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The Various Kinds of Public Debts


§ 523. The facts relating to public debts which we have reviewed have so far been distinguished into classes only accord ing to two principles of classification. ( 1) According as the loan is made for productive or for unproductive purposes, and (2) with respect to the kind of public body which issues the loan. We shall now have to make a further distinction.

We have here three typical forms of public loans differing in respect of the term for which they are to run, and this differ ence in duration is in its turn determined by the differing causes and purposes of the loan.

Just as we distinguish between long and short credit in pri vate business, and just as the credit employed assumes various forms to correspond to the object for which it is employed, so also in the case of the public credit. We make a distinction between mortgage-loans advanced to a Land-owner for a long term of years, answering to the permanency of his tenure of the land, and loans made on bills of exchange or on personal secur ity, the short term of which corresponds to the rapidity of cir culation with which goods pass through the various stages of the productive process. Similarly, occasions arise in the public economy which demand the use of a longer term of credit, at the same time that there are also objects for which a short credit is sufficient.

§ 524. It has appeared from the historical survey that the great body of public debts, whether contracted for productive or unproductive purposes, is always of some considerable duration, and the mature development of the public credit even enforces the conviction that an unlimited duration is the essential characteristic of the public credit. The essential nature of the great body of requirements which occasion the use of the public credit is on this point at one with the essential nature of the state. The fiscal demands which the national economy makes through the loan market are in this respect of the same nature as the ethical-political demand which we know it is competent for the state to assert. And this demand is no longer reluctantly complied with ; the experience of the various states, for a long time past, goes to prove that the money mar ket is always ready to meet such demands, if only the state and the nation's industry have reached the requisite degree of maturity.

Some of these experiences have been outright triumphs for the public credit, in which confidence in the permanency of the state and in its financial soundness has mastered all doubts aris ing from the changing fortunes of a growing state and the changes and succession of constitutions and of dynasties. The stability of the national unity has proved itself so indu bitable that all the alterations have seemed trifling in com parison.

The fiscal need of obtaining loans of a long term must always come prominently into view when large sums have to be raised for carrying on a great war, or even when more moderate sums are wanted for establishing great productive institutions.

The name " funded debt" which has usually been applied to this best known class of public debts is itself an evidence of the growth of the public credit at this point. The term came into general use in England during the eighteenth century, and was there used to designate the practice of setting apart certain specified public revenues for the payment of a debt and its inter est-charge. This was a further development of the earlier prac tice of pledging certain crown estates and crown revenues, only that the setting apart of certain revenues by a legislative act now took the place of an earlier quasi-private hypothecation of prop erty by an act of the crown. By a further step in the develop ment, this close relation between a particular expenditure and a particular source of revenue fell into disuse, and the annual pay ment for interest and redemption of the debt took its place among the other national expenditures ; and this led to the " funding " of all the state's expenditures, so that all expendi tures without distinction have come to depend on the aggregate of the national revenue.

The original meaning of this old term has therefore been lost, so far as regards any modern state with a mature system of national credit. The term funded debt has come to sig nify only so much of the original content of the term as has survived in practice, viz., a debt intended to run for a long time.

§ 525. To distinguish it from the funded debt the rest of the public debt is designated as a " floating" debt. This latter is ordinarily of slight consequence as compared with the funded debt, especially in countries with a large funded debt ;. it is made up of so great a diversity of items, and is incurred for such a variety of purposes, as to require some detailed consider ation.

This subject has already been touched upon in the general exposition dealing with the relation between taxes and national debts in meeting the public expenditures (sec. 168) It will now have to be taken up somewhat more in detail.

A national economy with an undeveloped credit system is like an ill-ordered private economy ; it will incur debts of whose necessary term of duration it has no adequate conception, at the same time that it does not possess the means for their speedy discharge. It may even be that the debts arise out of a simple disproportion between expenditures and income, such as cannot be remedied either by an increase of revenue or by any avail able recourse to credit. This may fairly be designated a " shift less " credit system.

Under this system, in the public as in private finances, arrears will drag on from year to year, increasing as time goes on through the persistence of the causes out of which they originated, and in the absence of an increase of ordinary revenues they can be liquidated only by facing the facts squarely and recognizing that this multitude of small over-due liabilities amounts to the same thing as a considerable body of debt, for the discharge of which, and for the payment of interest on which adequate provision must be made.

This is the oldest and therefore, under conditions of an inade quately organized public economy, the most prevalent form in which the floating debt occurs.

But even the shrewd manager, whether in public or in private life, must come to recognize that debts of this character will occur even where there is no such shiftlessness in the keeping of accounts.

Even the best administrator cannot avoid the carrying over from one fiscal period into the next unliquidated claims for sup plies and services rendered in the course of the former period.

There may moreover occur unforeseen shortages in the esti mated revenues, or unforeseen items of expenditure which will not admit of delay.

Moreover, the regular revenues and the regular expenditures do not always coincide in point of time. Considerable sums may be required for the payment of officials, troops, etc., whose equivalent in the shape of revenues from taxes, domains, rents and the like, will regularly be received after an interval of some months or quarters.

But it is especially the administrative activities of the gov ernment that give rise to floating debts due to other than finan cial reasons.

We will now take a closer look at the chief kinds of these administrative expenditures.

§ 526. The chief source of a floating debt of this kind is the issue of government paper money. All financial abuses apart, this paper money in any country with a silver currency serves the purpose of a more easily portable substitute for silver for the payment of amounts the transportation of which in silver would be burdensome, at the same time that the bank notes in circulation are, and properly should be, of too large denomina tions to serve for this particular purpose. A typical illustration of the need of such a paper currency is afforded by the practice of the German states ; previous to the imperial law of April 30, 1874, they kept notes in circulation of one, five, and ten thalers (gulden),—amounting to 184,298,500 marks at the time the law went into effect ; and the Empire inherited from them the insti tution of the imperial treasury notes of a normal amount of 120 million marks. In addition to this, as a measure of transition, the right to issue 54.74 millions was conceded to the individual states, to be redeemed between 1876 and 189o, so that at the end of March, 1887, there were still 133.86 millions in circulation.

A second provocation to the contraction of a floating debt, also incidental to the administrative duties of the government, is afforded by national (imperial) savings banks where such exist. This is especially apt to be the case under the modern practice of combining savings banks with the post-office, which involves the contraction of a large debt payable on demand. In Great Britain and Ireland the amount owed by the state on March 31, 1887, was 53.97 million pounds sterling.' § 527. Whether the causes of the floating debt are of one kind or another, whether the occasion out of which the debt arises may be said to be an active cause or an occasion simply, in any case the management of the debt by the fiscal administra tion will necessarily differ, according as the debt results directly and immediately from the occasioning cause or originates as an indirect consequence.

If supplies furnished to the state are not duly paid for, or if the postal savings banks bring large deposits to the state, this fact itself immediately gives rise to a floating debt. On the other hand, if the equilibrium aimed at in the financial estimates is disturbed by unforeseen shortages in the revenue or by unfore seen expenditures, so as to leave a shortage in the funds available for meeting immediate expenditures, then it becomes necessary. to incur a floating debt. Halfway between these two classes lies the issue of national treasury notes. A sufficient ground for much an issue is to be found in circumstances affecting the currency, as we have already seen. But neither as an historical fact nor in point of practical expediency is this the sole or most important ground of such issue. The outstanding imperial treasury notes which are at present to be found in circulation in the Empire, under the law of April 30, 1874, represent a legacy from the monetary habits and abuses of the states of Germany ; the institution owes its origin to the eagerness of (at least some of) these governments to exploit to the utmost the advantages of a non-interest-bearing debt. As a result Prussia found herself compelled as early as 1856 to reduce her paper-money issue by one-half,' and the imperial government was again compelled to reduce the amount from the 184.30 million marks outstanding at the beginning of 1874 to 120 million marks (at the same time introducing the gold standard).

Treasury notes (paper money in the widest sense) are there fore one of the usual means by which a temporary deficit in the available funds is supplied. Under what circumstances, within what limits, and with what special danger will appear later on.

Besides paper money there are (especially in countries which do not make use of this expedient, as, e. g., Great Britain and France) other forms of floating debt which serve the same purpose. As we have seen, Prussia, especially in seasons of financial or political straits, fell back on the Society of Marine Commerce, which helped out the abnormalities of the public credit by means of a permanent floating debt. In Great Britain there have existed ever since its foundation certain financial relations between the exchequer and the Bank of England ; also the privileged trading companies (the East India and the West India Companies) stood in a somewhat similar relation to the English public credit. The mixture of diverse forms of credit which resulted from these financial relations, and the conversion of cash deposits in the hands of these financial institutions into a permanent national debt, mark an immature, and therefore unsound stage of development of the public credit. After aberrations of the early days are past, banks of this kind come to assume their legitimate function in a developed system of public credit, viz., the maintaining of a running account for the purposes of the floating debt. The indebtedness of the English government on this account to the Banks of England and Ireland amounted, on March 31, 1887, to £7,647,072.' An important form of floating debt which is likewise native to England and has lately been introduced into Continental countries is Exchequer Bills [Schatzscheine]. These differ from treasury notes [Kassenscheine] much as commercial bills differ from bank notes. While treasury notes and bank notes are issued as a substitute for coin and are therefore intended to serve the everyday purposes of circulation, basing their accept ance in the circulation on their redeemability in coin on demand, commercial bills and exchequer bills .on the other hand are adapted for temporary investment of money, as contrasted with the relatively permanent investment in funded securities, mort gage loans and the like. As investments the exchequer bills, just like commercial bills, pay interest, and this interest being of the nature of interest on short loans (discount) has the charac teristics of a discount, which differs somewhat from the interest paid on loans of a long term.

§ 528. We come now to a consideration of the various kinds of public debts in detail.

The line of demarkation between the funded and the floating debt is determined by the form in which the debt is owed. The tendency in every ill-ordered financial system is to increase the amount of the floating debt and so lessen that of the funded debt. This is done partly to conceal the actual amount of the latter, partly in order to enjoy the fiscal advantages there are in a floating debt (no interest, or a low rate of interest); but this advantage finds its offset in the loss which it involves of all the advantages of a funded debt.

These advantages are the long term of credit and the less importunate requirement of discharging the debt ; whereas the floating debt, maturing from day to day or from month to month, may, if it grows very large, exert a great pressure on the finances, such as the fdnding of the national debt is devised to obviate. In case of an orderly and well-developed national credit, such an excessive accumulation of floating debt may exist in good times without evil consequences ; but if confidence in the state is shaken, as in case of a threatened war, when alarm may easily take possession of the public, such a mistaken policy may plunge the country into embarrassments at the precise moment when it is least able to cope with them.

If in such an emergency the state is unable to meet its obli gations, this failure will in its turn react on the public confidence and so increase the general alarm.

There is therefore great danger in an excessive issue of sub stitutes for money (treasury notes and the like) whose acceptance and value rest on their being redeemable in coin on demand, If this convertibility fails at the decisive moment the result will be precisely the contrary of what was aimed at in the issue of the paper money. The paper money which is issued in the expectation that it will float on the strength of an unshaken confidence in its ready convertibility into coin, is now importu nately presented to the treasury for redemption at a, time when redemption is impossible. There is in such a case a great temp tation for the state to help out its credit by the use of compulsion. While the acceptance of the paper as a means of payment had previously rested almost exclusively on public confidence, it comes now, when public confidence has failed, to rest on the legal-tender quality of the paper, at the same time that this legal-tender quality is unable to save it from depreciation.

Something similar has happened in cases where the state has not itself issued paper money but has incurred a floating debt in the form of short bills due to privileged banks of issue, and where, instead of being able to discharge this debt in a time of financial stringency, it has been obliged to incur additional debts.

In consequence of such a situation the banks have been unable to meet their own obligations, with the result that a continually increasing pressure has been brought to bear upon the state to use its authority to suspend specie payments.

It is, however, quite impossible to draw a hard and fast line between the floating and the funded debt.

There were in the German Empire, on March 31, 1887, 133.87 million marks of imperial treasury notes, 54.15 million marks of exchequer bills [Schatzanweisungen], which being non-interest bearing, just like commercial bills, were discounted at their issue (at an average of 3 per cent.). The amount of these exchequer bills outstanding at the close of each fiscal year between 1877 and 1887 varied between 10 and 70 million marks. In earlier years (1868-1875) the form employed was usually that of interest bearing exchequer bills, which, it is to be remarked, were not exempt from the fluctuations of discount by virtue of their bearing interest. Exchequer bills were especially used to a very great extent in connection with the monetary reform of the German Empire.

Since 1868, the date when exchequer bills were first employed both in Prussia and in the North. German Confederation, the amount of exchequer bills which may be issued during the year, as well as the interest-charge op them, is determined by the budget from year to year. The imperial budget for 1889-901 provides for an issue of 78.50 millions, and allows a sum of 350, 000 marks for interest. The Prussian estimates' contain the provision that " for the payment of interest on the exchequer bills issued for the temporary reinforcement of the funds at the disposal of the general treasury during 1889-90 there are appro priated 600,000 marks." § 529. Funded debts are of various kinds, differing and varying according to the progressive development of the chief characteristics which mark the funded debt as such. The more the feature of permanency in the credit of the state (empire or commune) comes into prominence, the more does the legal claim of the creditors to a repayment of the principal of the debt decline ; the state's obligation to redeem the debt is postponed or entirely done away; the dates and the amount fixed upon for the redemption of the debt, whether by the terms of the contract with the state's creditors or by legislative enactment, are gradu ally less and less regarded, or entirely disregarded.

The earlier Prussian loans, at the beginning of the nineteenth century, were issued for a term of only 3-8 years, and their redemption was accordingly divided into 3-8 instalments. Even in the midst of the distress under which the ill-ordered national finances labored, payments continued to be made towards the discharge of national obligations ; one million thalers a year being expended for this purpose in 1818 and 1819. On the first English loan (to Prussia, 1818) there were to be paid, on the principal of the debt, 3 per cent. during the first year and 2%, 2, I % and 1 per cent. in succeeding years.' Premium loans, the attraction of which lies largely in the gambling element infused into them, belong, in the history of Prussian debt, chiefly to this period, and recur from this time down to the middle of the nineteenth century. In England this fiscal expedient went out of use about the beginning of the cen tury. The first Prussian premium loan was issued in 1796, the second in 1821, the third in 1832, the fourth and last in 1855. The terms of these loans bind the state, by the specifications of the lottery scheme which they embody, to the payment of fixed annual installments ; in order to heighten the allurement of the loan the drawing of lots for the release of bonds is arranged to take place as soon after the issue of the bonds as may be, and with as large prizes as may be. But the scheme for the release of the bonds by lot always covers a considerable term of years, so that there is even yet (1889) a remnant of the Prussian pre mium loan of 1855 outstanding. The same is the case with the premium loans issued by Baden, Bavaria, Brunswick, Dessau, Hamburg, Lubeck, Meiningen and Oldenburg, 20, 30 and 40 years ago.

It is not only the form of this class of loans, but also the substance of the method, viz., the hard and fast scheme of redemption, which is to be regarded as a transitional stage in the course of development that results in the full-fledged funded debt. While this method was abandoned in England in 1828, in France in 1848, and in Austria in 1859—for reasons already suggested by our historical survey of the facts—it is still retained in Prussia. A motion was introduced in 1856 in the Upper House to abolish the requirement of redemption by a fixed scheme ; in 1867, in the Reichstag of the North German Confederation, Twesten made a similar proposition ; but neither of these projects came to anything. The productive character of the compact body of the Prussian national railway debt has occasioned (Law of March 27, 1882) an adherence to a fixed scheme of redemption, at the rate of three-fourths of one per cent., to be paid out of the annual net receipts. It is instruct ive to note that this obligation, which the brilliant results of the railway business have made it possible to meet, has in point of fact been met not by an actual cancellation of exist ing debts, but by contributions to new expenditures made by the state, which would otherwise have been covered by new loans.

§ 530. The funded debt of an unlimited term, without oblig atory redemption, or, at any rate, with no other obligation than that imposed by legislative enactment, logically leads up to the form of the annuity (rentes).

In this form of debt the obligation of the state which owes the debt does not include repayment of the principal, but only the annual payment of interest.

We have seen that this most highly developed form of national debt, which goes back to the beginning of public debts in the city republics of Italy and Germany, is related to the life annuities of earlier times and has gradually developed in Eng land into the typical form of a national debt.

While this form answers in all respects to the essential nature of a developed national credit, it still suffers a few limitations. In the first place this highest development of national credit, and the resulting abolition of all obligation to repay the principal, does not abolish the fact that individual creditors may sometimes find it desirable to withdraw their loans in order to use the capital which they represent for other purposes. It follows, therefore, that a public debt in the form of annuities presupposes the stock exchange where the national bonds can always find buyers, and which will, by virtue of this fact, act as a substitute for redemption by the state.

But while this restriction applies not only to the public debt in the form of annuities, but to every extensive debt owed by the state, there is still another and more important limitation to be mentioned. The interests of the state which issues the loan. demand that it take the form not simply of a perpetual rent payment, but that it must take the form of interest on a certain specified capital which the state reserves the privilege of repay ing sooner or later ; for the reason that future circumstances affecting the national credit or the money market may make it possible to borrow at a lower rate of interest and so effect -a reduction or conversion.

In the late adoption of the annuity form for the public debt in Prussia and other German states, as well as in Austria, it has accordingly been thought best that the securities should still retain the form of an obligation to pay a certain principal. In England this form has been readopted since 1866. In France the form in which the rentes' are issued leaves it an open ques tion whether there is any principal, and, consequently, whether the state has a right to redeem the debt. But the decree of March 14, 1852, (dealing with the conversion of the 5 per cent. rentes into per cent.) established the principle' that this right is "inherent in the nature of an obligation engaging to pay a perpetual annuity." In practice considerable departures from the annuity form of the public debt have been made in France ; in 1878 a loan of. about 500 million francs was issued for rail ways, the loan being in'the form of a 3 per cent. rente, but not convertible, and payable in 75 yearly installments at the face value of the principal. The immediate reason for this arrange ment was that the securities issued by the private railway com panies, and to cover which this loan was incurred, were like wise redeemable within a term ending between 1950 and 1960; and this for the reason that the railway lines would at that time become the property of the § 531. Connected with this development is the introduction of the Ledger of the Public Debt [Staatsschuldbuch] in Prussia and other German states.' Ever since the edict dealing with the Prussian finances, dated October 22, 1810, the principle has been adhered to of making all the bonds of the. Prussian public debt payable to the bearer. By an ordinance of January 17, 1820, dealing with the future management of the public debt, all obligations then outstanding, electoral, provincial and municipal, and bearing the name of a specified creditor of the state, were retired. After the acquisi tion of the new provinces in 1866 it was provided by laws of Feb ruary 29, and of February I I, 1869, that public obligations issued by these provinces and bearing the name of the creditor need not be converted into obligations payable to the bearer, but the central administration of the national debt was authorized to make such securities payable to the bearer at the request of their holder.

The case is different in other countries. In England, France, Holland, Austria, and also in some of the German states, in Hamburg and in the United States of America the practice has been, even down to the very latest times, either to write the public obligations payable to a creditor specified by name, or, more generally, to register them in a book kept for this purpose. In England the state's creditor receives only the amount of interest agreed upon ; the nominal principal, of the debt being entered against his name in the Great Ledger, in which the Bank of England enters the names of all holders of the consolidated debt. The creditor receives no bond in evidence of the debt. In France the Revolution, at the same time that it achieved the consolidation of the funded debt, also created, by a law of August 24, 1793, the Grand Livre de France, in which every item of debt must be entered 'if the claim is to be binding on the state. The holder of the public debt receives an abstract (inscription) of the entry in the Grand Livre (in which he is usually mentioned by name), certifying the entry. The Receiver-General of each of the eighty-six departments keeps a subsidiary ledger, in which he likewise makes entries of rentes. The items of debt entered in this subsidiary ledger may, on request, be transferred to the corresponding ledger kept in any other department, or to the Great Ledger in Paris. Interest is paid on presentation of the " inscription." This reads either in the name of the creditor, or payable to bearer (being in the latter case provided with interest coupons).

A desire for a change of the same kind has repeatedly been expressed in Prussia also, even as early as the enactment of the law of December 19, 1869, dealing with the consolidation of the public debt. More particularly a proposal was brought forward in the Chamber of Deputies during the session of 1880-81, which led the Prussian government to take up the matter, and, by a proposition presented to the Chamber in 1882, to prepare the way for the law of July 2o, 1883, dealing with the Ledger of the Public Debt. This example was followed by the Kingdom of Saxony in its law enacted April 25, 1884.

§ 532. The decisive argument for this step was the following : While the mobility of capital was adequately provided for and satisfied by the practice which had been in vogue in Prussia since the beginning of the century, of issuing national bonds pay able to the bearer, it is also true that there is a large body of capital seeking investment which is not best served by this form of securities.

Foundations, trusts, church property, and the like, seek a form of investment which affords the greatest possible security against loss, at the same time that it dispenses with adminis tration or superintendence on part of the owner. Moreover, as the accumulation of capital goes on there is a constant increase of the number of persons seeking a form of investment that is permanent, safe and free from care. The expedient resorted to in the past, of depriving securities payable to the bearer of trans ferability, had proved inadequate ; it does not afford the requi site security and also involves difficulties and complications.

Sufficient security is to be found only in a provision abolish ing the transferability of bonds employed for investments of this class. This can be accomplished by substituting a registration of the debt in a ledger in place of an issue of bonds. At the same time the practice of issuing bonds payable to the bearer may be continued in order to meet the demand for a class of public secu rities that are easily transferable.

The law provides that bonds of the 4 per cent. consolidated debt may be converted into a book-debt due to a particular cred itor specified by name ; the conversion is to take place upon pres entation of the bonds and by means of an entry in the book kept by the central administration of the public debt. A notice of the entry, in due form, is given the creditor. Interest is paid to the creditor or to his attorney. The fee for entering the debt on the ledger is 25 pfennigs per woo marks (with a minimum fee of one mark). For the issue of transferable bonds, in case the debt is withdrawn from the ledger, the fee is 5o pfennigs per 1000 marks.

The disadvantages of the new scheme are closely related to its advantages. There are inconveniences in the way of any change of ownership ; any transfer to a third party involves more trouble than is the case with obligations payable to the bearer.

The re-conversion into the form of a bond involves certain formal ities, and so long as the claim remains in the form of a book-debt the creditor is not possessed of any evidence of debt which will unquestionably satisfy any third party of the existence of the book-debt, and the creditor frequently has occasion to prove the fact of his claim on the state (as e. g., in proving assets, in giving security or mortgage). The Ledger of the Public Debt, moreover, is on other grounds not open to the public.

Still, the new arrangement has come into use more and more. The Ledger of the Public Debt was opened October 1, 1884, and the number of creditors who have made use of it has increased with each succeeding year since that time.

33 per cent. are 20 " fl 41 8 " 448 44 4,000 10,000 50,000 100,000 " 10,000 marks " 50,000 " 100,000 over 4,000 marks and under Of these entries 4230 were to the account of physical per sons, 1025 were to the account of legal persons, and 1493 to the account of estates not possessed of a legal personality.

debt, credit, national, floating and time