre: This substance, rumored to have been put into our milk at summer camp to keep us from getting too restless, was an important component of gunpowder in the eighteenth century. For $260 I purchased at auction a Salt Petre Inspection certificate dated June 11, 1776. Back to Text
Quote of the Day
Every debt is ultimately paid, if not by the debtor, then eventually by the creditor.~Jim Grant
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