CHAPTER XXXIII

THE GENERAL CHARACTERISTICS OF PUBLIC DEBTS

IN Book II. Chapter XI. the theory of public debt was discussed, and it was shown that expenditure from loans as distinct from expenditure from revenue is in certain circumstances justifiable and expedient. The question of public debt may now be examined in detail, and this may be done conveniently from three points of view: (1) the characteristics of public debt; (2) the burden of public debt; and (3) the repayment of public debt, a question which includes a study of that vexed problem known as the capital levy.

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1. THE IMPORTANCE OF PUBLIC DEBT

It

It is only just over five years ago ", said Mr. Lloyd George in the spring of 1924, " since the last guns ceased firing in a war of concentrated destruction such as the world has never seen. cost the belligerent nations over £50,000,000,000; either by death or mutilation Europe was deprived of at least 25 millions of its best wealth-producers; and the whole of the delicate and complicated machinery of international trade was shattered." There is much truth in this. The pre-War debt of the belligerents was £7,300,000,000, and in 1923 it amounted to £49,000,000,000. The world's indebtedness in the same period, as will be seen from the following table, has increased from £8,800,000,000 to £53,800,000,000, and the direct gross cost of the War to the belligerents was, from a study of their budgets, £47,000,000,000. It is interesting to compare the growth of 22 chief countries. during the last half a century when the public debt of these countries has increased by £45,700 millions, or more than 12 times. It would have been madness to assume, ten years ago, that

the British House of Commons would actually pass votes of credit for the financing of the War to the extent of £8,742,000,000. In Great Britain the ratio of debt to revenue has increased from 3.6 in the pre-War year to 9-3 in the post-War period; from 1.6 to 5.6 in the case of the United States; from 6-9 to 11.9 in France; 5.1 to 6.6 in Italy; from 2-0 to 5-7 in Germany; and 2.1 to 6-3 in the case of Canada. In India the ratio has remained stationary at 3.6, and in Japan it has fallen from 4.5 in the pre-War year to 2.6.1 About two-thirds of the cost of the War to Great Britain and the United States were financed from loans and the remainder from taxation. In the great French War, which ended in January 1817, not far short of two-thirds of the cost of the War was met by Great Britain from taxation and the remainder by loans. These large increases in public debts have not been confined to states. Local indebtedness has in recent years increased at a rapid pace, in some cities almost at a rake's progress. The increase in the debt of local authorities has been specially noticeable in Great Britain, the United States, France, and Italy, owing to the extension of administrative functions by local authorities and to some extent by the larger amount of wealth seeking investment. The debt of the city of Bombay, for example, has increased from

1 Table XXVIII., App.

Rs.486 lakhs in 1904-5 to Rs.649 lakhs in the pre-War year (1913-14), Rs.769 lakhs in 1918-19, and to Rs.1854 lakhs in 1924-25. The "net loan" debt (i.e. gross debt less accumulated sinking fund) was budgeted at Rs.1566 lakhs in 1924–25, of which Rs.698 lakhs were on water works. In the United States as well as Great Britain similar instances could be given.1 There is continual necessity for financial supervision to prevent the piling up of Government loans, and in regard to local loans Central control is also essential. In some ways these huge debts have changed the attitude of financiers and public men generally towards the question of public debts. The real principles have not been radically changed, but many lessons have been learned, often at great expense, during the War.

2. THE ORIGIN OF PUBLIC DEBT

National Debt is the debt which a State owes to its own subjects or to the nationals of other countries. Such debts came into being on the decay of the older method of State hoards. The tendency in early times and in primitive conditions where commerce and industry are undeveloped is to hoard. When trade develops Governments provide only what is required for current expenses, and to meet extraordinary emergencies extraordinary means of raising funds are employed as in the late War. In one of the premier native States of India to-day the ruler's private treasury contains coin and bullion worth more than Rs.10 crores, and certainly not less. His jewels were valued privately on his accession, and in the opinion of merchants ("saukars") their value was not less than Rs.200 crores. In a native State in Rajputana there are in the State reserves over Rs.3 crores in coin and bullion, in addition to a private treasury containing Rs.2 crores. In another jewellery worth about Rs.2 crores is on view, and what is not shown to the public is probably much greater. Hume also reminds us that "it appears to have been the common

1 In many cases works have been undertaken which are not urgent. Estimates and plans for capital account are not always prepared in sufficient detail, and a programme five years in advance is sometimes not prepared. Deviations are allowed to take place without justification and often without proper financial control.

A crore is ten millions. Accordingly Rs.10 crores = £6.7 millions and Rs.200 crores = £133.3 millions.

practice of antiquity to make provision during peace for the necessities of war, and to hoard up treasures beforehand as the instruments either of conquest or defence; without trusting to extraordinary impositions, much less to borrowing in times of disorder and confusion". He refers to the large hoards of Athens, the Ptolemies and other successors of Alexander, and says: "We learn from Plato that the frugal Lacedemonians had also collected a great treasure; and Arrian and Plutarch take no notice of the riches which Alexander got possession of on the conquest of Susa and Ecbatana, and which were preserved, some of them, from the time of Cyrus. If I remember aright, the Scripture also mentions the treasure of Hezekiah and the Jewish prince; as profane history does that of Philip and Perseus, kings of Macedon. The ancient republics of Gaul had commonly large sums in reserve. Every one knows the treasure seized in Rome by Julius Caesar during the civil wars, and we find afterwards that the wiser emperors, Augustus, Tiberius, Vespasian, Severus, etc., always discovered the prudent foresight of saving great sums against any public exigency."1 Before the War Germany kept a hoard at Spandau of £6,000,000 in bullion, and a larger sum was invested in high-class securities. Even a hoard of £25,000,000 is of little use in these days when Great Britain alone was spending towards the end of the War daily £6 or £7 million sterling.

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The system of public borrowing, according to Blackstone, originated in the State of Florence about 1344. Government then owed about £600,000, and, being unable to pay it, formed the principal into an aggregate sum, called metaphorically a mount or bank, the shares whereof were transferable like our stocks, with interest at 5 per cent, the prices varying according to the exigencies of the State." Holland, however, is usually credited with being the first to contract a debt system on systematic lines. Great Britain followed her example. The Bank of England was founded by a Scotsman, William Paterson, in 1694, and its advances to the State are the oldest part of the public debt, a debt that was not formally recognised until 1701.2 Adam Smith reminds us that "the same commercial state of society

1 David Hume, Essays, "Essay on Public Credit" (London: Ward, Lock & Co.).

2 Thorold Rogers, The First Nine Years of the Bank of England. The loan was £1,200,000.

produces in the subjects both an ability and an inclination to lend ". To-day countries keep funds in bullion mainly, if not entirely, for currency purposes. They depend for supplies on taxation and on modern credit facilities. Adams is not quite correct when he believes that systematic borrowing "seems to be capable of wide acceptance only among people whose labour is of a high grade of efficiency and who have developed for themselves representative government ".2 Were this a correct statement of fact it should be applicable to Asiatic countries, but it is, for example in the case of India, not true. India's borrowings have, for at least over a century, been sound and systematic without these conditions.

3. THE PECULIARITIES OF PUBLIC DEBT

The practice of borrowing to-day has many points of similarity with that in vogue in the time of William and Mary in England. The causes are the same: (1) temporary requirements; (2) sudden emergencies such as war; and (3) especially in new countries the construction of public works which could not be undertaken if the whole burden were to fall on the year's revenue. There are one or two peculiarities of State borrowing that require emphasis. The rules that govern borrowing on the part of an individual are generally similar to those of the State. The State, however, can compel the taxpayer to supply it with funds, and these funds are anticipatory in the sense that they have to be subsequently met out of future revenue. Secondly, a State cannot retrench quite so effectively as the individual, although the Geddes Committee in Great Britain and the Inchcape Committee in India show to what extent retrenchments can be undertaken. A State does and can retrench when confronted with deficits, and when the proceeds of new taxes are not readily available. This should be considered to be as practicable as borrowing. It is true there are commitments like the Army and the Civil Service which preclude the cutting down of expenses in the manner which a commercial firm can follow. Nevertheless, when retrenchment is seriously considered, it is surprising what can be done in this respect. Thirdly,

1 Wealth of Nations, Book V. chapter iii.

Adams, Public Debts, 1888.

• Vide Book II. Chapter III. p. 29.