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The Present State of the Public Credit

THE PRESENT STATE OF THE PUBLIC CREDIT.

§ 518. What the far-seeing philosopher Berkeley said, a century and half ago, in speaking of England, that the discovery of public credit was the discovery of a new gold mine, and what James Steuart, and more particularly Sinclair, had to say of its efficiency as an instrument of political power, all this has been realized in actual fact during the course of a hundred years after their time. The debts of the nations of Europe, the magnitude of which at the close of the wars with which the nineteenth century began, filled the most sensible of our financial writers with astonishment and dismay, have gone on increasing during a further couple of generations in a degree to correspond with the progress in industrial productivity accomplished during the cen tury.

It is true that the wealthiest and most involved of all the nations—Great Britain—was able not only to come to a halt in its career of national debts, but even to cancel a consider able portion of its old debts. But at the same time it is to be noted that the other states which have attained a similar abun dance of credit and capital, have, as fast as the circumstances have permitted, also found occasion for the contraction of large national debts ; so that we have today the following situation.

While, according to computations given above ( sec. 493 ), the interest payable on debts in 1820 by the various states of Europe amounted to 1,125 million marks, later computations show that by 1865-66 this sum had nearly doubled, and by 1885 86 had increased nearly fourfold.' From the principal of the debt (1885-86, 108,431 million francs) is to be deducted so much as is covered by productive investments, as, e. g., the Prus sian railway loans. But as against this there is to be added the municipal and communal debts, of which but a very modest portion are so invested as to cover their own interest-charge. In Prussia alone the urban and rural communes together paid, in 1883-84, 34.50 million marks in interest and in discharge of the principal of their debts ; in the kingdom of Italy the communes and provinces in 1880 paid 41.50 million francs as interest on their debt (on a principal of 745.40 million francs).' The national debt of England, the interest-charge on which amounted to 32.5o million pounds in 1820, has been gradually redeemed, so that the interest-charge in 1852 amounted to only 28 millions, and in 1885-86 only 22 millions.' Instead of amounting to three-fifths of the national expenditures, as in 1820, the interest-charge now amounted to only one-third or one-fourth of the total.

But in most other countries (with the exception of the Ger man states, especially Prussia) the public debt has increased with great rapidity.

Austria-Hungary in 1820 paid only 31 million marks in interest, as compared with 395 millions in 1882 ; Russia 23 millions in 1820, and 640 millions in 1882 ; France 148 millions in 1820, and 790 millions in 1882. Italy paid 410 million marks in interest on its public debt in 1882, while in 1820 all the Italian states, together with Spain, Portugal, Sweden, Denmark and the minor German states paid only 225 million marks interest.

It is especially in the case of states like Austria-Hungary and Russia, which had exhausted all their resources, including their credit, at the close of the great war, that the contrast between the relatively slight amount paid after the Napoleonic wars and the large interest-charge of today brings out the great advance that has taken place in the growth of the public credit and of the financial strength of the states. Even in the case of France, which, it is true, was treated with leniency at the re-establishment of peace in Europe, but was still subjected to burdens that were very great for that time,—even in France the increase of the interest-charge by more than sevenfold is evi dence of a great development of industrial productivity and wealth during the nineteenth century.

§ 519. Let us take up, somewhat in detail, the development of the public credit in Prussia and Germany. In so doing we shall (here as in the discussion of the tax system) avoid com parison of multifarious facts and figures taken from various sys tems of legislation and various nations, and will be able to con fine our attention to definite facts regarding the community immediately under consideration. We shall in this way get a conception much truer to life than is attainable by the old fashioned method of discussion.' A survey of the Prussian public debts, and their development since the middle of this century, is calculated to impress us with the worthlessness of the customary arithmetical comparison of our state with other of the larger states. What everyone under stands in speaking of the debts of any private person, viz., that the degree of indebtedness depends on the purpose for which the debts have been contracted and the assets to be set off against them,—this important fact is left out of consideration in speaking of public debts. This is to some extent due to the influence of unsound theory.

During the years 1848-1866 the Prussian national debt increased from 158.5o million thalers to 290 millions, that is to say, by 131.50 million thalers. The amount invested in the state railways built or bought during this period (inclusive of the stock held by the state in private roads) amounted to 124.33 million thalers. This leaves a remainder of only 7 million thalers not covered by the value of the railways. The national treasure at the end of 1865, moreover, amounted to 20 million thalers (1848, 19.40 millions).

The interest-charge on the national debt in 1865 was it mil lion thalers,.whereas the railroads turned in funds to meet this charge amounting to 9.6 million thalers.

The latest changes in the national railway policy have appre ciably altered this condition of things for the better. The national debt has greatly increased in aggregate amount, and, through productive investment, it has not only afforded the funds necessary for interest and redemption, but has even yielded a progressively increasing surplus above these requirements.

The debt has increased as follows : But the net receipts of the state railway business hare devel oped at such a rate that from 1878-79 they nearly equaled the interest-charge on the entire national debt, and since 1879-80 they have even exceeded the interest-charge.' The figures are as follows : Interest-Charge Net Receipts Year (million marks) (million marks) According to this showing the public debt of Prussia during the last forty years has been in a radically different situation from what we find in Austria, France, Russia, Italy and even the United. States, and differs likewise from the debts contracted by Great Britain in the eighteenth century and such remnants of the great national debt as have survived down to the present. Apart from slight and, relatively to the great average of the the Prussian debt, quite insignificant exceptions, this debt does not answer to the description of the data which the .history and the theory of the public debt has had to struggle with for the past century-and-a-half ; it is not the same either in its good or in its bad features. In place of a nebulous conception of an immaterial productivity due to the national loans, we have here an imposing example of a true productive credit, which while it far exceeds the conceptions of a past age (Nebenius), is but the prelude to a further development of the national and communal economy in the same direction in the future.

It is of course to be remembered that this clear and unham pered development of the Prussian naticnal debt system in the direction indicated has been greatly favored by a general situa tion favorable to the national life as a whole. The events of the years 1864-1866 and 187o-71, so fortunate in every respect, were of course also fortunate in their financial bear ing. The wars, being brought to a victorious conclusion, have paid their own expenses and have consequently not left the usual traces in the way of a national debt. If, nevertheless, there has been a vigorous beginning made (not in Prussia, but in the Empire) towards a debt for military equipment, that is to be taken simply as testifying "to a growth of the military require ments and a resort to the customary financial expedients.

§ 520. The state of the public debts in the minor German states is much the same as in Prussia. In Wurtemberg the his tory of the national debt is the history of the railways.' The "general " debt amounted in 1845 to 36 million marks, in 1885 to 47.50 millions. Almost the entire increase of these forty years falls under the head of railway debt, amounting to 381.50 million marks. As we are aware, the relation between the surplus earn ings of the railways and the interest-charge on the railway debt is different in Wurtemberg from what it is in Prussia ; the interest-charge on the railway debt amounted in 1883-84 to 15.39 million marks, while the surplus earnings of the railways

were only 13.64 million marks, so as to leave 1.75 millions to be met by other revenues (according to the estimates for 1884-85 and 1885-86 the uncovered interest-charge was 2.22 millions and 2.4o millions respectively). But in spite of this difference in detail, in which respect an improvement may take place in the course of years, there is after all a great difference between a debt which draws on the national finances for only one-eighth or one-tenth of its interest-charge, and one which calls for the payment of the whole of the interest.

In Baden the situation is much the same as in Wurtemberg. The debt contracted for railways and for the Bodensee shipping amounts (1888) to 334.20 million marks, while the remaining interest-bearing debt is 17.30 millions.' In the Kingdom of Saxony the national debt on January 1, 1888, was 659 million marks, by far the greater portion being railway debt. The interest-charge amounted to 22.30 millions, while the net earnings of the state railway business amounted to 28 millions.

Finally, as to the Kingdom of Bavaria. In 1870 its aggre gate national debt was 85o million marks. Of this the railway debt made up to 379 millions, and the debt contracted for the enfranchisement of landed property [Grundentlastungsschuld] to 163 millions. On April 1, 1884, the entire debt was 1347 millions, of which 947 millions was railway debt and 163 millions enfranchisement debt. The remaining debt was, during the years 1870-1884, reduced from 308 millions to 237 millions.

§ 521. The predominantly military character of the imperial finances is shown also by the character of the imperial debt.

It has already been noticed in another connection that the progressively increasing provision made for the defense of the Empire has resulted in constantly recurring financial sacrifices (which will undoubtedly continue to increase) that can properly be called " extraordinary " expenditures only in a very circum scribed sense of the word. It is further to be noticed that this designation of " extraordinary " must be made to serve as an excuse for loans which would be replaced, wholly or in part, by taxes, in case the Empire possessed a more adequately devel oped tax system.

At the end of 1871 the debt of the German Empire, inclusive of the debts of the North German Confederation, amounted to 769.50 million marks (of which 692 millions were interest bearing). The war indemnity paid by France enabled the Empire to discharge this debt, so that by the end of 1873 there was only some two millions left. Since 1877 loans have been repeatedly issued, for the most part in small amounts ; latterly, to meet the increased requirements of army and navy, the amounts of the loans have somewhat increased.

Until a few years ago—in a manner similar to what hap pens in the individual states of the Empire—the earnings of the imperial railways afforded an offset to this interest-charge, but these receipts have been considerably exceeded by the inter est-charge since the larger loans of the last few years.

The net earnings of the railways for 1889-90 are estimated at 19.20 million marks.' The consequent remaining interest-charge to be covered by taxes (17 millions) is a small sum compared with the analogous demands on the finances of the greater neighboring states ;— France 1291 million francs (principal of the debt 31,718 mil lions) according to the budget of 1888,' Russia 281 million rubles according to the published balance for 1887, and 288 million rubles according to the budget for 1888 (with a deduction of 53 millions for railway earnings).' § 522. Municipal (communal) credit [Gemeindekredit], as is evident from some facts already cited, has of late made consid erable growth, both in Germany and in other states. There are several points in this connection that call for special discussion, as, for example, the purposes for which municipal debts are incurred, and the relation of dependence in which the municipal ities stand to the state.

As concerns the purposes for which loans are issued, by municipal bodies of high and low degree, they are (because of the similarity of the functions devolving on the state and on the municipality) partly productive, partly unproductive, just as in the case of the state, water-works, gas-works, slaughter-houses, markets ; street railways are ordinarily in position (if the town is large enough) to pay interest on their cost out of their net earnings.

to the communes, and highways and insane asylums belonging to larger civil divisions, can produce no such net earnings if they are gratuitous and are open to the lower or indigent classes of the population. Various improvements and embellishments of modern towns (the opening of new streets, paving, lighting, etc.) can in the nature of things not repay their cost out of their own earnings.

We therefore find side by side, here as in the case of the national debts, loans for productive and unproductive purposes.

The position of the commune and of all communal and municipal bodies relatively to the state involves on the one hand a supervision of the municipal contraction of debts by the state (if the latter has attained the maturity requisite for this and on the other hand the state may be of assistance to the municipal body in obtaining the loans desired.

In the orderly and well-governed states of today there is ordinarily nothing of that adventurous element to be found in the use of the municipal credit which is so frequently seen in any experimental democracy (where, among other things, dema gogical railway politics have sometimes led to municipal insol vency). Still it is always possible that the responsibility of the national administration for the acts of minor civil bodies may, in case of a catastrophe of any kind, leave the national govern ment morally answerable for the obligations of an insolvent commune. Hence the unquestionable right of the state to exercise a supervision and control of municipal indebtedness. Supervision is exercised in this case as in that of taxation gener ally, but for more urgent reasons. We accordingly find that in Prussia and the other German states, in Austria, France, Great Britain, Belgium and other countries, no municipal loans are permitted without the approval of officials having the matter in charge.

The relation of the municipalities to the state also involves state aid to the municipalities in obtaining loans. Large and favorably situated municipalities need no such assistance ;' but the majority of the small municipalities need it all the more. In the German Empire this purpose is served, as a subsidiary purpose, by the Reichsinvandenfonds in Belgium a special insti tution (the Credit Communal) has been erected (186o) for this particular purpose.

In Great Britain there prevails, in this respect, a strongly centralized Municipal authorities have three ways of obtaining funds. They may apply to Parliament for permission to issue a loan for a particular object (special local act); for certain public purposes they may apply to the Exchequer through the Board of Public Works Loan Commissioners ; or finally they may go into the market for loans for similar objects under the general act governing municipal loans (1875). The last-named method has been used to but a slight extent ; whereas loans to a considerable amount have been obtained from the Exchequer (the rates of interest since 1879 are as follows : 3% per cent. payable in 20 years ; per cent. payable between 20 and 30 years after the date of issue ; 4 per cent. for loans payable between 3o and 40 years after the date of issue ; 4% per cent. for loans of a longer term than 4o years).

The aggregate amount of the municipal debts has greatly increased of late years.' In 1872-73 its amount in England and Wales was only 8o million pounds, and in 1879-80,137 million pounds. Of the latter amount only 3o millions were funded on special items of revenue (tolls, dues, rents); the whole of the remaining 107 millions rested on taxes. The control exerted by Parliament or by the Board of Public Works Loan Commis sioners seems to be very lax and to unduly facilitate the con traction of debt, especially it has little effect to enforce season able discharge of the debt.

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