Public Finance

There is an appearance of exaggeration in the statement that public borrowing has only come into existence since the end of the seventeenth century. In all but the rudest societies credit has been more or less employed, and we can hardly conceive that the governing body would altogether neglect its use in times of need. So far, however, as classical antiquity is concerned, there is hardly any trace of loans to the State. The explanation of this fact lies in the characteristics of Greek and Roman society.
*12 Instead of borrowing from the wealthy citizen, the State adopted the more drastic, but in the long run less fruitful, method of levying a special tax on him. The small amount of floating capital also prevented a ready recourse to loans. Compulsory loans, or the farming-out of taxes, were, in default of a treasure, the favourite methods, to which may be added the rarer one of pledging some state or regal possessions. Temporary credit transactions with contractors were the nearest approach to a public debt in our use of the term.
*13

§ 2. The Middle Ages show little advance on—in some respects they fall below—the economic position of the Roman Empire. The strong sentiment against usury and the feeling that it was beneath the dignity of a prince to borrow from his subjects
*14 both tended to check the use of the royal credit. Where it was exercised the quasi-private nature of the feudal state system comes out clearly. The King borrows on his personal credit, or on his domain, which he even gives in pledge as a security for payment.
*15 These loans were usually obtained from the Church, or from foreign bankers. Hallam tells us that ‘in 1345, the Bardi at Florence, the greatest company in Italy, became bankrupt, Edward III., owing them, in principal and interest, 900,000 gold florins. Another—the Peruzzi—failed at the same time, being creditors to Edward for 600,000 florins. The King of Sicily owed 100,000 florins to each of these bankers.’
*16 Both in England and France these borrowings grew more common as wealth and the cost of government increased. Francis I. obtained various sums through the city of Paris, which kept a list of the creditors and distributed the interest.
*17 Appeals to Parliament in connexion with loans occur as early as the reign of Richard II. Forced loans were tried by Edward IV., and by the Tudors in the sixteenth century. The pledging of taxes as security for debt is the last step in the older forms of borrowing.
*18

A more advanced position is found in the loans of the Italian cities, especially Genoa and Venice, which raised money through the agency of banks established for the purpose. The bank of St. George in the latter city was the most important instance in this system. The superior commercial development of Italy contributed to the increase of state, as well as private credit, and more especially to complicated dealings in the farming of state domains and taxes.
*19

The commercial revolution of the fifteenth and sixteenth centuries, which depressed the Italian towns, brought those of the Low Countries into prominence. The system of state-borrowing and of lending to foreign countries was engaged in by the Dutch, who, in consequence of the low rate of interest, were anxious to enlarge the field of investment, and therefore undertook most of the limited international business of the time, such as the carrying trade and public loans. Imitation of Dutch methods of commerce and finance—so powerful an influence on the English policy of the seventeenth and eighteenth centuries—was a principal cause of the creation and advance of the English funded debt, which has in its turn been an example to other States.
*20

§ 3. It is thus plain that neither ancient nor mediæval finance possessed the modern public debt system. The latter, indeed, contained the germs from which our present expedients have been developed, but with so many differences that it is hardly right to place two such distinct groups under a common heading. They are, rather, separate species of a comprehensive genus. The increase of public debt in modern times is the result of economical and political conditions of the highest interest and importance. From one point of view, the vast indebtedness of States and smaller governing bodies is due to the transition to ‘credit economy.’ Money, as a medium of exchange, has been largely superseded by the use of credit instruments. In like manner, great masses of property, or, more correctly, the evidence of its ownership, have become freely transferable. The shares of companies, or their acknowledgments of debt, are very readily dealt in. Railways, banks, and other industrial undertakings by this means increase their business and the value of their property. It would be incomprehensible if the greatest of co-operative organisations—the State—declined to avail itself of a like expedient. In fact, governments,—supreme and subordinate, strong and weak,—have mobilised their credit, and thereby increased their immediate financial power. The mechanism of the Stock Exchange has remedied the weakest point in the earlier state-borrowing—the absence of any way of quickly realising the capital lent.

This connexion of public debts with the money market is, perhaps, most clearly seen in the modern methods of contracting loans. Whatever be the particular form adopted the substance of the operation is the same, and amounts to an investment of capital on the part of the lenders, carried out in nearly every case by the special class of dealers in stocks. To the investor there is no difference between taking up the stocks or bonds of a railway and those of a government. In the cases in which the latter are contracted on account of a particular undertaking, the resemblance is even closer. A loan to an Australian colony for railway construction is indistinguishable from one to a company for fresh capital outlay.

Though the modern money market affords the machinery for continued extensions of state-borrowing, it does not give the motive power. The amount of loan transactions must, it is plain, depend on the conditions of supply and demand; but, then, this somewhat general formula stands in need of further analysis. The reasons for the expansion of demand are discoverable in the increased public outlay of modern societies. We have often had to notice how both military and civil expenditure are growing, and also that some parts of this outlay are at once uncertain, and productive of durable advantage. War and public works require large immediate expense, and their full benefits are not reaped at the moment. To procure sufficient funds by taxation is both disagreeable and, on the surface at all events, unjust. The financier very naturally takes what he knows to be the most convenient, and probably believes to be the fairest, course in appealing to capitalists for assistance. It is true that all loans have not this plausible ground; they are often due to weak or careless finance, and are simply a mode of staving off the evil day. State credit is, like all modern credit, made up of both good and bad elements, and in its case the latter are often the more powerful.

As the increasing cost of the State gives us the motive for its greater borrowing, so do the development of the capitalist class and its greater influence on government explain the willingness to bring forward the needed supply. The earlier loans were either obtained by force, on the pledge of specific property or taxes, or finally on the honour of the personal ruler. In the constitutional epoch, advances are made to an administration over which the moneyed classes have influence. The close connexion of the English debt with the Revolution of 1688 and the maintenance of the system introduced by it is well known,
*21 and at an earlier time the Italian cities and the Dutch provinces were under mercantile influence. It is unquestionable that the development of representative government and its control of the administration have helped to secure a larger supply of loans than would otherwise be forthcoming. At the same time it is easy to overrate the significance of this fact. The mere existence of constitutional rule does not suffice to create borrowing, nor its absence to stop it, as the French debt of the eighteenth century and that of Russia at present will suffice to prove. A powerful class in the possession of disposable wealth will be in a position to act on the most irresponsible of rulers, and a prudent absolutism will recognise the wisdom of sustaining public credit. Nevertheless, the advance of constitutional government and the increase of indebtedness have been coincident, a circumstance due to the fact that both are products of the present stage of development, and not solely because ‘the moneyed interest has captured the machinery of government.’
*22 The greater attention to justice that, on the whole, characterises popular government naturally operates on public as on other economical relations.

Nor is there any reason to doubt that on the whole the change is advantageous. A strict observance of public faith, besides its immediate services both to lenders and borrowers, has a further influence in making the general financial administration more regular. When we remember the vital importance to a State of being able to secure assistance through credit at times of pressure, it is evident that anything tending to strengthen the guarantees for punctual payment is and must be for the general good.

In some respects, however, the development of public indebtedness has been accompanied by serious, though it may be hoped only temporary, evils. Where the administration is corrupt, or where the interests of the ruler and his subjects are opposed, there has been both undue use of borrowing, and terms far too favourable have been given to the lenders. The taint of rash speculation and of craft, amounting in some cases to fraud, which hangs round the modern
Bourse has affected the great class of public loans. It may be that religious or political prepossessions have led some critics to attach too much importance to these dark features,
*23 but there can be no doubt of their existence. Immense advances have been made to governments that no prudent person would trust, and for objects that could not possibly be regarded as beneficial. Exorbitant rates of interest, in order to cover the great risk incurred, have been stipulated for, but not always paid; while, finally, the course of public policy has been sometimes influenced by sinister financial interests. Such practices naturally and justly arouse strong feelings of hostility in the minds of the sufferers, and of all whose moral standard is not debased; but in condemning them we should not forget the solid benefits that public credit has conferred on the world, nor the extent to which evil and good are usually blended in the ordinary economic transactions of men. There is, too, decided evidence of improvement. International public opinion is better pronounced, and, as in the case of individual credit, the sphere of the usurer in national transactions is being gradually restricted.

§ 4. The powerful effect of the influences that favour indebtedness is shown by the figures of every stock exchange, and by familiar facts of statistics. Out of the, in round numbers, 1,800 stocks quoted on the London market, 340 may be fairly described as public, of which the larger part are British. Berlin has something over half that number, of which about one-third are German.
*24 Paris has a still larger number. We may say that any State that pretends to be civilised regards the creation of a debt as one of the essential marks of its having reached that position. So does every colony and large city. The latest developments of municipal life are shown in the issue of bonds by the responsible authorities. Universality is one of the features of the modern debt system, and it is explicable only by reference to the conditions noticed in the preceding section, together with, in the case of backward States, the influence of imitation.

Public indebtedness is remarkable, not merely for its universal employment, but also for its great and growing amount. The following details are instructive, though in most cases the results are only approximate. The total public debts of the world in 1783 have been estimated at £506,000,000; by 1820 they had increased to £1,530,000,000; their amount in 1848 was about £1,730,000,000. According to a careful estimate, the national debts of European States in 1870 were, in round figures, £3,000,000,000, in 1885 they had risen to £4,600,000,000, or an increase of £1,600,000,000 in fifteen years.
*25 In 1900 the debts of the Great European powers and the United States were £4,000,000,000; Mr. Palgrave states
*26 the total debts of the various countries of the world towards the close of 1890 as £6,505,000,000, or an increase of over £1,000,000,000 on the debt existing in 1882. At the close of the nineteenth century the national debts of the world can hardly have been less than £7,000,000,000. This enormous sum does not include the local debts that are, if we may judge from all available facts, increasing even more rapidly. Both have been growing apace in such a manner as to excite the apprehension of reflecting observers. The reality and extent of the danger will demand examination later on—the existence of the circumstances that have caused alarm is all that concerns us at present; but even at this stage of the inquiry, it is well to notice the fundamental difference between two classes of debt, the one contracted for non-economic ends, the other for purposes of reproductive employment. War and public works have been mentioned as the two chief causes of abnormal outlay, and loans for these objects belong respectively to the different classes. To take obvious instances, the great addition to the French debt from the war of 1870-71 cannot be regarded in the same light as the indebtedness of Prussia and other German States for railway purchase and construction. The former involves increased taxation; the latter, if prudently applied, does not. The same contrast appears in the case of the English national, as opposed to the local debt, though this instance suggests the necessity of a qualification. Outlay on public works is not of itself, and apart from the revenue to be thence derived, different from the cost of war, or other unproductive expenditure. No readier or more dangerous mode of increasing debt can be found than the execution of works that are not economically productive. Vague assertions of indirect benefits should not be allowed to conceal the fact that ‘improvements’ of this kind should be paid out of income, and cannot be regarded as investments in the proper sense of the term.

§ 5. To summarise the results of the present chapter: state borrowing appears to be, in its leading features, a creation of the constitutional period, built upon the decay of the older method of state hoarding and having its germs in the Middle Ages. It is the result of the credit system, combined with the increase of public expenses and the greater security for observance of faith to the state creditors. Both on account of its universal employment and its rapid growth, it is one of the most influential factors in modern finance, and one whose tendencies and actual effects are deserving of close attention. To form a just appreciation of the system, a study of its history in the more important countries is desirable; and we shall therefore devote some space to this side of the question before passing to its theoretical aspects.