Public Indebtedness, Its Modern Development
THE development of public indebtedness accom-
panied the decline of the older system of treasures. In its
present form it is essentially a creation of the last two
centuries, and even within the last fifty years it has gained
more ground than in all preceding periods. The causes of
its rise and immense expansion must be sought in the
special circumstances, both political and social, of the time.
There is an appearance of exaggeration in the statement
that public borrowing has only come into existence since
the end of the seventeenth century. In all but the ruder
societies credit has been more or less employed, and we
can hardly believe that the governing body would altogether
neglect its use in times of need. So far, however, as classical
antiquity is concerned, there is hardly any trace of loans
to the State. The explanation of this fact lies in the
characteristics of Greek and Roman society 1 . Instead of
borrowing from the wealthy citizen, the State would adopt
the more drastic, but in the long run less fruitful, method
of levying a special tax on him. The small amount of
floating capital also prevented a ready recourse to loans.
Compulsory loans or the farming-out of taxes were, in
default of a treasure, the favourite methods, to which
may be added the rarer one of pledging some state or
1 Introduction, Pt. II. i.
5/J4 PUBLIC FINANCE. [BOOK V.
regal possessions. Temporary credit transactions with
contractors were the nearest approach to a public debt in
our use of the term l .
2. The Middle Ages show little advance on in some
respects they fall below the economic position of the
Roman Empire. The strong sentiment against usury and
the feeling that it was beneath the dignity of a prince to
borrow from his subjects 2 both tended to check the use of
the royal credit. Where it was exercised the quasi-private
nature of the feudal state system comes out clearly. The
King borrows on his personal credit, or on his domain,
which he even gives in pledge as a security for payment.
These loans were usually obtained from the Church, or from
foreign bankers. Hallam tells us that 'in 1345, the Bardi
at Florence, the greatest company in Italy, became bank-
rupt, Edward III owing them, in principal and interest,
900,000 gold florins. Another the Peruzzi failed at the
same time, being creditors to Edward for 600,000 florins.
The King of Sicily owed 100,000 florins to each of these
bankers V Both in England and France, these borrowings
grew more common as wealth and the cost of government
increased. Francis I obtained various sums through the
city of Paris, which kept a list of the creditors and dis-
tributed the interest 4 . Appeals to Parliament in connexion
with loans occur as early as the reign of Richard II. Forced
loans were tried by Edward IV, and by the Tudors in the
sixteenth century. The pledging of taxes as security is
the last step in the older forms of borrowing.
A more advanced position is found in the loans of the
Italian cities, especially Genoa and Venice, which raised
1 Roscher, 130.
8 Turpe est et multunt regali reverentiae derogat a suis subditis mutuare
pro sumptibus regis vel regni ; Thomas Aquinas (?), De Regimine Principum,
ii. 8. The approval of state treasures by so many early writers was a dis-
approval of the counter-method of loans.
3 Middle Ages, iii. 340. Loans by the French kings can be traced back to
1287. Vuhrer, Histoire de la Dette Publique, i. 2 sq.
* Vuhrer, i. 16-20.
CHAP. II.] PUBLIC INDEBTEDNESS. 545
money throagh the agency of banks established for the
purpose. The bank of St. George in the latter city was
the most important instance of this system. The superior
commercial development of Italy contributed to the increase
of state, as well as private credit, and more especially to
complicated dealings in the farming of state domains
The commercial revolution of the fifteenth and sixteenth
centuries which depressed the Italian towns brought those
of the Low Countries into prominence. The system of
state-borrowing and of lending to foreign countries was I
engaged in by the Dutch, who, in consequence of the low
rate of interest, were anxious to enlarge the field of invest-
ment, and therefore undertook most of the limited inter-
national business of the time, such as the carrying trade
and public loans. Imitation of the Dutch methods of
commerce and Finance so powerful an influence on the
English policy of the seventeenth and eighteenth centuries
was a principal cause of the creation and advance of the
English funded debt, which has in its turn been an example
to other States.
/" 3. It is thus plain that neither ancient nor mediaeval
Finance possessed the modern public debt system. The
latter contained the germs from which our present ex-
pedients have been developed, but with so many differences
that it is hardly right to place two such distinct groups
under a common heading. They are widely separate
species of a comprehensive genus. The increase of public f
debt in modern times, is the result of economical and
political conditions of the highest interest and importance.
From one point of view, the vast indebtedness of States
and smaller governing bodies is due to the transition to
4 credit economy.' Money, as a medium of exchange, has
been largely superseded by the use of credit instruments.
In like manner, great masses of property, or more correctly
the evidences of its ownership, have become freely
transferable. The shares of companies, or their acknow-
546 PUBLIC FINANCE. [BOOK V.
ledgments of debt are very readily dealt in. Railways,
banks, and other industrial undertakings by this means
increase their business and the value of their property. It
would be incomprehensible if the greatest of co-operative
organizations the State declined to avail itself of a like
expedient. In fact, governments, supreme and subordinate,
strong and weak, have mobilized their credit and thereby
increased their immediate financial power. The mechanism
of the stock exchange has remedied the weakest point in
the earlier state-borrowing the absence of any way of
quickly realizing the capital lent.
The connexion of public debts with the money market
is, perhaps, most clearly seen in the modern methods of
contracting loans. Whatever be the particular form adopted,
the substance of the operation is the same, and amounts to
an investment of capital on the part of the lenders, carried
out in nearly every case by the special class of dealers
in stocks. To the investor, there is no difference between
taking up the stocks or bonds of a railway and those of a
government. In the cases in which the latter are contracted
on account of a particular undertaking, the resemblance is
even closer. A loan to an Australian colony for railway
construction is indistinguishable from one to a company
for fresh capital outlay.
Though the modern money market affords the machinery
for continued extensions of state-borrowing, it does not
give the motive power. The amount of loan transactions
must, it may be said, depend on the conditions of supply
and demand, but then this comprehensive formula stands
in need of further analysis. The reasons for the expansion
of demand are discoverable in the increase of expenditure
in modern societies. We have remarked how both military
and civil expenditure are growing, and also that some
parts of this outlay are at once uncertain and productive of
durable advantage. War and public works require large
immediate expense, and their full benefits are not reaped
at the moment. To procure sufficient funds by taxation
CHAP. II.] PUBLIC INDEBTEDNESS. 547
is both disagreeable and, on the surface at all events,
unjust. The financier very naturally takes what he knows
to be the most convenient, and thinks to be the fairest course
in appealing to capitalists for assistance. It is true that
all loans have not this plausible ground : they are often
due to weak or careless Finance, and are simply a mode of
staving off the evil day. State-credit, in this too, is, like all
modern credit, made up of both good and bad elements,
and in its case the latter are often the more powerful.
As the increasing cost of the State gives us the motive
for its greater borrowing, so do the development of the <
capitalist class and its greater influence on government
explain the willingness to bring forward the needed supply.
The earlier loans were either obtained by force, on the pledge
of specific property or taxes, or finally on the pledged honour
of the personal ruler. In the constitutional epoch, advances
are made to an administration over which the well-to-do
have influence. The close relation of the English debt
with the Revolution of 1688 and the maintenance of the
system introduced by it is well known *, and even earlier
the Italian cities and the Dutch provinces were under
mercantile influence. It is unquestionable that the de-
velopment of representative government and its control of
the administration have helped to secure a larger supply of
loans than would otherwise be forthcoming. At the same
time it is easy to overrate the significance of this fact.
The mere existence of constitutional rule does not suffice
to create borrowing, nor its absence to stop it, as the French
debt of the i8th century and that of Russia at present will
suffice to prove. A powerful class in the possession of
disposable wealth will be in a position to act on the most
irresponsible of rulers, and a prudent absolutism will
recognise the wisdom of sustaining public credit. Never-
theless, the advance of constitutional government and the j
increase of indebtedness have been coincident, a circum-
stance due to the fact that both are products of the present
1 Macaulay, Hist, of England, i. 141.
N n 2
548 PUBLIC FINANCE. [BOOK V.
stage of development, not solely because * the monied
interest has captured the machinery of government V The
greater attention to justice that, on the whole, characterizes
popular government naturally operates on public, as on
other economical relations.
Nor is there any reason to doubt that the change is
advantageous. A strict observance of public faith, besides
its immediate services both to lenders and borrowers, has
a further influence in making the general financial ad-
ministration more regular. It may be that in some cases
the policy of contracting loans has been carried to excess,
or the funds so obtained injudiciously used, but the repu-
diation of obligations would be an aggravation of the evil.
When we remember the vital importance to a State of
being able to secure assistance through credit at times of
pressure, it is evident that anything tending to strengthen
the guarantees for punctual payment is and must be for
the social good.
4. The powerful effect of the influences that favour
indebtedness is shown by the figures of every stock ex-
change, and by familiar facts of statistics. Out of the, in
round numbers, 1800 stocks quoted on the London Market,
340 may be fairly described as public, of which the larger
part are British. Berlin has something over half that
number, of which about one-third are German 2 . Paris
has a still larger number. We may say that any State
that pretends to be civilized regards the creation of a debt
as one of the essential marks of its having reached that
position. So does every colony and large city. The
1 Adams, Public Debts, 9. So far as the influence of the monied class is
directed to securing public credit it is decidedly beneficial.
2 Cohn, 535, 536. ' At the present time over one hundred States that
possess practical sovereignty for debt purposes offer their bonds to the choice
of an English investor, and if to this number were added the obligations of
^a.s7-sovereignties, the London market would show over 150 sorts of public
securities. There are here found the bonds of China, Japan, Persia, Siam,
Egypt, Liberia, Orange Free State, Zanzibar, besides many other peoples of the
Old World. The South American States are nearly all represented.' Adams, 5.
CHAP. II.] PUBLIC INDEBTEDNESS. 549
latest developments of municipal life are shown in the
issue of bonds by the responsible authorities. Universality
is one of the features of the modern debt system, and it is /
explicable only by reference to the conditions noticed in
the preceding section, together with, in the case of back-
ward States, the influence of imitation.
Public indebtedness is remarkable, not merely for its
universal employment, but also for its great and growing '
amount. According to a careful estimate, the national
debts of European States in 1870 were, in round figures,
.3.000,000,000, in 1885 they had risen to .4,600,000.000,
or an increase of 1,600,000,000 in fifteen years 1 . This
enormous sum does not include the local debts that are,
if we may judge from all available facts, increasing even
more rapidly. The national debts, strictly so called, have
been reduced both in England and the United States, but
the heavier local debts probably leave the total burden
undiminished. In other countries both divisions of debt
have been growing apace in such a manner as to excite
the apprehension of reflecting observers.. The reality
and extent of the danger will demand examination later
on ; the existence of the circumstances that have caused
alarm is all that concerns us here, but even at this
stage of the inquiry, it is well to notice the fundamental
difference between the two classes of debt, the one con-
tracted for non^economic ends, the other for purposes of
reproductive employment. War and public works have
been mentioned as the two chief causes of abnormal outlay,
and loans for these objects belong respectively to the dif-
ferent classes. To take obvious instances, the great
addition to the French debt from the war of 187071
cannot be regarded in the same light as the indebtedness
of Prussia and other German States for railway purchase
and construction. The former involves increased taxation ;
the latter, if prudently applied, does not. The same con-
trast appears in the case of the English National, as opposed
1 Neymarck, Les Defies Publiques, 86.
550 PUBLIC FINANCE.
to the local debt, though this instance suggests the necessity
of a qualification. Outlay on public works is not of itself, and
apart from the revenue to be thence derived, different from
the cost of war or other unproductive expenditure. No
readier or more dangerous mode of increasing debt can
be found than the execution of works that are not
economically productive. Vague assertions of indirect
benefits should not be allowed to conceal the fact that
' improvements ' of this kind should be paid out of income,
and cannot be regarded as investments in the proper sense
of the term.
5. To summarize the results of the present chapter:
State borrowing appears to be, in its leading features, a
creation of the constitutional period, built upon the decay
of the older method of state hoarding and having its
germs in the Middle Ages. It is the result of the credit
system, combined with the increase of public expenses and
the greater security for observance of faith to the state
creditors. Both on account of its universal .employment
and its rapid growth, it is one of the most influential factors
in modern Finance, and one whose tendencies and actual
effects are deserving of close attention.
To form a just appreciation of the system a study of its
history in the more important countries is desirable ; and
we shall therefore devote some space to this side of the
question before passing to the more theoretical discussion.