transferred to the creditor country in payment of interest or principal, and the payment of this reduces the net income of the paying or debtor country by the transference of part of its income abroad. Had the capital not been used by the country for development of railways, irrigation works, etc., its income would. have been less than it would have otherwise been. To repay an external debt or to pay the interest the debtor country raises revenue by taxation, borrowing, or inflation. Taxation may be difficult owing to lack of organisation of the financial system. Inflation will lead to further inflation, and will fall so heavily on the poorer classes of the debtor country as to affect the standard of comfort. There are also exchange difficulties which such payments not infrequently produce. The debtor country exports goods or exports gold to meet such claims. In short, there are larger exports or sales abroad and smaller imports as the result of the payments by the debtor country. Productive or reproductive loans are debts which are fully covered by assets of equal or greater value. The source of the interest is the income from the ownership of these as railways or irrigation works. Deadweight or unproductive debts are those which have no existing

War is the chief cause of unproductive debt, and to a much smaller extent Budget deficits. Funded debt is a debt which is repayable (i.e. compulsorily repayable) at a distant date, and for the payment of interest on which regular provision is made. Unfunded or floating debt 1 is the opposite of funded debt, and is debt repayable within usually 3, but also 6 or 12 months, such as Treasury Bills and the Ways and Means advances from the Bank of England to the British Government in anticipation of revenue payable at a later period. The dividing line between funded and floating debt may in ordinary financial parlance be said to be the period of a year. In English official publications unfunded or floating debt is used in a restricted sense. Funded debt in these accounts means debt the principal of which will never be repaid, and unfunded debt is debt the principal of which must be repaid not later than some fixed date in the future. Thus consols belong to the former class, and to the latter all other British debt and the debt of local authorities. This distinction is out of date and exasperating. The British Funding Loan of

1 Floating debts are unfunded, but all unfunded debts are not floating debts.

1919, repayable in 1960 at the earliest, and in 1990 at the latest, would be included under unfunded debt. The disadvantage of floating or unfunded debt is that when the bills fall due it might be difficult to pay them off or to renew them, especially in a financial crisis. This form of debt might entail borrowing on less favourable terms, and may lead to further inflation. Taxfree loans are to be avoided, since these hamper Finance Ministers and complicate the tax system. In Great Britain there is only one tax-free loan.1

Governments often borrow money upon annuities. For a certain sum advanced on loan, Governments undertake to pay a specified sum for a term of years. It may be paid over a certain period, 10, 20, or 100 years, or for a certain period when it is called a contingent annuity. A life annuity is one determined by the duration of one or more lives. A deferred or reversional annuity is one that does not commence until after a certain period of years or after the decease of a person. An annuity in possession is one that has already commenced. Tontines, named after the inventor Tonti, an Italian banker of the seventeenth century, are annuities shared by subscribers to a loan with the benefit of survivorship, the annuities being increased as the subscribers die, until at last the whole goes to the last survivor or to the last two or three according to the terms of the tontine. A Mr. Martin who was nominated a subscriber to a tontine of 1777 and died in his 92nd year, in return for £100 originally contracted, received as dividend for the preceding six months in January 1870, £3875:0:4, and in July 1870, £3891: 10:2. The amount originally borrowed by the British Government was £228,000 at 7 per cent. The principal of each subscriber (£100) lapsed at death, while the entire interest was divided among the survivors. Consols owe their origin to the passing of an Act of Parliament in 1751-52, when five different loans and certain annuities were consolidated into one stock of 3 per cent annuities. The interest was payable out of the sinking fund from June 1752. Exchequer bonds, Treasury bills, and war savings certificates are dealt with in the chapters on the "History of Public Debts ".

The favourite expression of nineteenth-century writers on British finance, the funding system, means the system of creating funded debt, i.e. debt raised for permanent purposes, repayable

1 See Chapter XXXV. p. 502.

at a distant date or not repayable at any definite date. A sinking fund is the fund formed by a regular annual provision over and above the interest charges, for the purpose of forming a fund which would repay the debt.1 The sinking fund was, as explained in Chapter XXXV., discredited in eighteenth-century British finance, owing to illusory schemes put forward by many writers on finance. It is necessary for the creation of a real sinking fund to invest from taxation a given annual sum, and to accumulate all interest on such sums for the same purpose.

6. THE FLOTATION OF PUBLIC DEBT

When loans are floated they should be so arranged as to cater for the wants of various classes of investors. The amount for each class should be large enough to make the security readily negotiable and marketable. The stock should be issued as near to par as possible, with interest at the current rate rather than at a lower rate of interest with the stock considerably below par. There may be occasions, however, when it may be advantageous to the State to keep the immediate charge of the loan as low as possible. Investors accepted a low rate of interest before the War when they saw their stock clearly appreciating in value. In view of the increase in the capital of the debt by issuing the stock below par and a low rate of interest, it is desirable to issue the stock at the current rate of interest with the stock at par or at as near par as practicable. In English financial history of the eighteenth century, low interest and high nominal capital predominated, because (1) people believed in the efficacy of the sinking fund, and (2) the State was not supposed to borrow beyond per cent in view of the restrictions on usury. There are various ways of keeping in close touch with the money market. A Finance Minister may first of all sound the State bank and other bankers. He may make an offer through them or a group of capitalists. Rates of commission to brokers, insurance agents, and others are frequently paid at a higher rate on the opening of the loan, and fall to a lower rate as the date of closing of the loan draws near. Sometimes in the last week in which the loan is opened little or no commission is paid. Tenders are sometimes called for, as was,

5

1 An example of the use of the sinking fund will be seen in Table XXX., App., on the British debt to America.

for example, customary in regard to the sale of Council drafts on behalf of the Secretary of State for India. At the risk of wearying the reader with many repetitions, it is again advisable to emphasise the importance of promptly liquidating debt. Nothing enhances a country's credit as this does at all times.

CHAPTER XXXIV

THE BURDEN OF PUBLIC DEBTS

In the previous chapter a distinction has been made between dead-weight public debt and productive public debt. Internal loans for the purpose of creating public assets, the yield of which is sufficient to cover loan charges, is no burden on the community. At the same time a caveat was necessary when, in dealing with capital expenditure, we emphasised the importance of realising the advantages of straightforward taxation, so that in the long run there is a positive gain to the community from its having been obliged to save to pay the taxes required. The principles underlying the use of loans for railways, irrigation works, and other enterprises repayable within a period of years have been set out in Chapter XI. Governments in peace time frequently contract loans abroad when they are unable to develop the natural resources by internal loans. There are numerous instances of this, e.g. Canada, India, Australia, and Argentina. In the Great War some countries financed their imports by external loans, and others since the War, notably Austria, have attempted to reestablish their currency systems by contracting external loans. It is the aim of the present chapter to examine these questions a little further, with special reference to the burden of debt.

1. METHODS OF ESTIMATING THE BURDEN OF PUBLIC DEBTS

There are various ways of estimating the comparative burden of public debts. One method, and perhaps the most common, is to compare the nominal capital of the debt in various countries. Thus, in the following table, the public debts of Great Britain,