The Relations Of Expenditure And
Receipts. Introductory. State Hoarding.

THE preceding books have been devoted to the con-
sideration of the various questions connected with public
expenditure and revenue. We have seen that there ought,
under usual conditions, to be a balance between these two
sides of financial activity. Outlay should not exceed income,
or and this is more often the way in which the case is pre-
sented tax revenue ought to be kept up to the amount
required to defray expenses. The financier, so far differing
from the business manager, should not aim at a surplus, but
neither should he allow a deficit. Either is an indication
of some defect in calculation or administrative system.

This general principle must, however, admit of modifica-
tions. Temporary deficits and surpluses cannot be avoided.
In the management of a large financial organization com-
plete equalization of receipts and expenditure could hardly
ever be obtained, or, if it were, would be due to chance. The
many different forms of expenditure and the varying pro-
ductiveness, both of the quasi-private and the tax revenue,
forbid minute agreement. All that can be claimed is a sub-
stantial approach to a balance in the two sides of the
account. The safest rule for practice is that which lays
down the expediency of estimating for a moderate surplus,
by which the possibility of a deficit will be reduced to a
minimum.

The foregoing consideration would apply to any system



1336 PUBLIC FINANCE. [BOOK V.

of Finance in its ordinary or usual state, but the difficulty
of adjustment is much increased by the operation of what
has been described as extraordinary outlay 1 . Occasions,
as we saw, will from time to time arise in which it becomes
necessary to spend large sums for particular objects. War
and the execution of public works are the great causes of
this sudden increase of expenditure, and the former of these
is very hard to foresee and provide against. In any case
it may fairly be said that exceptional charges of the kind
should not be altogether met out of current income. As
I the advantages realized are of indefinite duration, it seems
fair that the charge should, in popular language, be spread
over a number of years. Without at present criticising
this doctrine, we may remark that the political conditions
place limits elastic ones it is true on the revenue-collect-
ing powers of the administration, and that in practice there
are only two expedients for meeting abnormal outlay, viz.
either the modern method of incurring debt, or the older
one of storing up treasure or other disposable wealth for
the time of need. The absence of equilibrium in public
Finance must show itself in the creation of a surplus
store of wealth, or in the formation of liabilities. In the
present chapter we shall therefore examine the policy
of forming public treasures or other reserves, in order
to provide for the necessities of the State in times of
emergency.

2. The system of public treasures can lay claim to a
high antiquity. Thus the Athenians in the period imme-
diately preceding the Peloponnesian war accumulated a
sum of 9,700 talents, and at its outbreak had actually 6,000
talents in store. Even earlier, the Persian sovereigns had
collected the tribute of their provinces in the shape of con-
tributions of the precious metals, large stocks of which fell
into the hands of Alexander 2 . The same policy of hoard-

1 Cp. Bk. i. ch. 8. i sq.

2 Thucydides, Bk. ii. ch. 13; Grote, Hist. Greece, xi. 498-500; Roscher,
124. n. i.



CHAP. I.] STATE HOARDING. 537

ing was followed by the Romans. The stores of the sove-
reigns conquered by them were accumulated, and the special
tax on the emancipation of slaves was used in the same
way. The possession of the treasury became a leading
object of the rival parties in the civil wars that overthrew
the Republic \

Like facts are noticeable in the mediaeval period. One of
the first objects of the successor to the Crown on the death
of a king was to gain possession of the treasure. Both
in England and France there were several instances of this
eagerness 2 . The treasure and the kingdom were regarded
as a joint possession, each being, in accordance with the
conceptions of the time, looked on as equally a form of
property. The practice lasted in England till the time of
Henry VIII, who speedily dissipated the savings of his
prudent father. Henri IV, who in this was guided by
Sully, was the last French monarch who maintained a
treasure 3 .

By the time of Adam Smith the practice had decayed :
he notes that the canton of Bern was the only Republic,
as Prussia was the only monarchy, that continued to keep a
reserve 4 . The latter country has been remarkable in this
respect. Thus Frederic William I (1713-1740), as Carlyle
tells us, * Yearly made his own revenues, and his people's
along with them, and as the source of them larger : and in
all states of his revenue he had contrived to make his ex-
penditure less than it ; and yearly saved masses of coin and
" deposited them in barrels in the cellars of his Schloss 6 ." '
His successor, Frederic the Great (1740-1786), continued
this system, and it affords a striking instance of the persist-
ence of national policy when we find that the present
German Empire follows what is virtually the same
method.

3. The reasons that induced so many States to accumu-

1 Roscher, op. cit. ; Merivale, Romans under the Empire, ii. 169.

8 Sinclair, Hist, of Revenue, i. 76. 8 Wealth of Nations, 386.

* Ibid. s Frederic, i. 290.



538 PUBLIC FINANCE. [BOOK V.

late treasure are to be found in the conditions of society
existing at the time. A very rude community will have no
need of a store of money ; weapons and provisions would
be more useful in its case. The system of money dealings
must have come into being before hoarding can be regarded
as the duty of a wise sovereign. Once that point has been
reached, the great convenience of having a stock of a univer-
sally desired article on hand is too plain to be overlooked.
The efficient maintenance of an army in the field depends
in a great degree on the supply of what is so often called
the ' sinews of war.' Cases are not unknown where expedi-
tions failed altogether from want of this indispensable
auxiliary. The superstitious reverence for the precious
metals and the force of habit may partly account for the
great treasures of ancient States ; but they owe their con-
tinuance far more to their felt necessity. Where credit card debt
was undeveloped, and taxes were occasional and uncertain
expedients, a State that had no treasure was in a dangerous
situation, unprepared either for attack or defence. The
position of the sovereign in earlier times as a large pro-
perty-holder was contributory to the same result. Lands,
forests, mines, and various lucrative claims were in the pos-
session of the ruler. The treasure came to be looked
on as one part of this extensive class, serving a particular
purpose and completing the public economy.

As the system of state hoarding was produced by the
economic conditions of the periods in which it was em-
ployed, so the change to the modern economic organization
necessarily led to its abandonment. The increased pro-
ductiveness of taxes, and the facility with which credit card
could be used, relieved governments from the duty of
keeping a stock of bullion for emergencies. The State
ceased to be its own banker and came to rely on the
instrument supplied by the growth of credit card debt. Not only
were the ultimate advantages greater, but there was an
immediate benefit in the saving of the amount required to
replenish the store when it had from any cause run down.



CHAP. I.] STATE HOARDING. 539

Borrowing at times of need was more pleasant than a long
course of previous saving. The change was, as we have
seen, as gradual as the alteration in the ruling conditions
that produced it. The keeping of stores of bullion died
out slowly, and has even left, as in the case of Germany,
survivals to the present day. This last instance deserves
some further notice. The traditional policy of storing up a
reserve for the pressure of war was applied to the German
Empire by means of the resources obtained through the
French indemnity. A sum of 6,000,000 was held in
bullion and a much larger amount was invested in high-
class securities, chiefly German railways and the debts of
foreign countries. The ' fund for invalids ' came to nearly
35,000,000 in 1889. There is, therefore, a reserve of over
30,000,000 held by the Empire in what is practically the
form of a hoard, and apparently ready for use in time
of war.

German economists have defended this proceeding on
the ground that it is imperatively required for military
necessities. The use of the treasure in the past is dwelt on,
and it is further urged that at the outbreak of war the
money market is so strained that a large loan
is costly, if
not unobtainable. The treasure or war chest is but the
complement of the fortresses, equipment, and system of
speedy mobilization that constitute the safeguards of
German unity 1 . On the other hand, the general argument
against state reserves is a forcible one. The retention of
bullion by the State involves the loss of the interest that
could be gained by its productive employment, while it is
quite uncalled for in any country with an efficient system of
banking. What is really required is a sufficient dispos-
able metallic reserve to be drawn on in the time of trial.
The state-treasure policy thus invades the domain of
banking, and is at best inadequate. Three weeks of war
would exhaust the store of 6,000,000 now held at

1 Roscher, 124; Wagner, i. 173-7; Cohn, 169.



540 PUBLIC FINANCE. [BOOK V.

Spandau 1 . It is so hard to measure the precise amount
needed, and error in either direction leads to such loss, that
the policy is too uncertain in its effects to be advisable.
The influence of state hoarding on trade and prices should
also be considered. The withdrawal of a large mass of
money means lowered prices, and is so far a hindrance to
the development of trade, and the ever-present possibility
of its sudden use has a disturbing effect. On the whole,
then, it is beyond question that in any country with
modern credit facilities the formation of a treasure is a
mistaken proceeding. The case is still stronger against the
use of a reserve in the form of securities. They, it is true,
have the advantage of yielding interest, but where a public
debt exists it is better to use this available property for its
redemption. To borrow with one hand, while lending with
the other, is simply introducing an additional complication
into the public accounts, without any corresponding ad-
vantage. The repayment of a portion of the German debt
would be as much an investment as the policy actually
pursued. But the method of investing in securities is not
merely useless : it has direct disadvantages. If home
securities are chosen, the State is drawn into the business
of speculation and stockjobbing, with injurious results to
trade. The interest on such investments may apparently
exceed what would be saved by paying off debt ; but this
higher yield means less security or at least stability, a con-
sideration that leads to another objection to such invest-
ments. The aim to be realized is the possession of a dis-
posable fund for emergencies, but it is just at times of
emergency that stocks are certain to fall in value. A large
sale of securities by a government at the outbreak of war
would force down their price and make the process of
realization a costly one. Moreover, the funds so obtained
would be equally available for taking up a loan. To come
on the market as a needy seller is the worst possible mode
of disposing of any kind of state property.
1 Cohn, 169.



CHAP. I.] STATE HOARDING. 54!

Where foreign securities are held the position is some-
what different. They will not be so much affected by the
commencement of war, as they possess an international
market. Political difficulties are, however, greater. Should
the contemplated war be with the Power whose debt is used
as an investment, the question of retention of interest
would arise. In any case the relation between the investing
and lending States is not a satisfactory one : it brings a
sovereign power into the domestic affairs of another State,
and in case of readjustments respecting the debt may cause
grave difficulties. These considerations fully support the
opinion that, speaking generally, the system of state
treasures or reserves of securities is indefensible at the
present stage of financial development.

Some exceptional cases have been suggested, but even
they can hardly be admitted as modifying the principle
just stated. A State e.g. may have no public debt to
redeem, and then the formation of a reserve may appear
desirable, but there are other alternatives, viz. either (i) the
remission of the less eligible forms of taxation, or (2) the |
increase of the agricultural or industrial domain of the
State, a course which may be adopted on social as well as
economic grounds. Again, the interest on the debt may
be so low that its redemption may not seem commercially
profitable as compared with investment. The objections
to state dealings with capital already noticed * are too
serious to be set aside on this ground. The remission of
taxation, though it seems to be a sacrifice on the part of
the State, may in many cases be the best course. The real
source of state revenue is, need we say once more, the j
national income, and judicious remission of taxation has
a beneficial influence on the growth of this reservoir, on
which the State in the last resort depends for its tax
receipts. The often-used phrase about allowing taxation
' to fructify in the pockets of the taxpayers ' is here exactly
applicable. The financial power of the State rests on the
1 Bk. ii. ch. 4 . i.



542 PUBLIC FINANCE,

economic development of the people, and will be pro-
portional to it. Any special resources in the form of
money that may be required are best procured through
the normal agency of bankers. The case in this respect
is far clearer than in the somewhat parallel one of manu-
facture of weapons and supplies, since the question of
quality, or that of effectiveness of competition, does not
arise.

4. Whatever be the conclusion as to special and ex-
ceptional cases of state reserves, it is at all events plain
that the older policy of hoarding as a general rule of
Finance is obsolete. It is, in fact, on its ruins that the
modern phenomenon of public debts has arisen. From
keeping a reserve to meet all emergencies States have
passed to the opposite course of not paying their working
expenses. The problem of public indebtedness is be-
coming more and more important, and giving rise to serious
questions. The remaining chapters of the present book
will therefore be devoted to an examination of the different
aspects of this vital part of modern Finance.