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Nature of Public Credit

NATURE OF PUBLIC CREDIT.

A Consideration of public credit leads the student to a phase of the Science of Finance quite different from that which has thus far claimed his attention. According to the classification of public revenue already laid down public credit is the source of anticipatory revenue as contrasted with revenue that is direct or derivative, and every question that arises respecting it must be judged in the light of this fact. Moreover, industries usually, and taxation always, are limited in their view to the ordinary and constantly recurring fiscal needs of the State; while credit, when legitimately employed, is a means of securing money for some unusual demand or for a demand of an unusual amount. A people that appeals to public credit with any other idea than that it is a means of anticipating an orderly income in the future, or that such an appeal to meet ordinary expenditures is unwarranted, will sooner or later encounter serious fiscal embarrassment. Pub lic credit is a most useful instrument when employed under the direction of a wise and conservative policy, but the slightest disregard of those rules for its use laid down by the laws of its own nature will surely work mischief to the State guilty of so serious an abuse.

76. A Government Bond Considered as Commercial Paper. To say that a State secures an income through the use of its public credit is equivalent to saying that a govern ment borrows money. The transaotion itself is a very simple one. Assuming adequate authority to have been granted by law, without which no act of the public administrator is bind ing, the public treasury offers its bonds for sale in the same way and under very much the same conditions as a private corporation might do. The bond, which is a contract in the form of a simple promise to pay, names all the terms of the loan. It states in explicit language the respective rights of the contracting parties, and the price that will be offered for it, by which the cash proceeds of the loan to the government is determined, will depend in large measure upon the terms named.

Quite a number of facts are implied in this statement that a government bond is a form of commercial paper, and that it is drawn as a contract between a borrower and a lender of capital, for, although the form of public credit is the same as that of private credit, its life or its character is essentially different. In the first place, although the transaction is in the form of a private contract, it cannot be overlooked that one party to the contract is a government invested with sovereignty, while the other is an individual vested with the rights of private property; from which it follows that the security which underlies a public bond, and without which it can possess no value whatever, is different from the security that underlies ordinary commercial paper. Confidence in a private bond is due to the fact that it is a mortgage as well as a note; that is to say, the contract gives the lender the right to enter into the possession of some definitely described pro perty in case the borrower fails to meet his obligation. The holders of railway bonds, for example, can seize the property of the road, or of such portion of it as is mentioned in the bond, if the corporation fails to make payment of interest or of principal according to the terms of the contract. The lender in this case finds his security in the contingent owner ship of a specific piece of productive property.

There can, however, be no such security in the case of public bonds, for the State, although a party to a commercial contract, is at the same time a political sovereignty, and for that reason cannot be approached by any of the ordinary legal processes. This explains why a public bond is not com monly drawn as a mortgage but as a simple promise to pay; and, except when very weak or semi-barbarous states borrow money, the addition of the mortgage clause would not in crease the confidence which a lender might feel that his money is safely invested. The State, being sovereign, cannot be sued except under conditions which it itself prescribes, and even then, since there is no one higher in authority than itself, it must be the judge in its own case.

Upon what, then, rests the confidence of the public that money loaned to the government is well invested? The answer to this question is a simple one. A modern State is obliged to maintain its credit in order to retain its in fluence. The difference between three per cent and six per cent in the ability of a government to borrow money is the difference between strength and weakness. An army may be defeated, warships may be destroyed, but as long as resources are abundant and at the command of the government at reason able rates, that government may still retain its influence in the councils of the nations. It is the instinct of self preservation which causes a public minister, jealous for the power and dignity of the government he represents, to be solicitously anxious that all public agreements should be strictly and even generously fulfilled. It is the importance of public credit to the State, taken in connection with the difficulty of its establishment and the ease with which it may be shattered, that is the basis of the confidence of lenders in the promises of a government. The reasoning upon which this conclusion rests is the same as that which leads a banker to regard a bill of exchange as the safest of all ordinary invest ments. Such bills must be honoured at maturity, or the man against whom they are drawn cannot longer continue in busi ness.

Although the State cannot divest itself of its sovereign character, the financier must, when he appears upon the money market in search of funds, conform in all particu lars to the conduct of private transactions. The motives to which he appeals must be those recognised by the commer cial world, and the terms of the contract which he proposes must adjust themselves to the needs of a successful bargain. In no other transaction which the public financier is called upon to contemplate can he forget so completely that he is the representative of a corporation clothed with the right to coerce its clients. It thus appears that the difference between revenue by taxes and revenue by the employ ment of public credit is a fundamental one. The former rests on coercion, the latter on agreement; the former em phasizes the public interest when contemplating the relations of the State and the individual, the latter the private interest; the former makes its terms holding in view only its own needs and relative justice as between citizens, the latter -adjusts its terms to the desires of a particular class of citizens. In determining whether or not a loan should be undertaken the government includes within its argument all those considera tions of public policy or sovereign authority that pertain to it as government, but the process of loan-making and of loan management must 'follow the rules of private financiering.

78. Industrial Effects of Public Borrowing. The nature of public credit will be further disclosed by observing the industrial results that follow its employment. We shall not consider in this connection an operation in credits which ex tends no further than to affect the form in which public obligations exist, as, for example, the exchange of bonds bearing a higher for bonds bearing a lower rate of interest. This is doubtless an operation in credits, but it does not bring the government into competition with industries in their demand for capital, and on this account it lies outside the direct influence which public borrowing may exert upon the industrial life of the nation. The true method of analysis is suggested by the statement that capital is potential industry. Its quantity at any given time is limited, and, like all limited quantities, its employment in one manner precludes its employment in another. The industrial effect of public borrowing, therefore, must show itself in the fact that capital which might develop or sustain industries under the direction of private control is taken over by the State; and if, as we shall assume throughout the greater portion of this discussion, the capital borrowed is put to a non-industrial use, it is evident that %the demand made by the State for funds through the placement of its bonds will disturb the orderly development of industry, if indeed it does not check that development or proceed so far as to cause the fall of industries already established.

A complete analysis of the industrial effect of public borrowing will distinguish three cases, according as the government fills its loans at normal, at high, or at excessive rates of interest. These cases will be considered in the order named, and, that the situation may be presented in a concrete manner, it will be assumed that the government is obliged to sell its bonds to procure funds with which to prosecute an expensive war.

(I) Loans Placed at Normal Rates of Interest. A public loan which offers only the normal or usual rate of interest cannot affect established industries. It must be filled, if at all, from the fund of free capital, that is to say, capital which, except for the demand of the State, would be consumed in ,the pleasure of living or devoted to the extension of the fixed plant of the nation. While the rate offered by the government is no higher than the normal rate in the com munity no competition is established between investments in industries and investments in public bonds, and we are con sequently justified in concluding that a public loan so placed is followed by no unusual or peculiar industrial results.

It is sometimes asserted that the offer of the government to pay interest on money loaned induces men to save where otherwise they would not save, and for this reason that a public loan results in a positive advantage independently of the use that may be made of its proceeds. There may per haps be some truth in this suggestion for those nations that have not as yet developed a healthful system of private credits; but as a rule it may be asserted that saving cannot be greatly stimulated by the offer of public bonds at normal rates of interest.

It has also been claimed that the placement of a public loan must affect industries because it will be followed by a rise in the price of capital, Which is equivalent to saying that a government cannot fill a loan at a normal rate of in terest. This may be true, provided the demand of the govern ment is in addition to the ordinary demand for industrial extension, and this will, of course, depend upon the purpose for which money is borrowed and the conditions under which the government appeals to the money market. H the pur pose be industrial there will doubtless arise a certain degree of competition between the government as an undertaker and individuals as industrial promoters. Should the competition prove to be active a wise financier will defer his project, for the time in which the government should become an investor of capital is when, through depression of business expecta tions, there is a surfeit of free capital upon the market.

If, on the other hand, the purpose for which the loan is placed be to provide funds for a war there can be no " extra demand " for capital. The government may spend more, but individuals will spend less. Moreover, the uncertainty which attends a condition of war will tend to check private investment, and provided the government has adopted a sound fiscal policy for the conduct of the war, and provided the purpose of the war meet the approval of the public, it can at least secure what money it needs at normal rates of in terest. Our general conclusion, then, needs no modification. A loan that proceeds no farther than to draw into the public treasury the free capital which at any time exists will not seriously affect industrial conditions.

(2) Loans Placed at High Rates of Interest. Let it now be assumed that the government needs more money than it can secure by offering the usual rate of interest, and that in con sequence it raises the rate which it offers above the normal rate. Provided its credit is not impaired the govern ment will doubtless procure the money which it needs. What will be the industrial results that follow this second step in loan financiering? It is clear that these results will depend upon the character and importance of the funds that are thus approached by the government, and it is therefore incumbent upon us to inquire respecting those funds.

There are three funds of capital that may be placed at the disposal of the government on account of its offer of a rate of interest higher than the usual or accustomed profits accruing to industrial investments. In the first place, some thing may be expected from a saving in personal expendi tures, and here for the first time is it possible to trace a direct relation between public borrowing and industrial affairs. If commodities commonly consumed cease to be used in order that the money thus saved may be expended in the purchase of public bonds the producers of such commodities will cease to find their full employment, and the temporary embarrass ment thus occasioned will, by a process familiar to the student of economics, react upon all industries. This at least would be the result were there no counteracting influences. It is not likely that a government would take this second step in the placement of a loan were it not in need of men as well as of money, and the embarrassment to which we have referred would in large measure be relieved by this fact. In the case of a war, for example, the men thrown out of employment as a result of the saving occasioned by the high rate of in terest offered by the government would find employment in the army, upon which the capital thus collected would be ex pended.

The second fund of capital placed at the disposal of the government because of the high rate of interest offered re sults from the abandonment of industries which were upon the stage of paying no profit before the government made its appearance as a borrower, and from the suspension of in dustries which a change in demand has rendered tempora rily unprofitable. Fixed capital cannot, of course, be trans ferred to the government; it is the circulating capital as represented by the proceeds of the last sales, or the accumu lated surplus of past years, that must go to the purchase of public bonds. This is a fact of considerable importance in tracing the industrial results of the placement of a loan at a high rate of interest, for it shows that the influence of such a policy is limited by one of the simplest of commercial laws. Public 'bonds will not be purchased with funds necessary to maintain an established industry in a profitable state of ac tivity except the rate that can in this manner be secured on the free capital gives rise to a larger annuity than the profit which accrues from the use of the fixed capital. Were it not for this natural limitation of investments it might be dan gerous for a government to offer a rate any higher than the established rate of profit in the community, for it would by so doing induce the abandonment of useful industries; as the matter stands, however, this second step in loan financiering may be of positive advantage to the community, inasmuch as the opportunity to purchase public bonds may serve as a temporary refuge for investors who are seeking to change their line of investments. If the political policy of the govern ment be the occasion of the embarrassment which necessi tates a readjustment in investments there is in this fact an added reason for placing bonds at a high rate of interest.

The third source from which government loans may be filled in response to an offer of high interest results from the increased activity of those interests which continue to enjoy their accustomed demand. The managers of such industries recognise that government bonds offer an easy investment at good rates for practically unlimited amounts. The possi bility of an outlet for capital accumulated gives an added mo tive for its accumulation, and the only means of securing this is through the application of greater energy or skill to the industries maintained. No one can say that the spirit of tech nical invention or the ability of business organization has ex hausted itself. On the contrary, there is every reason to believe that motive alone is necessary to bring yet greater talent to the service of the business world. If this be true, and if the offer of a high rate of interest can serve as a stimulus to energy and application, not only will the result be of im mediate advantage, but it will entail remote benefits as well. While, then, it may be said that only an exigency can warrant the disturbance of established business relations through the offer of a high rate of interest on public bonds, it is equally true, provided the exigency in question, as, for example. a war. has disturbed those relations, that the commercial adjustment which must follow will be assisted rather than hindered by what we have termed the " second step in loan financiering." (3) Loans Placed at Abnormally High Rates. The third step in loan financiering is taken when the government seeks to fill its loan by the offer of an abnormally high rate of in terest, and it is a step commonly followed by most unfortu nate results. The permanent interests of the treasury and the social interest of the community are alike opposed to the po licy of borrowing money under conditions which necessitate the payment of abnormally high rates. A moment's con sideration will show why this is the case.

So far as the interest of the treasury is concerned the ap pearance of the government on the money market as a strong competitor for capital will tend to dry up the sources from which money may be secured through taxes. There is always at any given time a class of industries that stand upon the mar gin of profitable returns, but should the established rate of profit be raised by the offer of a high rate on government loans many of these weaker industries would endeavour to release their capital from industrial investment to place it at the disposal of the nation—a procedure which curtails the fund from which taxes are paid, while at the same time it in creases the annual charge imposed upon the proceeds of taxes. Nothing could be more pernicious, and only imperative neces sity could warrant the offer of excessive rates even as a tem porary expedient.

The social interest opposed to this policy is equally clear. Nothing can be more unfortunate for a community than an arbitrary and therefore a temporary change in the general scale of prices. Calculations become difficult and all business takes upon itself a more or less speculative character. The best illustration of such a change is the sudden rise of prices due to monetary inflation. But a similar result would follow a rise of prices due to the non-commercial rise in the accepted scale of profits such as would follow the offer by a govern ment of abnormally high rates upon its loans. The govern ment would doubtless get the money, partly, as we have said, from the release of capital from industries which have become relatively unprofitable, and partly by the unusual profits of those who sell goods produced at the old cost at an advanced price. In the competition that follows an arbitrary rise in the scale of prices the gain will always lie with those who possess goods that respond quickly to industrial changes, while the loss will be sustained by those who seek to sell goods that are commercially sluggish. There

are many applications of this generalization, all of which show that the industrial readjustment which follows the placement of a public loan at unusually high rates of interest must work unfairly as between citizens. A single illustration will suffice.

The goods which the labourer consumes respond almost im mediately to any change in commercial conditions, while the commodity which he sells is of all commodities the most sluggish in its movements. This being the case, it is evident that during the period in which wages are rising as the re sult of the increased cost of living the employer is in receipt of an unusual profit. The funds thus concentrated in his hands may perhaps go to the purchase of public bonds, but it is certainly a result that no government can contemplate with satisfaction, that the burden of its loan is borne by one class of its citizens while the advantage is enjoyed by another. The placing of a loan under the conditions assumed tends to the unequal distribution of wealth, it intensifies class relations, and from every point of view must be regarded with disfavour. A wise government will foresee these pernicious results of an extensive application of the loan policy, and provide in time against the necessity of appealing for funds by the offer of excessive rates of interest.

Our general conclusion, then, is as follows: Loans at nor mal rates of interest are followed by no very important indus trial results; loans at a rate slightly in advance of the normal rate will disturb somewhat the placement of capital, but, pro vided the occasion of the loan is such as to cause a readjust ment of commercial relations, the action of the government may be regarded as positively advantageous; but to carry the rise in the rate of interest so far as to become itself a cause for commercial disturbance would be followed by results for which no conservative government would care to be respon sible. No part of financial administration calls for a keener business sense than the placement of government loans.

79. When may Public Credit be Employed 1—This ques tion, which is naturally introduced by the foregoing analysis, will lead to a yet clearer appreciation of the nature of public credit. As already remarked, credit gives rise to anticipatory revenue. The placement of a loan must sooner or later be followed by the levy of a tax. We need not argue this point. for no writer or statesman since the seventeenth and eighteenth centuries has claimed that a public debt is a public blessing. Nor is a public debt a public evil. Public credit, considered by itself, has no moral or social quality whatever. It is one of several means of procuring public funds. Unless the government is in need of money neither a loan nor a tax can be justified; but, assuming that one or the other of these means of securing money must be em ployed, a great deal depends upon the choice of means made by the financier.

Coming at once to the answer of the question asked, for we are not at liberty to enter upon an extended analysis, it may be said that there are three objects for which a govern ment may properly borrow money. These are as follows: To cover a casual deficit.

To provide funds for an emergency.

To provide funds for industrial investment.

(z) Loans may be Used to Cover Casual Deficits. In a pre vious chapter the question of a deficit in specific appropria tions was brought to the attention of the student, and it was concluded that an efficient fiscal system will provide some means by which an inadequate appropriation may be made good in order that the projects approved by the legislature need not be embarrassed in their execution. The question that now claims consideration pertains to deficiency in general income rather than to deficiency in a specific appropriation. In discussing this question it will be assumed that there is ample revenue legislation, but that for some reason the in come of a particular year has fallen short of the accustomed income. It may also be assumed that the loan under con sideration is an act of the legislature and not of the govern ment, since in this manner we avoid the intrusion of any parliamentary or constitutional questions that might be raised. Under such circumstances the claim here urged is that a sound system of finance will make orderly provision for cover ing a possible casual deficit by a temporary loan.

The reasons which favour such a conclusion are three : In the first place, there being an orderly and well-recognised pro vision against a deficit, its appearance cannot operate to the injury of public credit or public administration. The " psy chology of the crowd " is not very well understood, but one of its minor laws is that in matters pertaining to public policy the opinion of the public is less sensitive to an event, no matter how threatening it may be, than to an apparent lack of prepa ration on the part of the government to make headway against it. It is not enough that a people have resources; the govern ment must have the means of availing itself of those resources without hesitation and without exciting comment.

In the second place, the only provision against a casual deficit is found in such an underestimation of income or over estimation of expenditures as to guarantee a constant surplus. It is therefore necessary to inquire which is preferable in public financiering: close estimates with possible deficits and temporary loans to cover them, or loose estimates with broad margins for contingencies and a probable surplus. The ques tion being presented in this manner, we answer without hesi tation that a wise fiscal policy will approve deficit rather than surplus financiering. This is true because a constant excess of income over approved expenditures will exercise a bad moral influence on the legislature and induce it to approve expenditures without scrutiny which under other conditions would be disallowed. It is a wise rule that no new expendi ture should be voted until after the legislature has considered the ways and means by which it is to be met. Legislation in the presence of an overflowing treasury is sure to be foolish legislation. This point, like the former one, seems so clear as to require neither illustration nor comment.

The third reason in support of a policy of temporary loans can only be approached indirectly. It will be noticed that the loans here contended for are temporary loans, and it is evident that this must be the case, since otherwise a policy of deficit financiering would lead to a constantly increasing public debt. There is no warrant in the above argument for permitting the average income for a series of years to stand below the average of expenditures for the same period. It may be that the casual deficit which was the occasion of the loan is due to a reduction of imports, in which case it may confidently be expected that revenue will recover when business revives, and it is no slight advantage of the loan policy that the deficit of a poor year may be thus thrown over onto the surplus of a good year. The necessity of a change in the revenue laws, than which there can be nothing more pernicious, may be thus avoided. The great service of a policy of temporary loans, therefore, is found in the fact that it relieves a legislature from the necessity of too frequent changes in the rates of taxation.

One word further may be added respecting this policy. Like all forms of credit financiering, it will succeed or fail according to the provision made for it in the orderly revenue system. The need of an elastic revenue has already been pre sented; it may now be observed that the easy administration of a policy of temporary loans demands a mobile revenue as well. Were it possible that the surplus and the deficit of a series of years could balance the issue of loans to cover de ficits need be the occasion of no thought on the part of the financier; but such a balance cannot be expected, and on this account the financier must attain this balance through the adjustment of income. To do this in such a manner as not to disturb the general revenue system it would seem wise that a few specific taxes be placed at the disposal of the financier, the rate upon which might be raised or lowered annually ac cording to the demands of temporary loans. Suppose, for example, that a tax on the import of tea be assigned to this service, or such portion of it as may be necessary, to move the income of the government up or down according to the exigencies of the temporary debt, the revenue system as a whole would be unaffected by a surplus or a deficit, the government would have no excuse for an increase in its per manent debt, and no industry within the country would in any way be affected by the modification of the tax.

We therefore conclude for the three reasons named that temporary loans are a legitimate part of an orderly fiscal sys tem, but in the establishment of this policy the legislature must make ample provision for its successful administration by assigning to its service a mobile revenue.

(2) Loans may be Used to Meet a Fiscal Emergency. By an emergency is meant any calamity, or threatened calamity, which gives rise to an immediate demand for public funds. A war or threatened invasion may be regarded as such an emergency. Under such circumstances a government is jus tified in borrowing money and for two reasons : First, the demand for money being due to an emergency, the government cannot wait to secure it by the levy of new taxes. Experience shows that considerable time is required to bring a new tax into working order. In 1812, for example, a direct tax was levied to provide for the war that Congress had seen fit to enter upon, but the tax did not become produc tive until two years after it was levied, and the largest amount of revenue accruing from it came to the government in 1816, after the emergency had passed away. Nor can an emergency demand be met by raising the rate of existing taxes; for, in the first place, it is not sure that such a measure would, under the commercial conditions of a threatened war, result in an increase of the revenue, and, in the second place, arbitrary and unadvertised changes in a revenue system do not lie within the contemplation of reputable states.

Second, the only other means of providing against an emergency so as to avoid the necessity of borrowing lies in the accumulation of a surplus which can be used when the emergency arises. This is regarded as sound financiermg when followed by private corporations, although it must be said that even in this case the larger the enterprises con sidered the more difficult will it be to make use of an accu mulated surplus. If this surplus be invested in profit-bearing obligations it is apt to fail of its purpose when most needed, because such obligations could not be easily sold on a strin gent market; an uninvested surplus, on the other hand, would be a very expensive sort of commercial insurance. As ap plied to the government, however, the policy of storing up money or values as against a future contingency is without reason. If it consist of specie, not only will its accu mulation act as a contraction of that portion of the cir culation which is the basis of all credit relations, but its expenditure, which from the nature of the case must be almost instantaneous, will act upon the circulating medium like the discovery of an unusually productive mine. Nothing could be worse than this slow contraction of the world's specie to be followed by sudden inflation. To say nothing of the disasters that would follow such a policy, a government itself would be greatly embarrassed by the in fluence which such a policy would exert upon the price of those things which it might be called upon to purchase.

If, on the other hand, this reserve be made up of interest bearing obligations the policy presents itself in no more favourable light. The difficulty comes when the govern ment seeks to make use of its fund of invested capitaL No government would care to use such obligations as collateral security, for it would be simpler and equally cheap to borrow the money outright; nor could the govern ment sell its securities to advantage, since, 'the occasion of the sale being a public emergency and the amount thrown upon the market large, their price would in evitably fall. Only in the case of barbarous states operat ing in the midst of civilized states of higher credit can any reason be urged for the accumulation of a war fund, and then only when such states possess sufficient sagacity to purchase the highest priced bonds that the world offers. It is theoretically possible for a government without credit dealing in the values of a government of unblemished credit to realize more by the sale of foreign obligations than by the issue of its own obligations, but a people possessing such sagacity would be likely to enjoy a high credit of its own, in which case the argument would not apply.

The unreasonableness of this policy is further seen when it is noticed that the transaction contemplated is merely a trans action in credits. The sale of an accumulated investment is equivalent to the placement of a debt, and the accumulation of an investment preparatory to sale is equivalent tb the pay ment of a debt. It cannot be argued that by means of pre vious accumulation a government is enabled to secure more money than would otherwise be the case, or to increase its re ceipts more quickly or more easily than by the simpler process of borrowing money; for the fund of free capital is at any time a limited quantity, and any portion of it absorbed by the sale of existing obligations cannot be absorbed by the sale of newly created obligations. Why, then, should a government impose taxes in time of peace in order to accumulate a fund against an emergency if, when the emergency comes, the fund renders no service that cannot be as well, if not better, rendered by the sale of new obligations? The most efficient provision against a fiscal emergency consists in a flourishing condition of industry, and a government which deserves the confidence of its subjects will be able to obtain immediately and for the asking all the money it may need. The danger which lies in credit financiering is, not that a government cannot by means of it obtain funds to make headway against an emergency, but rather that the ease with which funds can be obtained will induce a government to declare an emergency where none exists. Our conclusion, then, is that a fiscal emergency as well as a temporary fiscal embarrassment warrants the employment of public credit.

(3) Loans may be Used to Procure Funds for Public Invest ment. The third occasion for the employment of public credit arises when an extensive scheme of public investment has been voted by the legislature, a statement for the support of which two reasons may 'be presented : In the first place, this is the only economical method of going to work. Were it possible to proceed slowly with the work the necessity of collecting a sufficient amount of capital at the beginning to carry the enterprise to completion might not be imperative; but it is not possible to proceed slowly with such enterprises as are now under consideration, as, for example, railways, levees, dredging of rivers, and the like, for not only are such enterprises unable to bear an inter rupted construction without damage to the work already done, but the part that is finished represents an idle investment until by completion the whole may be put in operation. Improve ments of this character should be carried through from start to finish rapidly and without interruption. It is thus evident that small annual appropriations are condemned by both the engineer and the financier.

Such being the case, the only means of obviating a debt would be to levy a tax adequate to the demands of the en gineer, but such a policy would disregard that principle of finance which asserts that a sound taxing system must be stable. Changes in rates, and the shifting of commercial con ditions which such changes entail, are frequently a more serious burden to industry than the payment of a tax. This burden may be obviated by the placement of public bonds, for the payment of the bonds (so far as it comes from taxes), being spread over a series of years, will be the occasion of no disturbance 'or serious change in the form or rate of taxation. There is, then, economy in the loan policy, whether regarded from the point of view of the enterprise undertaken or of the relation which the enterprise holds to taxes.

The second reason for the employment of credit in collect ing capital for public industries is limited in its application to investments that are industrial in character. An industrial investment, as the phrase is here used, is peculiar in that the service which it renders may be particularized and a payment for it demanded from the individuals who enjoy the service. A railway owned and operated by the State is an illustration of such an investment. In the case of such an enterprise it is generally conceded that the capital required should be sup ported by the charges for service rendered, a result which could not easily and naturally be accomplished were the government to procure the funds without the creation of a special class of obligations. It thus appears that the policy according to which the contemplated work shall be adminis tered is involved in the means in which it is set on foot; and to render more easy a commercial management it seems wise to adopt commercial methods at the outset. This means that the funds for an industrial investment should be collected by the sale of bonds resting in the first instance on the enterprise in question, but rendered salable at a high price by The fact that the general revenues of the State are mortgaged for their payment.

The three occasions which have been presented are believed to be the only ones which justify the use of public credit. They are : the rise of a casual deficit, the appearance of a serious emergency, and the voting of extensive public works. The nature of public credit is clearly exposed by the use which may be justly made of it. The great service which it renders is to give steadiness to the fiscal system, which, after all, is the chief mark of successful financiering. Public credit as a source of revenue cannot be regarded as a casual expe dient. It is an integral part of a well-ordered fiscal system the recognition of which would save many peoples from the abuses now practised in the employment of their credit.

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