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The Development of Public Credit as Reflected by Contemporary Theory

THE DEVELOPMENT OF PUBLIC CREDIT AS REFLECTED BY CONTEMPORARY THEORY.

§ 503. It is the office of every science that deals with public life to be more than a simple reflection of facts and events. But it falls to the portion of every new science to be little more than that.

The writers of the age during which the science of finance and political economy came forward as a new science show us a reflection of the events of the time in the current theory of national credit. It is the historical facts that prepare the way for a broader theory, not the theory that prepares the way for the events. The process of development within this special field and the occasioning causes of the development are very similar to what, we have found in the case of the income tax. The efforts of the English nation in its struggle against the French Revolution carried both these financial expedients to a height of efficiency such as to shame the theory of Adam Smith.

- Even Montesquieu, whose broad view in historical and ical matters so greatly exceeds the horizon of many of the thinkers of the eighteenth century, takes a deprecatory attitude towards public debts.' In his continual comparison of nations and peoples, it is true, he recognizes and acknowledges the advantageous position of a commonwealth such as the English state was even at his time, in comparison with other contempo rary states. But while he enumerates the manifold disadvantages of public debts, and among them some which are frequently dwelt on even today,' he has nothing to say to the fact that there may be circumstances which will oblige the state to If we now turn to the authorities in financial science and economics we shall find that at the dawn of the scientific era there is by no means a dearth of profound discussion on the public credit. In England the practical importance of state debts had by the middle of the eighteenth century necessarily led the theoretical writers to go into the question. Not only Adam Smith (1776), but even to a much greater extent, his predecessor, Sir James Steuart (1767), devotes a considerable portion of his voluminous work+ to this phase of finances.

The half century which separates this writer from Charles Davenant finds a summing up of its experiences in Steuart's works. Davenant, living at the time of the painful efforts put forth by the new regime, about the close of the seventeenth and the beginning of the eighteenth century, to make use of the national credit, has a thoroughgoing abhorrence of state debts. He asserts that England's industry will not flourish until the greater part of the national debt has been canceled. A poor prophet ; the growing prosperity of England during the next century was accompanied by a stupendous increase of the national debt, compared with which the amount which Davenant contemplated was but an insignificant beginning.

Not so Steuart. He gives a definition of the public credit which brings out the essential characteristic that distinguishes public from private credit. The public credit is confidence in a public body which borrows money on the condition that repay ment of the principal can not be exacted, but that a yearly pay ment will be made, either as interest or as an instalment to apply toward the cancellation of the debt.

With this conception of the public credit Steuart takes a position directly opposed to Davenant, whom he considers the best informed man of his time, but who held to the view that a nation's debts, just like those of a private person, had best be redeemed within the year ; the current view at that time being that the nation was in much the same position as a private indi vidual, and the contracting of debts by the nation was con sequently deprecated.

Steuart shows even a profounder insight into the new course of events in that he regards the development of public credit as an element of national strength which must be made use of by every state that is to assert itself in the struggle for national power. If a state resorts to a new contrivance, says Steuart, by which it is able to raise more money than before, the other states will be compelled to apply the same method. This is a truth which also today serves to explain so many things in the domain of European public debts and of the development of power by European nations ; and on the other hand, it also serves to show the groundlessness of all excessive solicitude for the welfare of the people and finances of the several states, by inculcating the doctrine that financial exertion and its progres sive growth is the elastic basis on which the development of power rests, instead of being an effect of power attained.

Indeed, Steuart possesses so large a gift of historic sense as to enable him to explain the views of Davenant on the ground of the economic and financial circumstances prevalent during his time. From a detailed comparison of the French national credit with the English he draws the conclusion that France has not yet reached the stage occupied by England.

While it is true that Steuart affords a faithful reflection of the brilliant advance of the English national credit at the middle of the eighteenth century, it is also to be said that his exposition shows conspicuous traces of the newness and unsettled condition of this financial institution. The dangers which he points out as surrounding the use of the public credit in his own country, the precautionary measures which he thinks necessary to be taken against bankruptcy or the repudiation of the debt, show the limitations of his view even though that view is prevailingly favorable.

§ 504. The different view of the state and its functions enter tained by Adam Smith, as it appears in his discussion of the national economy, is probably the cause of his being more disinclined to the employment of national debts than his prede cessor.

The standpoint of destructive criticism from which Smith is fond of regarding the doings of governments and princes in general, characterizing them as spendthrift, foolish, arrogant, etc., could not be expected to incline him to a favorable view of national debts and the luxuriant growth of debts during his time. His radical view of wars and the occasions of wars must neces sarily carry with it a radical view of the financial means requisite for them.

This fact infuses into the views entertained by Smith and his school on public credit a peculiar theoretical element, not an element fated to conquer and direct the facts, but one which the march of events has disregarded- and passed over.

A lack of parsimony in times of peace, according to Smith, is the cause of the necessity of contracting debts in time of war.' When war supervenes there is no money in the national treasury. He extols the two Prussian kings (Frederick the Great and his father) as the only two among the greater princes of Europe who, since the death of Henry IV. of France, have laid by a considerable national treasure. The parsimony necessary, to this purpose had been lost through the influx of luxury and the love. of pleasure which had everywhere else followed in the wake of the development of industry and commerce. The Italian repub lics and the United Provinces of the Netherlands were in debt, just as the monarchical states were. The canton of Berne alone possessed a national treasure. For the lust of pomp and luxury holds sway in the senate of a small republic as well as at the prodigal court of the greatest of kings.

But while a flourishing industry and commerce hinder the accumulation of a national treasure, they foster a superabundance, of people who are always able to loan their own or foreign capital to the government. But this means a diversion of capital from the employment of productive laborers to the sustenance of unproductive laborers. The comforting doctrine that the payment of interest on the debt is merely a paying into the left hand out of the right' is a mercantile sophism, proceed ing on the assumption that all the state's creditors are residents of the country ; a supposition which will not hold for England, whose securities are in large part held by the Dutch and various other nations.

But even if it were true that the entire English debt was held by inhabitants of the country alone, it would be none the less pernicious. Taking the greater part of the income from land and capital out of the hands of their owners in order to enriclh the unproductive class of state creditors must in the long run result in neglect of the land and a wasteful expenditure or exportation of capital.

And this is proved by history. Genoa, Venice and the Netherlands were exhausted by their debts. Will the debt which has brought exhaustion or annihilation upon every other country prove harmless in Great Britain alone ? How far Adam Smith, in his criticism of the public credit, is affected by the conceptions of an earlier period is shown by the fact of his agreeing, to some extent even literally, with his older friend, David Hume. Hume, in 1752, in his essay on " Public Credit," criticises the use of national debts in a decidedly hostile manner. " It would scarcely be more imprudent," wrote Hume,' "to give a prodigal son a credit in every banker's in London, than to empower a statesman to draw bills, in this manner, upon posterity." Hume had also remarked that the taxes which are levied to pay interest on the debt must either raise the price of labor or depress the working class ; and that the national debt gives a great impetus to idle and unproductive living, since the greater part of it is always in the hands of idle people. He had also answered the sophism about the right and the left hand by pointing to the distinction of social classes which vitiates this seductive argument. He had denounced the strange equanimity with which all classes regarded the increasing national debt, and had made use of these strong words : Either the nation must destroy the public debt or the public debt will destroy the nation.

§ 505. Adam ith's question and Hume's prophecy were answered by events a generation after, but not in the way Adam Smith and Hume expected. Sir John Sinclair, the English writer on finance, who lived during the succeeding generation and was immediately occupied with public affairs as a member of Parliament, is consequently the representative of views on the public credit of a very different nature from those entertained by Adam Smith.

To begin with, Sinclair, looking at the matter from the stand point of the new development and use of credit, denies the expe diency of the national treasure which Adam Smith had so greatly commended. For a state with a slightly developed credit, says this writer,' a national treasure may perhaps be a necessity, on account of the difficulty with which any considerable sum is to be obtained at a critical juncture. But apart from such special cases it is more expedient to sink the surplus of the people's income in useful public works, or .even in the building of useless pyramids (as in Egypt), than in a public treasure, laid by as a lifeless hoard, without interest and without circulation.

The experience of the latest times has shown that he went altogether too far in his estimate of what the public credit is capable of. And with respect to his polemic against David Hume, the succeeding century has shown the older writer, and not Sinclair, to be in the right (cf. sec. 169 above). Hume' says, in words which might have been written today, that "the opening of the public treasure, as it produced an uncommon affluence of gold and silver, served as a temporary encourage ment to industry, and atoned, in some degree, for the inevitable calamities of war." But Sinclair's optimism is proved to have been in the right in contending, against Hume and Smith, that the public debt is, financially considered, a necessity and, economically considered, an indication of increasing wealth and confidence. For a thoughtful observer, says he, it is scarcely possible to deny the beneficial results of the use of the public credit in the conduct of a just and unavoidable war. England's credit was the chief advantage of England over France and all the other states of Europe ; it was a gold mine for England. If a state is enabled to raise great sums of money without difficulty, it can put forth the greatest efforts with the highest probability of a successful issue.

The limit which the men of Sinclair's time observed in their praise of the national credit lay in the dogma of an inviolable sinking fund. He commends—quite in the spirit of the full grown public credit—the employment of perpetuity funds, leav ing it optional with the state after a term of five to seven years to reduce the interest or repay the principal, it being a recog nized fact that under circumstances of increasing wealth the rate of interest constantly declines. But for the preservation of the nation's credit a sinking fund is indispensable it should be intrusted to an independent commission, which is to be entirely distinct and disconnected from the officials who have to do with the placing of the debt. The sinking fund should be based on a large, stable and productive tax, bearing some relation to the wealth and to the debts of the nation. Peculiarly appropriate for this purpose is an inheritance tax, amounting to at least one half the yearly income of the property. In addition to this, every means should be used to induce wealthy persons with no near relatives to bequeath their property to the state ; "The effects of such a measure, especially in wealthy and commercial nations, would be almost incredible." 506. Even before Sinclair's time, the anonymous but well known author of the Traits' de la Circulation et du the Dutch writer Pinto, reflects in his writings the marvels of the Dutch and English public credit of those times.

Pinto is the practical man of the money market of the eight eenth century. His method of thinking on economic subjects betrays the experience and impressions of the world's money market. His polemic, principally directed against the Physiocrats, is effective at those points where practical experience is opposed to abstract ideas of reform ; he is one of the most decided and readiest opponents of the imp& unique.' But his discussion is less felicitous and shows the limitations of practical business logic, when employed on the profounder questions of principle. The wide interval there is between Pinto's discussions on money, circulation, etc., and the lucid exposition of Turgot's which preceded Pinto by a few years, will serve also to explain the oft-mentioned exaggeration with which Pinto speaks of the importance of the public credit.

This exaggeration is, in fact, to be taken as nothing more than the reflection of contemporary phenomena in the brain of a man without scientific training ; in part the exaggerated state ments are to be construed in their proper organic relation to the work as a whole,. and the work taken as a whole goes to show that so shrewd a man of affairs does not readily make nonsensi cal statements of the kind often imputed to Pinto. His work is in substance a panegyric of the English national debt, and he clearly comprehends the basis, presuppositions and limitations of this debt, and sets himself the task of explaining England's advantage over other states, 'especially over France, from these circumstances.

Pinto makes the rash statement that the public securities become capital, just like a piece of land or a building ; they yield interest without expenditure for repairs, or In another place he says :4 With every loan which it places, the government of England, by setting apart a portion of the taxes as security for the interest, creates a new artificial capital which did not previously exist, which is enduring, stable and sound, and which, on the strength of the public credit, circulates among the public with the same advantage to them as if it were a veritable hoard of coin which the country had acquired.

This preposterous notion might serve to enforce upon the "practical" men, as well as the "historians," that in order to resolve economic phenomena into their simplest elements it is necessary to have been trained to economic thinking. But Pinto is far from drawing the rash conclusions warranted by such a position, or even admitting. them.

In all these statements he is always speaking of the English national credit of his time. It is not the public credit, says he in answer to Mirabeau, which has destroyed France, but simply the fact that no such regard has been paid to the necessary con ditions of public credit in France as in England ; it is there fore the lack of credit that has injured the French finances. Foremost among these conditions is the sacred observance of all obligations, and, further, the appropriation of certain speci fied revenues to the payment of the principal of the debt and unreserved publicity, by which the government may gain and retain the public confidence. The means of lightening the burdens resting on the people are not' primarily a radical tax reform, least of all the Physiocratic scheme, so much as a pro tracted period of peace and an economic administration of the finances.

Even as regards the English administration of the public debt he takes exception to the fact that it made no provision for a permanent sinking fund ; that if wars, and consequently national loans, were to follow one another in rapid succession so as not to leave time for the greater part of the debt to be can celed during the interval, the machine might collapse and bring ruin upon the country.3 The substance of Pinto's thinking on the public credit, what he means by his obscure statements concerning a " newly created capital," is really the well-founded conviction that, in the first place, certain conditions must be fulfilled in order to a plentiful public credit, and, in the second place, that the employment of this credit would enhance the efficiency of the available capital. Even a hundred years after Pinto's time the English writer Macleod and others have identified this moral power of credit with actual capital ( by the aid of the untenable notion of an "immaterial capital").

§ 507. Leaving the English national credit and the theories built upon it, we come now to a writer on finance who reproduces in his writings the results of French financial practice of the pre revolutionary times. This is the French minister, Necker.

With Pinto and the English writers the French national credit serves as a contrast to the English, and brings home to the enthusiastic admirers of the English national credit the conditions and limitations of all public credit. With the French finance minister it is his own experience that serves to bring out the dark side of this new and brilliant institution.

Necker not only opposes the favorable view of national debts that was coming into vogue in his time so far as regards the French finances. He goes on to generalize, and extends his criticism and objections to all national debts, and applies his objections especially to the English debts. He points out the disadvantages attaching to the English public credit as compared with the French. So, for example, he remarks that England owes more to foreign countries than France, with the consequence that a great part of the interest paid is consumed in foreign coun tries.

Necker lays great stress on the divergence of interest between the state's creditors and the taxpayers. In answer to the light-hearted view that the payment of taxes to the creditors of the state amounts to nothing more than a change from one hand to the other, he remarks that the relations between the dif ferent members of society are not like the relations between the individual grains in a heap of sand, which can be altered at will.

Is it a matter of indifference, he asks, if great changes in owner ship are wrought, whereby the property of those whoare attached .to the soil and to the country is diminished and new accessions of wealth are created for the class of people known as annuitants, who can readily become citizens of any country ? The growth of national debts has done much to destroy public spirit, by increasing the number of those persons whose interest is opposed to the public welfare.

Within moderate limits the use of the public debt might become means of enlarging institutions of public utility. But the debts have been made an instrument of political and military ambition. They have made it possible to expend two or three hundred millions, where forty or fifty millions could perhaps have barely been raised by means of extraordinary taxes. Nations ought to enter into a compact never to contract loans in order to carry on war against one another. A very amiable wish! One might just as well propose that the different governments should agree to discontinue the use of cannon. There is better reason to hope that the greatness of the evil itself would set a limit to it and that the nations overburdened with enormous debts, and taxes to correspond, would be compelled to call a halt.' How very different is this discourse on public debts from what the financiers of England and Holland have to say on the same topic! A similar attitude of opposition is taken by a considerably later French writer, Jean Baptiste Say,' who took the lead in introducing the political economy 'of Adam Smith into his country.

So far as regards the detriment to the taxpayer,. there is, according to Say, no difference between a public loan and a tax ; the former is somewhat the worse in that the taxpayer has to pay not only the entire amount of the principal but the costs involved in discounting future taxes. The increase of taxes raises the price of all articles, which is equivalent to a general impoverishment (appauvrissement gineral), The conclusion is therefore that public loans doubly impoverish the future.

Against the claim that public debts encourage people to save, Say objects that it could much more truly be said that public debts dissipate capital by drawing into "the abyss of the public expenditures" capital which would otherwise be employed, though at a lower rate of interest, for some purpose of human use or Proceeding still further in his opposition to the views then in vogue, Say, quite in the spirit of the orthodox school, rejects the argument that public loans serve to keep capital within the country. He says : Let the capital go abroad, by all means, rather than that it should stay and oppress our taxpayers ! Say follows Necker almost to the letter in national loans with having greatly favored the lust for conquest and war.

§ 508. We come now to the German writers on finance, the first one to be mentioned being J. H. G. von Justi.

Justi, the ablest of all the German Cameralists, approaches the questions involved in the public credit from 'the standpoint of a man who is familiar with the remarkable results achieved by the Dutch and English through the employment of national debts during his time, and has at the same time intelligently studied the peculiar and divergent circumstances of the German states, as he has encountered the facts in his own rich and varied experience.

His point of departure is the question of the alternative which offers itself to the state under unusual circumstances and exigencies : extraordinary taxes, or state debts. He is disin clined to the usual forms of extraordinary taxation, especially the property tax ( the ascertainment of the property of all sub jects would take time, and in case the attempt were not to be nugatory this ascertainment must be under oath, which would require still more time ; and even then there would be no end of perjury, not to speak of the fact that the publication of their pecuniary circumstances would be very detrimental to merchants and many other subjects, and would be highly distasteful and objectionable to all ). In all this he describes the facts as we meet with them in Prussia half a century after his time.

Hence the necessity of public debts. If the government has no credit, says Justi, the state suffers from a great and pervading injury. It is therefore one of the first principles of action for any wise government to keep its credit perfect. And this pur pose is served almost exclusively by the prompt payment of inter est. For every creditor considers his money safe and has no desire to make any change so long as interest is punctually paid. In this respect the case of the state's creditors is very different from that of the creditors of a private person. No one is concerned about the question whether the state is able to pay all its debts ; if only the interest is properly paid the creditor can transfer his claim to some other person, so that the claim is always as good as coin. The astounding debts owed by the state in England and Holland are well known all over the world, and everybody knows that it would be impossible to redeem these debts in case all the creditors demanded payment at once. But these states do not on this account suffer for lack of credit, and they could readily, at any hour, add many millions of new loans to the old debts if necessary, simply because the interest is punctually paid.

Justi, too, strongly favors an independent sinking fund com mission, like the other writers of the West of Europe whom we have already mentioned. It would be better, in his opinion, if the business of paying the debt, in great states where there are large debts, were entirely disconnected with the exchequer, and a special commission were appointed, to consist one-half of skilled financiers and the other one-half of learned and conscien tious men trained in the law. Such an arrangement, he says, is to be found in the Austrian states, and its usefulness is very evi dent.

If, therefore, the national credit is perfectly good, nothing is easier than to raise any required sum under all circumstances. It needs only to publish the fact that the state will receive so and so much money, and creditors in abundance will present them selves and freely offer their money even beyond what the state desires. The experience of H011and and England is evidence of this fact.

§ 509. While Justi points to the highest perfection of the public credit to be found in Holland and England as the goal of the development, he falls short of this level by several degrees in his discussion of details, and takes us back, on this head, into a different and remote age.

The bridge by which the higher development is to be reached is to be constructed out of financial expedients which had already been discarded by this more highly developed public credit, but which were yet to be introduced into German and Austrian finance administration. Annuities, tontines, lotteries—the essential prin ciple of all these, the spice of chance which they contain, is treated by Justi with characteristic expressions of approbation. Many respectable writers, says he, have made what are in fact specious objections to the morality of institutions of this sort (referring particularly to the lotteries); but it is not opposed even to the strictest principles of ethics to entrust a superfluous portion of one's property to the chances of fortune, otherwise we should be able to carry on but very few branches of trade. The state may properly assume that everyone will make use of these institutions according to the dictates of duty ; at any rate it is not the state's duty, nor does it lie within its power, to prevent their using them to excess ; and in case it were to block this road, they would find a hundred other ways of misusing their wealth. And in case the government were to exclude establishments of this kind from its 6wn territory, it would by so doing accomplish nothing more than to divert a great deal of money to other states.

Justi counts this fiscal expedient among those which a gov ernment must use when in possession of a "perfect credit." But Where such a credit is absent, what is then to be done ? One of the most usual means in such a case is that of farming out all the revenues of the state and receiving the farm-rent in advance. Such a method was in almost constant use in France, but that was an evil state of affai(s and the French farmers gen eral were looked upon by everybody as leeches sucking the blood of the people. Very similar is the method of pledging the domains or leasing them for a long term. It is preferable to pawn the royal heirlooms and crown jewels, or even to sell them, as it is easy to replace them when times are better again, and probably at a lower price, as the supply of jewels is constantly increasing.

The most desperate of all expedients is for a state in financial straits to raise money, as a last by the alienation of terri tories, provinces, cities, or fortifications, to other states. During the Middle Ages this occurred quite frequently, and many domin ions grew great by this method ; but nowadays the claims of national sovereignty and integrity are regarded as quite priceless and not to be offset by any sum of money.

In order to avoid such extreme necessities a national treasure must be accumulated. It is a great misfortune to any state not to be in possession of an adequate treasure. Circumstances do not always admit of the state's obtaining the necessary funds from its subjects, or by the use of its credit. At any rate the state may suffer the greatest misfortunes before it is able effect ively to do so. Hence it is imperative to make a seasonable provision for the accumulation of a treasure, and this work must take precedence of all expenditures that are calculated simply to serve some purpose of use or convenience. It is true, certain writers had expressed the opinion that the devotion of the sub jects might take the place of a treasure, through the subjects coming to the assistance of the sovereign with their possessions in time of need. But Justi would advise no sovereign to depend on such a support in case of real necessity.

The extravagant importance which Justi ascribes to a national treasure shows how far behind Sinclair and others he still stands, and how greatly he is bound by the circumstances of the German principality of his day. The whole substance of the power and suzerainty of a monarch, according to Justi, rests on this national treasure ; all his negotiations will carry an added, weight when it is known that his power is sufficiently backed by force. Here again what holds true of a person in private life holds true of the sovereign : where there is money it is possible to accomplish something.

The German Science of Finance, which followed in the footsteps of Justi and Cameral Science for a hundred years after his day, down to Rau and Roscher, followed him very closely also on the head of the national credit.

There is a painstaking collation and comparison of the various facts of political and financial affairs, of the experience of foreign countries, especially England, with the experience of the German states, in all of which the homespun practicality of the writers gives a preponderant importance to the homely facts of their own immediate surroundings. This characteristic also furnishes an clement of moderation, as contrasted with the dogmatism fos tered by Adam Smith and his school, especially as opposed to their one-sided disapproval of all development of state activity and of the development of the financial means necessary to such activity.

Theodor Schmalz' may be taken as one of the most radical of these writers. He was a campfollower of the Physiocrats and the representative of the science in the new University of Berlin. And still, even his judgment is influenced by his Prussian sur roundings and by the circumstances of the time.

A statesman, says Schmalz, must always look upon debts as a great evil, to which he can resort only under stress of great neces sity, viz., the impossibility of meeting extraordinary demands by means of taxes. But in such a case he must not fear the evil, as it can be rendered quite harmless by a proper exercise of sagac ity. For the fact is that the oppressive character of debts is simply a result of the manner in which they are contracted and the method by which they are redeemed.

Schmalz accordingly sets up the requirement that the debt must be paid by the generation by whom it was contracted, and that a sinking fund must therefore be established ; and if the state is in so fortunate a position as to have paid off its debts, then it should turn its attention to preventing future debts by accumulation of a treasure. What has been said in derogation of such accumulated treasure originated in the erroneous notions of the Mercantilists, who conceived money alone to be capital, and then, on the ground of this premise, talked about capital lying idle.

§ 511. More moderate, and more nearly approaching the facts of the case, is the view of Ludwig Heinrich von Jacob.' - While Schmalz still adhered to the opinion that public debts could be avoided by the accumulation of a war treasure, Jacob, on the other hand, makes the war treasure his point of departure, and argues from the limitations and inadequacy of such a treas ure to the indispensability of public loans.

Jacob enumerates the reasons for and against a national treas ure in the fashion which K. H. Rau's usage has since made typi cal, and concludes that the reasons against preponderate. He admits that many good financiers had proposed to provide them selves for times of war with a treasure large enough not only to cover everything that is required for the opening of a campaign, but even to defray the expenses of several campaigns. But as contrasted with the savings of private persons, such treasures lie idle, to the detriment of the finances and of industry.

Accordingly, if a state is able to provide the means for an expeditious conduct of war in other ways, then it may properly dis pense with the treasure. Such is the case with any wealthy nation, where there is a great accumulation of capital and an unques tioned confidence in the government. Under different circum stances the accumulation of a treasure in times of peace is desir able and necessary. But in our day such a treasure will proba

bly never be large enough to go far. For one thing our states are generally not in a position to think of accumulating a treas ure, and for another, the wars of our time are much more expen sive than formerly. The state will accordingly.always have use for its credit. It is therefore a matter of the first importance for every state to establish its credit on a firm basis.

Jacob enumerates the means by which this firmer basis for the public credit is to be established, in the same long-winded fashion as Justi, who preceded him by two generations. These long and elaborate prescriptions, which rehearse what is matter of course to the German state of today and to the English state of that time, are but the symptoms of those diseases of child hood from which the German public credit of that time suffered. The ever-recurring asseveration that public debts, although necessity, are an evil, that the public creditors live on the product of the people's industry, that national debts have a detrimental effect on production, that they are a dangerous financial engine in the hands of an ambitious or wasteful government—all these are little else than evidences of the influence of the Smithian school.

On the other hand, a decided progress on the part of the German political and financial organization since the days of Justi is indicated by Jacob's position, that a powerful state will not readily resort to any other method than that of borrowing on its own credit simply, without the pledging of specific portions of its property or revenues. A similar progress is indicated by the position that "the principles of sound policy demand " that the state should dispense entirely with annuities, tontines, and other like means of raising funds, and rather place its loans in such a way that the creditors, instead of being repaid their capi tal, will receive simply the interest on it. It is also to be con sidered a relative advance that the " funding method invented in England" is commended as an indispensable means of maintain ing a perfect national credit, the method consisting in this, that a loan is not put upon the market until a specific source of reve nue has been set apart for the payment of the interest and the establishment of a sinking fund.

§ 512. The work of Friedrich Nebenius (Ueber die Natur and die Ursachen des.oentlichen Kredits!) is in the form of a mono graph on the subject, which it treats in the school-book fashion so much in vogue in Germany at that time. It is also in point of its content a faithful expression of the circumstances of the author's time and surroundings, but somewhat clearer and more definite than is to be found in the works of his contemporaries.

We are told that the expenditures demanded by a modern war are too great to be met by an accumulation of treasure, and at the same time the greater activity of industrial life, which now absorbs all available capital, has made such accumulation inex pedient on other grounds. Credit enables a nation to employ its energies on the offensive or the defensive, and to concentrate them upon a given point at the decisive moment. In cases where no lucky turn of the fortunes of war shifts the burden to the losing party alone, it will always be necessary to draw on the future. Credit, therefore, adds to the political power of the state.

After the events of the successful war against Napoleon there was added ground for the admiration with which the German Cameralists had looked upon the English national credit even as early as the middle of the eighteenth century. Without preju dice to the gratitude due the liberator of Europe, says Nebenius, we may well ask if, in the absence of the credit which the British government was able to use to such stupendous effect at the crit ical moment, events would not have taken a different turn in Europe, unfavorable to the independence of the European nations.

Every state should therefore take, thought to maintain and strengthen its credit. Upon the conclusion of a war the next step is to proceed to the redemption of the debt ; history teaches that it very rarely happens that a single generation is exempt from this disease of human society. And this method will more over conduce to greater moderation, because the same generation which has contracted the debt must count on contributing to its redemption. Experience also teaches that representative institutions are no defense against a progressive accumulation of debts, but they are good security for a faithful observance of obligations entered into.

Nebenius is a writer who solemnly emphasizes the importance of good faith and honesty for maintaining and strengthening the public credit, and this makes the unconstrained way in which he (quite different from many of his contemporaries) judges of the sinking fund all the more remarkable. What is of avail is not those schemes that are constructed to run for several generations and are never adhered to ; but rather, the point of importance is the relation in which the interest on the debt and the other national expenditures stand to the resources of the country, that is to say, the means available for the redemption of the debt after these other demands have been satisfied. People are prone to believe that they have cleared themselves of the debt as soon as they have made provision for the interest and the sinking fund ; but they forget that the values which the public accounts present as an increasing sinking fund are not a product of the amortiza tion office, but are drawn annually from the people's income.

But Nebenius is all the more the spokesman of a bygone age when in a painstakingly elaborate chapter on the sundry aims of operations in public credit, he remarks with regard to loans for productive purposes,' or what we have called "productive credit" in the stricter sense (sec. 162), that experience condemns the undertaking by the financial administration of such produc tive enterprises as come into competition, ordinarily into disas trous competition, with private industry. The few exceptions which must be admitted are, taken as a whole, of no consequence. And even of these (highways, canals, etc.) it has become possible, through a progressive accumulation of large bodies of capital in the hands of single individuals, and through the increasing facility of combination, to relegate a good portion to private industry.

What Nebenius has in view in his reflections on the influence of public loans upon the industrial situation, is the German indus try of his own time and its scanty supply of capital, and he views this situation in the light of that exaggerated sense of the impor tance of private production which was then so much in vogue in economic science. This is the ground of the proposition' that : Public loans destroy capital which has been accumulated by indus try and thrift, and in so doing they deprive society of an impor tant means to the improvement of its condition ; just as the beginning of all civilization is conditioned upon the capacity of men for the accumulation of capital, so it is also true that all progress of any people in welfare and happiness essentially depends on changes which take place in their fund of accumu lated capital. The very existence of a considerable national debt, says he, affects production detrimentally, particularly by the resulting increase in the number of persons who withdraw their energies from the services of production—that is to say, on the one hand the creditors of the state, with the persons who serve their luxurious mode of life, and on the other hand the numerous official class who perform the unproductive labor of collecting the taxes.

Further it is worthy of remark that Nebenius approves' of lottery loans (on the lines of the financial practice of Baden,' 1820, 1840, 1845) provided that no great favors are conceded to the lucky numbers, no more, for example, than the interest on their investment, and provided that the principal remains unim paired, and also provided that the shares are not altogether too small. The third of the lottery loans issued by Baden, during Nebenius's lifetime, contracted in 1845 in order to provide means for railway-building, consisted of 400,000 shares of 35 gulden, to be redeemed by means of four drawings a year and canceled within forty years ; this loan was issued at 3% per cent, interest and was taken up at considerably above par (11034 per cent.). Regenauer, in fact, remarks that "the demand for interest-bear ing obligations was for the first time fully met by the loan of 1842 ; the demand for lottery shares should in all reason be decidedly more active. Still this was Baden's last lottery loan.

§ 513. C. A. von Malchus (Royal Finance Minister of Wurtemberg) unreservedly from the standpoint of the financial practice of his time.

According to Malchus, in the existing state of all political relations, internal and external, a more or less extended use of credit is a necessity for all states, and especially for the larger states ; it is a necessary and effective means for consolidating political power. Still, a large national debt is " a canker which consumes the political energy and the wealth of a nation," and will sooner or later destroy it. It is, of course, less detrimental where there is a sufficient surplus of capital to prevent the con traction of a national loan from trenching on the increment of capital demanded by industry ; but it is all the more disastrous in countries not so favorably placed. There is, accordingly, no financial measure which is less confidently to be justified on the simple plea of its successful employment in other countries.

The idea of a national treasure is, for Malchus, an obsolete notion, just as it was to the greater number of his contemporaries and to the financial administrations of his time. He discusses the various forms of national debts dispassionately and concisely, and explains the nature of annuities and lotteries also with con siderable breadth of view. He lays stress on the requirement that loans must not be made terminable at the pleasure of the creditors, but insists also on the great value of the sinking fund.

Johann Friedrich Eusebius Lutz,' the contemporary of Mal chus, Nebenius and Jacob, goes into a detailed criticism of the expediency of a national treasure. The example of the ancients, says he, cannot be appealed to with any effect ; their treasures were accumulated from a source which is available only in the very rarest cases in our time, viz., the spoils of a conquered enemy. And the possession even of the richest treasure cannot afford a modern nation the same degree of security that a nation derives from its wealth and culture ; and these factors in turn presume as low a rate of taxation as possible.

Of all expedients in times of need the contracting of debts is the least objectionable. This means has the advantage over forced loans, anticipation of revenues, and the levying of extraor dinary imposts, that it ordinarily diverts to the government only the floating capital and especially that belonging to the wealthier classes. It can, therefore, "never have a particularly detrimental effect upon the regular course of the nation's indus try." Indeed, if it brings out capital which has previously been lying idle, or brings in capital from abroad, it is even conceivable that it will act to quicken industry for the time being.

It is however to be added that the loan results in a heavy burden of taxation, and the case with which they can borrow has tempted many governments into a wanton contraction of debts. It is a sore grief to anyone who has the welfare of the nation at heart to see that individual politicians have so far forgotten themselves as to incite our governments to an unnecessary con traction of debts, by advocating the doctrine that public debts always increase the wealth of a people, and that there is no sounder means of furthering the nation's wealth and welfare than to borrow without stint.

Lotz accuses Pinto particularly of this "scarcely intelligible nonsense ; " of course this is an overstatement, as we have already seen. For it is not only true that Pinto emphasizes the limita tions of the public credit, but, more than that, it needs only a charitable construction of his exposition in order to see that, though clumsily expressed, his meaning is that the development of credit as a substitute for metallic money increases the efficiency of a people's industry.

The most powerful motive to the contraction of public debts which is usually cited, viz., the assertion of independence and political power, may, as a matter of fact, have a result the con trary of that desired if, as so often happens, the government places its loans abroad and so becomes a tributary to a foreign country. At the same time, national debts which are owned at home are a very effective lever for political revolutions, because they give the capitalists too great an influence in all the affairs of the nation, and too great a preponderance over the landowners and professional classes, who are the real support of the existing order.' As an offset to the wonderful results wrought by the English national credit, Lotz not very felicitously remarks that while England had contracted a debt of 706 million pounds between 1688 and 1813, she could in case of need scarcely contract an equally large debt during the next 124 years, because the wealth of the English nation had already been trenched on too seriously by previous loans. He puts the responsibility of England's large debt on her representative form of government ; the repre sentatives of the people made use of loans in order to avoid the sacrifices which would have been required of them to meet extraor dinary demands by taxation. But he forgets the great sacrifices in the way of taxes which England bore in addition to the debt during the long period of the war (sec. 482).

§ 514. To the group of German writers on finance already spoken of belongs also Karl Heinrich Rau. In the successive editions of his work on the Science of Finance he stands as the exponent of the views of that age, even down to a date very near the present.' His method of treatment, collecting and collating the views of other writers with the same industry as he does the varied facts of the fiscal and industrial field, is as far removed from the harsh radicalism of Lotz as it is from the sober lucidity of Nebenius. His work, which was in progress for a generation, during which it was pushed on to completeness with painstaking industry, places in juxtaposition doctrines and facts which mutually contradict one another. For example, he is of opinion that : "Under the circumstances of today, when governments as well as private individuals can find the necessary In France, in 1845, the payments of interest to private creditors on the 5 per cent. securities were : credit with the owners ctf capital, it is unnecessary to accumulate a national treasure, because the state can easily get along by loans in case of need ; it is moreover unwise, because the lying idle of considerable sums of money works an injury to the industry and income of the people, as well as because the pres ence of such large funds will easily tempt to unnecessary expen diture." But in a note to this proposition, in the ,last edition of the book, he says : " Latterly it has been claimed with respect to the Prussian state that a national treasure has great value, in that it affords a speedy resource in case of a sudden emergency, and probably also because it enables the government to dispense for the time being with parliamentary consent to a loan. . . . This treasure amounted in 1862 to 12 million thalers, in 1863 to 20 millions." Which of the two was in the right, the text or the note, became evident the following year. And it is probable that in case of a sixth edition the note would have found its way into the text and the text into the note.

Rau considers national debts the unavoidable means of meeting great expenditures in time of war or under other extraor dinary circumstances. With the rate of taxation already at a given height it seems to him "beneficent" for the government to make use of its credit to meet such demands. But at the Same time he hedges this necessity about with all manner of precautions, and in the course of so doing he brings under view all the many unfavorable circumstances connected with state debts that have ever been discovered. He cites as a commendable example the " Pragmatic Sanction on Public Debts," of November 18, 1808, issued under Charles Frederick of Baden. This pro vides that a public loan must not be contracted except on occasion of an actual and immediate public necessity, such as a permanent improvement of the situation of the country, or the redemption of an honest debt, or the rescue of the state, the prince or his successor from some great danger or calamity.

Quite in the spirit of the Aufklarung is the proposition that the history of national debts goes to show how little the nature of public credit and the best manner of employing it have been understood in the past ; but during the present century an under standing of this matter has reached maturity, with the result, on the one hand, that the sacrifices demanded ofthe taxpayers have been reduced, and, on the other hand, that the rights of the public creditors have been better secured.

- In point of fact, the history of public debts shows a gradual development of the finances and of the national credit, which is not by any means due to " insight " alone. It shows a mature development in several countries long before the insight of the nineteenth century came to its aid. It attained, especially on the classic soil of modern economic life and economic theory, a high degree of perfection half a century if not a whole century before the insight of the nineteenth century impressed its seal of approval. It is particularly to be noticed that the insight of Adam Smith and his school falls wofully short of the practical development of English national credit in their time.

§ 515. During the first half of the nineteenth century, German writers on finance are substantially agreed in a position of a more positive character and more nearly in accord with existing insti tutions than that of Smith and his school ; although in recogniz ing the necessity of public debts they for the most part recognize them as a necessary evil. About the middle of the nineteenth century there comes a change in the attitude of German writers which at a single stroke shifts the position quite appreciably nearer to a full recognition of the nature of public debts, and makes an effort to bring the developments of the new era into harmony with certain fundamental points of theory insisted on by the old school.

The representative of this new departure is Carl Dietzel.' First as to the fundamental points of theory.

Among the doctrines of the Smithian school (vol. i. secs. 143-146) the concept of productivity has, ever since the begin ning, been the occasion of a great deal of discussion. These discussions are in line with the efforts of the Physiocrats to reach a clear comprehension of the essential nature of economic life, and are influenced by the advancing development of method on the one hand and by the shifting phases of practical life on the other. On the one hand we have the gradually unfolding doc trine concerning the nature of net product and income, which came down from the Physiocrats through the hands of Adam Smith and Ricardo, and reached a relatively definitive conclusion in the writings of Hermann. On the other hand we have the practical question as to the proper order of precedence of the industrial classes in the modern society, as judged by the standard of their relative importance to the social welfare ; the interest in this question, setting out from the peculiar and frequently mis apprehended views of the Physiocrats, acquired a continually wider and more philanthropic scope until it so seriously violated the boundary lines of the neighboring fields of science as to bring on a reaction, represented particularly by Theodor Bern hardi.' For the purpose in hand, and as bearing on C. Dietzel's work here under discussion, this literary growth becomes important at the point where the doctrine of " immaterial production" and "immaterial capital" (Say, Macculloch, List) comes into prom inence and seeks to terminate the ancient controversy by con ceding the invaluable character of "productivity" to every use ful activity. Possessed of the conception, quite natural to a new scientific system, that all and every human action must be meas ured by its measure and be ranked accordingly, the new depart ure magnanimously spreads its protecting mantle over the high est as well as the lowest of human activities.

As Bcrnhardi with a noble indignation has pointed out (though going too far in restricting the idea of productivity to the production of material goods alone), the error of this view lies in its seeking to bring every human aspiration under the yoke of the economic end. We arc told,' says he, about the righteous judge who defends the cause of the innocent, and about the soldier who fights for his country at the frontier, and so protects the house and home of the individual citizen ; and it is taken for granted that the trade of these persons, especially of the latter, is not a little improved in reputability when it is declared to be no less useful than any other occupation ; military service is a form of production ; it is quite proper that other producers should pay the security-producing soldier the value of the product of his work. Bernhardi goes on to say the defense of house and home is certainly of great importance ; but is property the only thing for which the fighting is done ? House and home might often be preserved by simple submission —a kind of prudence which has frequently been put in practice by sensible, calculating people. On the other hand the world's history teaches that hearth and home have frequently been for feited in war in order to preserve things which belong under quite another head, for a future which the men who take part in the struggle cannot hope to see or to enjoy, and which cannot well come within the scope of the eudemonism of the individual.

It may be set down as an accepted tenet of the political economy of today (apart from such reactionary tendencies as always occur) that the importance attached to the economic point of view and to economic standards in the aggregate of human activity, is a phenomenon of an essentially psychological and therefore historical nature ; and that its scope and degree of influence on the aims of human life and activities vary. Its influence is relatively strong in our century, but assuredly not so strong as to leave no room for other and higher interests. Even at lower stages of culture this is never the sole considera tion ; kinship, religion, independent national life, are interests possessing a powerful influence even there ; so much so that the economic interest must yield to them in part.

The state, as comprising all the highest interests of civiliza tion, is in a special degree the stage upon which this truth comes into view and is realized in any people. But the state is not the only form in which it expresses itself. Its expression in the state is but a repetition of what is present in private life as well. When the bold discoverer, bent on research, ventures his life and his property, both, on a polar expedition, he undergoes an economic sacrifice which is not repaid by any pecuniary results. When the fatherland calls out its sons to defend the highest of human interests and at the same time puts into the venture those expensive material equipments which are indispensable in modern warfare, then there is done in the name of the com munity something analogous to what is done by the individual investigator spoken of above.

After full allowance is made for the economic interests which, among others, are served by these public activities, there still remains a residuum which is not to be resolved into economic elements, but must be classed under a different head. There is a consumption of economic goods for purposes of another class, which yields no economic results.

From this it follows that a national expenditure of economic goods, whether they are obtained by loans or taxation, may yield an economic equivalent if it is undertaken for an economic end, but that where no such aim is present (as happens in the case of the greatest of all expenditures), there the production of an economic equivalent is not to be looked for, except as a possible incidental result under specially favorable circumstances (war indemnity). A theory, therefore, which insists on forcing taxes and national loahs into the mould of a pecuniary equivalent will accomplish nothing further than is accomplished by that mathe matical method in economic science, which is able to begin its work only after elimination of all the real character of the matter in hand. In point of fact, the question between the state and the individual concerns an exchange of economically incommensu rable benefits and economically incommensurable obligations.

§ 516. The foregoing brief reflections have been introduced in order to indicate the theoretical standpoint from which Dietzel's view of public loans is to be regarded, as well as to show what influence he has had upon later writers on finance.

According to Dietzel' the only expedient method of trans ferring capital from private economy to the national economy is by the use of national loans. By this method private individuals are led to put their disposable capital into the permanent capital of the community as a means of obtaining a permanent income, just as soon as it commends itself to them as a profitable invest ment.

The collective capital [Nationalkapital] is that portion of a nation's aggregate capital by means of which the collective busi ness of the people is carried on. It consists of those permanent works and establishments, and those immaterial relations and things, whose presence is necessary in order to the emergence of the useful results which the nation has to accomplish by this method of collective production. The causes of all perverse and derogatory opinions and sentiments with regard to public loans lies in a one-sided conception of the nature of the nation's econ omy, according to which the aggregate costs of production include nothing but the expenditures' which are made by each private economy in detail, and which reappear more or less pal pably in new products ; this view overlooks the fact that the national organization is the prime requisite of all economic development, and that the ever-recurring expenditures which this national establishment requires are properly to be included in the aggregate costs of production of the nation's industry.

The views which is expressed by most writers, that a system of public loans destroys capital, will not bear inspection. Aside from its defective apprehension of the nature of capital, this opinion is an inference from the proposition that everything which is consumed by the collective economy is consumed unproductively.

If the position were sound that national loans are an iniqui tous imposition of a burden upon future generations by the pres ent generation, then it should also hold that no one engaged in industry, who is at the same time the father of a family, ought to borrow capital in order, e. g., to add to his fixed capital a much needed and probably very profitable supplement in the form, say, of a new machine.' The line of demarkation between public loans and taxes is determined as follows.' Taxes are to serve for meeting the ordi nary running expenses and cost of repairs of the national estab lishment; whereas all expenditures for permanent public improve ments, for the extension and maintenance of the state establish ment must be met by means of loans. How much is to be regarded as ordinary expenditure in the sense here understood is easily determined by finding if it recurs invariably in each successive industrial period.

These propositions, given almost word for word in Dietzel's language, sufficiently characterize his doctrine of public debts. It is seductively simple, and brings the irresistible rise of the public debt in European countries into harmony with the plausi ble doctrines of the old school. It falls short at two points. It rests on an unsound theoretical basis, as I have already attempted to show ; and as a practical scheme, even if its theoretical sound ness be conceded, it affords but a very dubious footing for any actual system of national debts.

Viewed from the historical standpoint it must be conceded that this doctrine reflects the later phases of the public debt administration more faithfully than any previous formulation of doctrine does. It does not suffer from the vicious economics of Pinto and his contemporaries ;—though it is to be added that the doubtful economic doctrines of these latter writers serve to cover a much more moderate position with respect to the public debts than that of Dietzel.

Dietzel's position as to reckon the third and concluding epoch in his scheme of the theory of public credit as having begun with Dietzel.' The characteristic feature of this third epoch is that the pub lic debts are now judged of in a much profounder way. The position now is that a " public debt is debt only in form ; in point of substantial fact every loan is an independent method of taxing the future for all those government expenses which go to build up permanent government establishments for the benefit of the future by means of advances furnished by the present." To those who hold this view, therefore, Stein goes on to say, the placing of a debt has come to be not a manifestation of straitened finances, but simply an obligation of the state, which, by the payment of interest and the gradual redemption of such debts, shifts to the coming generation a part of the burdens incurred for the joint benefit of the present and the future. Hereby for the first time is a basis established for the organic connection of the national credit with the national finances, and in so doing we are also shown the bond which exists between the national administration and the national credit. " Dietzel was unquestionably the pio neer in this work." In order to a closer appreciation of this position, it may be well to give some attention to Stein's remaining propositions.' Every debt contracted by the state, says he, increases the state's "productivity,"' that is to say, every debt pays its own interest in the useful purpose which it serves. A national debt is directly productive if its expenditure results in income, and indirectly productive if its productivity consists simply in increasing the taxpaying capacity of the people. The former is calculable, the latter not. The former completes itself and may be measured within a period of one year ; the latter, as e.g., in the resumption of specie payments or the establishment of penal or educational institutions, will often demand several generations for the full accomplishment of its purpose. Instead of a computation, there fore, we must in this latter case fall back on a general principle. This principle can be no other than the principle which holds for all national income and expenditure. The national administra tion must see that in the contraction of any national debt the expenditure of the funds shall provide for interest payment and redemption of the debt, at the same time that its application works out the moral and economic results for which the debt was incurred. If this is not done then every public debt becomes a consumption of the people's capital instead of becoming an ele ment in the productive power of private capital.

So far Stein. He agrees in substance with Dietzel's theory of production, and what has already been said of Dietzel's view of the public credit will hold true in the main of Stein's view.

His writings constitute the summit to which the doctrinal reflex of the development of public debts gradually attained dur ing the course of two centuries. The economic science of the past rendered valuable service in this presentation of facts and views relating to public credit ; it may in a similar way be the privilege of the science of today, by viewing these reflections of past events' from its own modern standpoint, to reach such an understanding of the matter as shall do justice to the present and the past alike.

national, debts, debt, time and capital