The Local Government Commission was created by the General Assembly in 1931 after the funds invested in banks by many local governments had been lost in the stock market crash of 1929. Previously, North Carolina counties, cities, and other local taxing units had been given broad authority to borrow money and issue bonds. There were no limitations on the amount of bond indebtedness for which local governmental units could be obligated or on how these public funds could be invested. As a result, in many instances small, local, and often poorly managed banks were the depositories of choice for counties and cities, and often they were among the first to fail. As for bonds, in some cases county bonds, sold in the 1920s, were finally paid off in the 1930s at the rate of ten cents on the dollar.
The specific responsibility given the Local Government Commission was to approve, sell, and deliver all North Carolina bonds and notes. It was designated as the agency whose approval was required for certain types of financial agreements involving local governments, while at the same time it was to help counties, cities, and other local taxing units set up and maintain their financial and accounting systems. The commission was even called on to provide educational programs on finance and cash management for local officials. Adding extra clout in fulfilling these assignments was the commission's high-level membership. It consisted of nine members: four state officials serving ex officio, including the state treasurer, state auditor, secretary of state, and secretary of revenue; three members appointed by the governor, one of whom was required to be, or to have been, the mayor or member of the governing body of a city and the other a member of a county board of commissioners); and two members selected by the General Assembly, one recommended by the President Pro Tempore and one recommended by the Speaker of the North Carolina House. With these important officials and the state treasurer, who served as chairman, the authority of the commission was established from the outset.
As an early result of the legislative decision to provide the new agency with the supervisory powers needed to correct the costly mistakes of the 1920s, the Local Government Commission soon became, and remains, a bulwark of North Carolina government. One important consequence is that the state and many of its counties and cities consistently maintain credit ratings well above the average for other states.