Trip To Norway - A 100-Year Promise (Picture Frame Not Included)

N.Y, in our office in Scarsdale, framed, 000 bond that now hangs, i paid $25 at an antiques store to buy an old $1, not long ago.

1941, 1. Of which sum the said company agrees to pay in like gold coin to the bearer" on Oct, it recites that the railroad "acknowledges itself indebted to the bearer hereof in the sum of One Thousand Dollars in gold coin of the United States of America of the present standard weight and fineness. 1891, 1. On Oct, a newly organized subsidiary of the Lehigh Valley Railroad, the beautifully engraved bond was issued by the Lehigh Valley Terminal Railway Company.

A half-century after it was issued, in gold coin, together with that promise to repay principal, it carried a coupon interest rate of 5 percent. This was a 50-year bond, in other words.

It did neither. But only for paper money, gold coin. The railroad could not have redeemed its bonds for U.S, by 1941, so. Public and private, citizens and companies to exchange their gold for the paper money that was declared legal tender for all debts. He devalued the dollar by 75 percent and ordered all U.S. One of President Franklin Roosevelt's first acts was to nationalize all American gold holdings, in 1933. It could not legally have been, in fact. That promise was never kept.

The bond was extended to 1951. And America was shipping Lend-Lease goods for the Allies as fast as they could be hauled and loaded, britain was struggling to hang on against Hitler's Third Reich. The railroad apparently did not find itself in a position to retire the bonds, having survived the Great Depression.

To 1979, the railroad prevailed upon bondholders to grant another extension, somehow. Passenger service also became unprofitable as travelers took to the new turnpikes in their equally new automobiles. Went into a steep decline after World War II, hauling anthracite coal from the Pennsylvania mines, the railroad's key freight business. Either, but it was not repaid in 1951.

My bond's only value was decorative, by that time. When the federal government combined it with five smaller lines to form Conrail, the Penn Central itself went bust in 1976. Which staggered into a 1968 merger with the New York Central to become the Penn Central, by 1962 most of the Lehigh's operations had been folded into the Pennsylvania Railroad.

But investors were so eager to hand money over to the railroad for a century that it decided to increase the size of the offering, (1) The company had originally planned to sell only $100 million of the bonds. Recently sold $250 million worth of 100-year bonds with a 6 percent interest rate. Note that railroad titan Norfolk Southern Corp, if you think this tale is just a bit of quaint economic history that has no relevance today.

(2) When Norfolk Southern sold an earlier round of $300 million in century bonds, the last time an American company offered such long-term bonds was in 2005. Century bonds are rare, although they have enjoyed occasional periods of limited popularity.

The rise of totalitarianism and the outlawing of gold currency, an unprecedented depression, including two global wars, even half that span brought world-changing events that nobody could have imagined in 1891, as my old bond demonstrates. There is a good reason why these bonds are so uncommon: A hundred years is a long time.

A 19th-century business that will need to survive well into the 22nd century to repay the debt, why would anyone today lend money for 100 years to a railroad, especially, and? Why would anyone want to lend money for a century?

Norfolk Southern's bondholders are merely buying a 100-year promise. But Buffet bought an entire railroad. At least not irrational, if not wise, one of the country's four major transcontinental lines) for $26 billion was, warren Buffet's 2009 decision to acquire Burlington Northern Santa Fe (like Norfolk Southern. Heavy freight across long distances over land, railroads remain the most efficient means of moving bulky, to be fair.

The railroads can do little to make up for the lost business, if economic activity moves overseas. Even the largest North American railroads are mainly confined to one country, of course, but. The largest railroads are counting on their geographic reach to diversify this risk. Carries extreme risk, therefore, betting on a specific railroad for an extended time. The railroad can't just pick up its tracks and follow the customers, when economic growth shifts to new geographic areas. Are prisoners of their route systems, after all, railroads. The fates of individual railroads can rise and fall, even if the railroad industry remains strong.

" Nofolk Southern spokesman Robin Chapman explained: "We decided to reopen these 100-year bonds based on the current low interest rates and the strong appetite among buyers for them. But they do not need to worry about having to refinance the debt later when rates might be less favorable, they must pay a little extra to investors compared with short-term financing. Companies have good reason to lock in long-term financing, in the present low-interest-rate environment.

Pretending that a 100-year bond aligns well with their own cash needs over the next two to seven decades, absurdly, many of these investors are pension funds and insurance companies that are. Investors foolishly persuade themselves that a single company's 100-year promise is less risky than a diversified basket of stocks. They assuredly will, over a century's time, bond buyers are convincing themselves they will not arise in the future - even though, because those risks are not factors today. Credit and interest rate risk (these bonds' values will plunge when rates rise) they are assuming, heedless of all the economic, they are chasing high yields in today's low-yield environment. Delusional, at present, that "strong appetite" basically shows that bond buyers are.

Even if today's investors want to imagine that the 22nd century will look just like the 21st, no 119-year old piece of paper to remind future investors of all the things that are going to change. No beautiful engravings. Existing only as bytes of data, modern bonds are issued in "book entry" form. They won't even get a pretty wall hanging to show for it.

Sources:

(1) Wall Street Journal: Norfolk Southern Raises $250 M with Century Bonds

(2) Beacon Equity Research: Century Bond Alive and Well As Norfolk Southern Prepares to Issue the First Since 2005