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The Defrayment of the Public Expenditure

THE DEFRAYMENT OF THE PUBLIC EXPENDITURE.

§ 156. But a good deal nearer the surface, and therefore nearer to the point of view of the common run of practical discussion, are the questions which concern the defrayment of the public expenditures, that is to say, the maintenance of a balance between the expenditures and receipts of the public treasury.

The fact of the necessity of maintaining such a balance is obvious and requires no detailed discussion. Every good citizen is well acquainted with this necessity from its daily and ever recurring presence in the affairs of private life. As we have already frequently called to mind the identity of prudence as applied in public and in private economy, so also at this point. The deceptive appearance due to the peculiar resources at the com mand of the public administration, as compared with private sources of income, makes it necessary to begin by correcting the misconception according to which the maintenance of an equilib rium here is less imperative than it would be in the case of a pri vate establishment. Only when this has been done can we pro ceed to give our attention to those peculiar resources which state and communal administrations have at their disposal, together with the special difficulties with which they have to deal, as con trasted with any private establishment.

It is evident from this universal experience in economic mat ters that a chronic excess of expenditures over receipts—what is called a " deficit " in the public finances—is an abnormal condi tion and must be avoided.

The affairs of everyday life offer fewer illustrations of the failure of the adjustment in the other direction—of an excess of receipts over expenditures. For obvious reasons this case is much rarer than the contrary. It is evident, however, from its repeated occurrence in the national finances of the United States of Amer ica, in early years and also of late,' that, under given circum stances—in this particular case on account of the smallness of the national expenditure and the peculiarities of the tariff policy —a disturbance of the equilibrium may also take place in this direction. And this brings us to an appreciation of the fact that the fiscal administration must be prepared to meet this emer gency also. The precautions taken must follow the same general rule that has been laid down for the avoidance of a deficit, namely, such a change in the amount of the expenditures or of the receipts as shall suffice to establish an equilibrium.

§ 157. With a view to the maintaining of an equilibrium in the public finances it is necessary to examine the aggregate of expenditures in detail, with respect to the regularity or irregu larity of recurrence of the particular objects for which the expenditure is incurred.

Adopting the usage of private business, it is customary to distinguish public expenditures as ordinary and extraordinary expenses. In the economy of the household we are wont to consciously contrast the annually recurring and relatively invari able, or at any rate only gradually changing expenditures, for dwelling, food, clothing, social intercourse, recreation, education, etc., with the exceptional expenditure incurred for a household establishment or for some other like provision. Likewise in the case of the public economy we make a distinction between "current," "permanent," "annual," "regularly recurring" expen ses and the objects for which they are incurred on the one hand, and the "non-recurring" expenses on the other, and call the for mer class the ordinary, and the latter the extraordinary expenses.

This terminology is questionable. It indicates an elementary stage of economic thought in that it classes as " extraordinary " an item of expenditure which in many cases is to be distinguished from the so-called ordinary expenses by a technicality alone, and not by the extraordinary character of the object for which it is incurred. If we accept this view we are led to the curious conclusion that the "ordinary" expenses are smaller, relatively to the "extraordinary," the more confused our economic specu lation is, and conversely, the extraordinary expenses grow relatively smaller the more highly developed our economic conceptions become.

It is a well accepted fact in private life that wherever system atic management in household economy is but very slightly devel oped, where "hand to mouth" is the rule of life, there is a great number of items of expenditure which present themselves to a thriftless improvidence under the unwelcome head of " extraor dinary " expenses ;—items which a rational foresight would very easily have been able to bring in under the head of "ordinary " expenses. On the other hand, there is such a devel opment of systematic foresight possible as will bring a continually larger number of extraordinary expenditures into the category of ordinary, annually defrayed expenses. The whole question turns on a technical distinction.

§ 158. Elementary discussions in political economy have long been accustomed to make a distinction between goods which are wholly consumed in a single use (as food, drink, fuel) and goods which are consumed only gradually, and so are capable of a continued use (as clothing, shelter, furniture, tools).

The need for any given commodity will evidently recur more frequently the more distinctly it belongs in the first class, and less frequently the more distinctly it belongs in the second class, that is to say, the more durable a basis for a continued use its physical characteristics will afford. The need of food recurs daily in every household ; the need for tables and chairs recurs in most households scarcely once in a lifetime.

Now, since any scheme, such as is desirable in private life and is altogether imperative in every public administration, naturally covers a certain definite period, whether of one year or more than one, it follows that any items of expenditure which in consequence of the physical character of the objects for which they are incurred, regularly recur within the stated period, will readily fall into the periodicity of such a scheme.

On the other hand, such things as are too lasting to need renewal every year or two will appear under the head of "irregular" or "extraordinary" expenses.

Plainly this is nothing but an arbitrary classification resulting from the distinction of expenditures according to certain timer limits ; whereas with an indefinitely extended time-limit those items would be recognized as " regular " and "ordinary" whose regularity is now disguised by the arbitrary limits of the period selected.

§ 159. The difficulty arising from these arbitrarily chosen, narrow time-limits may be set aside by taking thought ; and the expenditures for such relatively imperishable objects may accord ingly be conceived of as likewise regularly recurring and as subject to the same regulations as the annually recurring body of expenditure. This is on the supposition that the extent of the longer period in question is known ; so, for example, it is possible to calculate beforehand the length of time which army uniforms or railway rails will last.

There are, surely, difficulties in the way of applying this prin ciple. In the first place, the degree of permanency in the case of a great many things cannot be known beforehand. Further, we have to do not only with what may be calculated beforehand, but also with other contingencies which simply defy all previs ion. In an age of such striking progress in the mechanic arts as ours, many a contrivance which is calculated to last for a long time ceases to be of any use long before its natural death, simply in consequence of its being left behind by the march of improve ment. We may call to mind the vessels of the navy, ordnance, fire-arms, fortifications, etc. We may mention the very exten sive demands made by our modern higher schools for purposes of scientific and medical research and instruction. Our depart ments of education and finance find themselves called upon year by year to make costly innovations at one point or another, in order to retain or to secure the services of the indispensable pio neer of research.

But still further ; wars, inundations, industrial depressions recur, but not with any regularity that is discernible by the human eye. Preventive measures, and therefore the expenditures they involve, may serve to lessen the intensity of such fortuitous calamities, and may even in many cases prevent them ; but, after all, there still remains a body of indefinite demands which can not be calculated beforehand. Dikes and works for the control of dangerous rivers, as a. safeguard against floods, a prudent industrial policy for the obviation of trade depression, a jealous care of the national defense—all measures of this class may be of use as preventives and so may serve to bring the "extra ordinary " expenses, to some extent, under the head of the regular annual expenditure. Still, these measures can avail only to reduce, never to abolish these calamities and the financial demands arising out of them.

So we are led to the conclusion that the line of demarkation between ordinary and extraordinary expenditure may be shifted but cannot be obliterated.

§ 160. Corresponding to the customary distinction between ordinary (regular) expenditures, and extraordinary (irregular) expenditures, there is the other customary distinction between ordinary and extraordinary resources.

While it appears that, as regards the former distinction, there will always be some occasion for an extraordinary expenditure, owing to the fact that the periodicity of certain of the needs of the community does not admit of calculation ; so also it appears, as regards the latter distinction, that the line between ordinary and extraordinary resources is a shifting one, inasmuch as there is no extraordinary resource which may not, under given circum stances, have to be applied to meet ordinary expenditures ; and conversely there is no ordinary resource which may not, under given circumstances, come to be applied to the extraordinary expenditure.

Yet something of a distinction remains. The resources pre ferably to be drawn on for meeting regular expenditures are those which are adapted to yield a regularly recurring income ; whereas, for meeting an irregular or occasional demand, such fiscal means may advantageously be employed (although it is not imperative that they alone should be) as can be drawn on only for occasional purposes and not for expenditures that recur annually.

As a concrete example, the annually recurring expenditures for the support of a standing army, for the salaries of the civil service, and for the like purposes, will in any well-ordered fiscal system be met by annually recurring taxes ; it is only when the accustomed order is disturbed by unusual exigencies (war, famine, industrial depression)—exigencies which threaten the orderly course of business and the tax-paying capacity of the community to a much less extent in modern society than in earlier times—that such financial expedients should be resorted •to as are primarily adapted to meet occasional demands only. Of such expedients during the earlier history of finance, may be mentioned the alienation of productive public property (domains, etc.); in the later development of financial policy by far the most important of such expedients is the public credit. Both of these fiscal expedients, both the alienation of domains and the use of the public credit, are by nature ill adapted for meeting annually recurring expenditures. Just as property once sold cannot be sold again the second time, so also resort to public credit cannot be made a source of annually recurring income without resulting in an annually increasing debt, and a consequent annually increasing burden of interest. And these difficulties will, with each succeeding year, increase all the more, the greater the difficulties were which were sought to be evaded by such expedients.

It is therefore imperative that this class of expedients should be reserved for such extraordinary exigencies, as by their infre quency and the suddenness and intensity of their demand upon the treasury, make resort to some such means indispensable. But even for exigencies of this kind, of which war is now and long will be the chief example, it should ever be kept in mind that some provision of another kind is also desirable whenever the special circumstances of the case will admit of it.

§ 161. In order to a clear comprehension of these questions some discussion of the nature of public credit (national and communal) is desirable.

In this field, too, theory has been influenced by the course of events in the historiCal development. In the early stages of public economy, credit appears in such an extremely precarious position —pawning of crown lands and revenues, onerous conditions attached to loans, usurious interest and the like, on the one side ; breach of faith, insolvency, exhaustion of resources, on the other side—that theoretical discussions of the matter are largely determined by the palpable destitution of the borrowing state. As fast as the ethical and economic character of the modern state has developed, all this has changed. From having been a perpetually embarrassed debtor, the state, with its demand for loans, has come to be sought after as affording the very safest form of investment. This happens because public sentiment, in all matters relating to the state, has changed ; because this altered public sentiment is backed by the infinitely increased resources at the command of modern industry and modern finance. There results a general confidence in the per manency of the state—in its ever-increasing strength and its unquestioned integrity and soundness. The impression made by the enormous amounts which for some decades past have been raised by this means in nearly all the great states of today, with out destroying the country's wealth or its financial system, and often without in the least impairing either,— this impression has been so pervasive as to inevitably leave its traces even in the theories held concerning public credit.

There resulted an extravagantly optimistic theory, which, significantly enough, had a great vogue in its time, and found many adherents. Contemporary admiration for these clever theories leads to rating them higher than they deserve. They are nothing but a reflection of passing events, whereas the object of scientific inquiry is not only to reflect the events but to under stand them.

Such a reflection of passing events was the view held a gen eration ago by those who, in accordance with the materialism and optimism of the older Political Economy, explained the state and the national activity as a whole as being an "incorporeal capital," represented by the productivity of all outlay made for national purposes, including war expenditures. There seems to have been no appreciation of the extent to which the best and highest elements of life were debased by attempting to erect them into an industrial investment.' § 162. It is true, there are certain objects of public expendi ture in which the funds raised by means of public credit take the form of a productive investment. In such cases the objec tions which might be made against " consumption loans " from the business point of view, are out of place, since the question really concerns a case of a " productive loan." Although Prussia, during the decade 1878-88, invested in the purchase and construction of some 18,o0o kilometers of rail roads a capital of over three milliards of marks, and although it has met this expenditure by recourse to its credit, on the other hand the railroad capital which it has acquired represents a pro ductive investment which sufficiently offsets this large debt. In point of fact, this capital is so far productive as not only to cover the interest on the national debt incurred, but also to afford a surplus toward its gradual extinction, and even something more.

This is an example of a " productive loan " in the traditional sense. The example is a particularly favorable one, and is typical of a great number of other cases that occur in national and communal economy, especially in view of the present ten dency towards a greater extension of state and communal activity in the direction of many and various business undertakings (gas works, water-works, horse-cars, etc.).

But this is only one side of the question, and moreover the side which offers the fewest difficulties in the way of a discussion of public credit.

The other and more difficult side begins where the scope of the so-called consumptive credit begins. And on this point opinions vary all the way from that prudent moderation which insists on applying the maxims of private business in such a sense as to condemn all "consumptive credit," even in the economy of the state proper, to the opposite extreme of the exaggerated views that stand for nothing but a spontaneous expression of the latest phases of the development of public credit, but which must be admitted, on this very account, to contain a legitimate protest against the former excessively narrow view.

§ 163. Even within the narrower field of private economy it will not hold that productive credit alone is to be commended, and that consequently consumptive credit is to be in all cases discountenanced.

This position amounts to nothing more than a well-grounded protest of common sense against the well-known and wide-spread abuses of the practice of living on credit. It is the intention to rebuke this practice without discountenancing all forms of con sumptive credit indiscriminately. For there are cases where necessity and expediency require that the accustomed routine of the household, which may be in itself commendable, should yield to the urgency of some exceptional demand.

But in the economy of the state the occasions of this kind are so urgent and at the same time recur so inevitably that, for one thing, they cannot be disregarded, and for another they can not be met except by contracting a large debt. The question in such a case concerns the very gravest interests of the nation, and in such a case no sacrifice of an economic nature, even includ ing that of the accepted and commendable adjustment of income and expenditure, is too great. And still, sacrifices of this sort are not "productive," especially not in the cases where they are the greatest. What productive end, for example, did the French gain by the expenditure of the enormous sums which the last war with Germany cost them? They have not even acquired the " incorporeal capital " of having learned to guard themselves against the like mischief in the future.

There is one thing, however, about this particular resort to public credit, that is really wonderful. And that is, that a modern state should be able, at the close of so unhappy a war as that of 1870-71 was for France, to borrow, on any toler able conditions, milliards after milliards, when the new loans went to increase enormously the burden of a national debt that was already very great.' This is a triumph for those moral and economic forces which go to make the modern state independent of the limits of the resources immediately at hand, and to place at its disposal further resources that are made available only through the confidence that exists in its permanence and con tinued development. It is the relative immortality of the state as compared with the short life of any individual, that serves to set these limits aside, and offers to the credit of the fully devel oped state resources which are accessible to it alone.

§ 164. We have now reached the point at which it will be well to give some attention to the doubts that occur as regards this seductive fiscal expedient, and come to some decision between the claims of this and other means of revenue. The discussion will, of course, be confined to that limited field of financiering within which the extent and suddenness of the demands does not make recourse to the public credit imperative.

One thing is constantly to be kept in mind. In the last analysis every public debt, however unusual and however large, must always rest on the taxes, as the regular and ordinary means of satisfying all fiscal demands. It is the nature of a debt to require payment, and at least the greater part of the debt bears an annual interest charge, and these charges can be met in a rational way only by means of current taxes. An extinction of the old debt by means of a new loan is no extinction ; the -pay ment of the interest charge on the old debt by revenues obtained from a new loan subverts the foundation on which public credit rests. Credit will grow constantly weaker, and the terms on which each successive loan is obtained will grow constantly less advantageous. Whereas a determined effort on the part of a community to meet its expenditures by means of the greatest possible exertion of its tax-capacity and an avoidance of all debt, cannot fail to produce such a moral effect as will increase the readiness of capitalists and of the money-market to advance any amount that may be required in such extraordinary cases as will unavoidably occur. And in case of the opposite financial policy a corresponding penalty will ensue. So it appears again that all business policy [ Wirthshaft] in private and in public life partakes of an ethical character.

It follows therefore that the readiest and most expedient method, in so far as adequate resources may be obtained in that way, is the method of taxation. The burden falls, in the las resort, on the taxpayers, and can in any case be shifted from their shoulders only temporarily by recourse to public credit ; while if resort is had to taxation this burden will fall immedi ately upon the taxpayers, and what has once been raised by this method need not be raised a second time.

But between the two alternatives of an unavoidable resort to loan and a plainly expedient recourse to taxation, there is a middle ground within which there is room for discussion as to the rela tive advantages and disadvantages of these two financial methods.

§ 165. Among the objections against contracting a national debt, which the earlier school of theoretical writers were wont to place in the foreground, a prominent one is the apprehension felt about withdrawing capital from industry.

This objection is an expression not only of the standpoint of industrial capital, which dominates the older school of thought, but also of a stage of industrial development which had come to an adequate consciousness of its own lack of the capital made necessary by the state of development of the industrial arts and the business methods of the time. This same objection, further, involves a protest against that exaggerated conception of the magical potency of credit, which is really open to the criticism that the means for meeting today's fiscal needs can under all circumstances whatever be drawn only from the stock of com modities on hand today ; no soldier can be fed now with the corn that is to be grown next year, nor can he be armed with the musket that is to be manufactured next year.

However, this objection has lost much of its force in conse quence of the great increase of accumulated capital in all modern civilized states, and indeed the latest phase of the development shows a surplus of capital which has given rise to a condition directly the contrary of the apprehended difficulty on which this objection proceeds. And it is not simply this surplus of capital, by itself considered, that fosters a sentiment favorable to the contraction of public debts. There is among the owners of capital a well-founded conviction of the superior character of national bonds as an investment, as compared with the opportu nities for investment offered by industry. No one who is not infatuated with the point of view of the old school will find any thing to deprecate in this new departure in the investment of capital, or be inclined to rate speculative enterprise above it. As a matter of fact the modern system of national debts has brought into existence a class of investments eminently suited to the wants of a great number of people, and destined to restrain precisely this class of people from rash speculative ventures.

Even in the earlier days of public credit and of the accumu lation of capital, it will hold true that the international character of the money market went far to equalize the discrepancies in the distribution of capital due to differences in industrial develop ment between different countries, and that the superior character of national securities attracted capital from a distance, which would not have migrated so far for other purposes.' § 166. More serious, it seems to me, is the objection that national debts act, as far as in them lies, to determine the distri bution of the nation's wealth in a manner which is already favored by the other factors at work in our industrial age, and which is by no means to be regarded as desirable. The objec tion is that they serve to strengthen the tendency which, in modern society, makes for contrast between those that have and those that have not, in that they add to the burdens of the por tionless and increase the income of the property-holding class.

A well-regulated system of taxation, even when it requires great sacrifices for the nation's welfare, should be so contrived as to burden all classes of society, and especially the classes that are best able to contribute, in due proportion.. The avoidance of raising funds by current taxation and a preference for the use of public credit, on the contrary, will not only exempt the property-owning classes from their share in the sacrifice incurred, but the national loans will at the same time afford them an opportunity for advantageous investments, the annually recurring interest charge on which is drawn from the income of society as a whole, and consequently in an especial degree from the great number of people of moderate means, and passes over into the income of the nation's creditors.

An example of this occurs in the conduct of the financial affairs of the French government at the time of the French German war of 1870 and 1871. These extensive loan operations resulted in a considerable addition to the interest charge and a consequent disproportionate burdening of the lower classes, and even to this day no tax reform has been undertaken that would neutralize this inequality.' It is to be noticed that in this case, as in all cases, the ques tion is far more as to the conformity of the tax system to the requirements of equity, than as to the desirability of loans in preference to taxes. The tax system wants reform, and so long as this want is not met, it is of no avail to emphasize the short comings of national loans.

Here we come face to face with a fact which needs closer attention.

§ 167. Apart from extreme cases, in which the contracting of national debts is and will always be unavoidable on account of the urgency of a great immediate demand, there is a middle ground within which there is space for the extension of a pro ductive tax system, instead of a resort to public debt.

There is no room for doubt that in the case of the state debts hitherto contracted (and municipal debts as well no small part of the debt represents what may be called a makeshift made necessary by the inadequacy of the tax system of the time. For in all cases where there can be any question—and therefore exclusive of the cases where absolute impossibility precludes question—as to the possibility of meeting the new demand by augmenting taxes,—in all such cases the question really is as to whether the resulting pressure upon the constituent units of the community is bearable, regard being had to their customary requirements in other directions (cf. § 155 above), and this again resolves itself into the question as to how patiently or impatiently the subjective effect on their feelings will be sub mitted to by the citizens on whom the burden rests.

Hence the historical character of the problem. Hence the view which finds in this middle ground the basis of all that 'development of national spirit which has ripened into a willing ness to afford such sacrifices as the exigencies of the common wealth require.

The farther advanced a commonwealth is, the more highly developed its tax system, the less will it be compelled to resort to the expedient of a loan.

§ 168. There is one peculiar function, and a legitimate one, in our political economy which will always devolve on credit. It is, in fact, the same function that credit performs in private business.

This function is the maintenance of that elasticity which is necessary to a balance of income and expenditure in cases of a temporary discrepancy between them. For example, if the state habitually pays its officials their salaries at the beginning of each quarter or month, while its receipts from taxes come in only at the end of the quarter, or may perhaps be delayed by difficulties affecting the taxpayers' ability to pay ; in such a case a dis crepancy occurs which will have to be provided for.

For this purpose there are special forms of credit which are calculated for no greater length of time than the duration of the exigencies which they are intended to meet. A form of loan which has latterly come into great favor for this purpose is that which has spread from England into other countries under the name of Exchequer Bills ; these fall due in a period of from three to six months to one or two years and bear a moderate rate of interest, very much as ordinary securities of corresponding char acter. A second form is non-interest-bearing paper money which serves the same purpose of a variable volume in the public econ omy that bank notes do in private business.

§ £69. Adolph Wagner has called attention to a certain pecu liar lacuna which the use of the national credit does not ade quately cover. In so doing he has evidently been influenced by the experiences of the Prussian war management during the last few decades. It is the lacuna which is sought to be covered by a war fund.

There is no essential incongruity between the use of the public credit and the war fund. It is by no means inconceiv able that in the absence of other sources from which a war fund may be accumulated (surplus revenue from the annual tax receipts, alienation of property belonging to the state, receipts from war indemnities) a loan might be issued for this special purpose. The point of contrast is simply as to the particular measures which it is thought expedient to employ when the crisis arrives.

And as to this point, experience proves that during the initial stage of a war—during that sultry calm preceding the storm, when the expectation, declaration and preparation for war follow on each other's heels—the sudden war demand on the treasury coin cides with a violent disturbance of credit, and a consequent stringency in the money market. The North-German army (exclusive of the Saxon contingent) required, during the weeks from July 15 to August 3, 1870, no less than two million thalers daily for mobilization and for carrying on the war, that is to say, an aggregate of fully 4o million thalers. As had already appeared in the war of 1866, so now again, the possession of an adequate cash fund, which had been accumulated for this purpose in times of peace, proved itself the most available means of meeting such a contingency, at the same time that it served to strengthen the tone of the general money market, and especially to maintain confidence in the state's own securities.

As a result of repeated experiences of this kind, the imperial war fund has come to take its place as an essential constituent element in the German financial system (fixed by imperial statute of November II, 1871, at 4o million thalers).

So it has come to pass that an institution which at one time, before the development of public credit, the best financiers found indispensable, and which afterward, when public credit had reached a fuller development, came to be regarded as obsolete, has again found acceptance in the theory' and the practice of public finance.

A war fund of course finds its limit in the fact that the great waste involved in letting the money lie idle (preferably for as long a time as possible) puts a limit to the amount, so that, for all purposes beyond the immediate expenditure of the first few weeks, recourse must always be had to public loans.

The adoption of a system of "extra taxes" for which legis lative provision has been made beforehand, is essentially a mat ter which depends on that development of national spirit and of readiness to submit to taxes, which has already been emphasized in what has gone before. Under present circumstances nothing considerable is to be expected from this source. On the other hand it is quite conceivable that at some time in the future special war contributions regulated by law may find a sufficient motive in an enhanced sentiment of patriotism, and may, at the same time, serve to obviate any general panic.

credit, expenditures, national, war and extraordinary