Chalmers that the system of borrowing presses too heavily
on the labouring class can be easily shown to be fallacious.
In the first place, it is not true that all loans come from
capital ; they may be obtained from savings made for the
purpose 1 . The prospect of a new and secure investment
is a stimulus to abstinence, and so far the labourers will not
suffer. But even granting this erroneous assumption, it
by no means follows that loans derived altogether from
capital are taken from wages. ' The loan,' says Mill, * cannot
have been taken from that portion of the capital of the
country which consists of tools, machinery, and buildings.
It must have been wholly drawn from the portion employed
in paying labourers 2 .' He, however, offers no proof, or
attempt at proof, of this proposition, which is plainly untrue.
The amount taken in loans comes at first from floating
capital that would otherwise have been applied to fixed
capital, raw material, or the payment of workers in propor-
tions determined by the actual circumstances. Again, the
effect of the employment of the loan is altogether disre-
garded 3 . So far as it is expended on hiring services it
actually tends to raise wages, so that, reasoning from the
wages-fund position, what is taken by the abstraction of
capital is restored by the outlay of the borrower on labour.
The utter unsoundness of the doctrine that all loans come
from wages will appear from the absurd result to which it
leads, viz. that where wages are at the minimum it would
be impossible to borrow without starving some of the
workers.

The facts that public loans are in many cases interna-
tional, and that in any event capital is capable of migrating
from country to country are allowed by Mill to have weak-
ened the theory that we are considering. If loans really
come from the international market, any pressure must fall

1 This is probably true of part of the French loans of 1871-2.

2 Principles, Bk. i. ch. 5. 8.

3 Mill briefly refers to this point in a footnote to his later editions, Bk. i.
ch. 5. 8 (6th ed.).



CHAP. V.] THE THEORY OF PUBLIC DEBTS. 585

on the labourers of all the countries which contribute ; e.g.
South American borrowings would have injured English
labourers. He is therefore led to suggest that so long as
public borrowing does not raise the rate of interest, the
labourers are not damnified. This qualification is again
unsound ; for every loan must, pro tanto, tend to raise the
rate of interest, or to keep it from falling. There is no line
or wall of separation between capital for home and that for
foreign investment 1 . The growth of international relations
has rendered antiquated any argument from the hypo-
thetical case of an isolated country 2 .

Such considerations as the foregoing make it difficult to
understand the acceptance of the doctrine by Mill. The
reasons are to be found, partly in a special case which
seemed to give it support, and partly in a portion of truth
that it did, in fact, contain. The great instance of state
borrowing known to Chalmers and Mill was that by Eng-
land in the period 1793-1815, and at that time the labourers
were suffering while the capitalists seemed to prosper. The
real explanation was of course different 3 , but the conco-
mitance of the two series of facts gave a plausibility to the
theory that it would not otherwise have had. The element of
truth contained in it was that public borrowing is a demand
for loanable capital which helps to raise its value, i.e. the
rate of interest. Higher interest leaves less for the other
shares in distribution, and as the employer and the land-
lord were able to hold their own, the pressure fell on the
labourers; but this could not be ascribed solely to state
borrowing. Taxation that really fell on capital would have

1 Mill, Principles, Bk. v. ch. 7. i. His error has been exposed both by
Cairnes, On the Best Method of Raising the Supplies for War Expenditure,
10, u, and by Cliffe Leslie, Notes (privately printed), 17, 18.

2 For a clear statement of the modern mobility of loan capital see Cunning-
ham, British Association Report (1891), 727.

3 The labourers' sufferings were really due to the depreciated paper money,
the restrictive laws against labour, the old Poor Law, the check to imports by
war, and the industrial revolution. The capitalists gained by the greater use
of machinery and the command that England at times obtained over the supply
of foreign markets.



586 PUBLIC FINANCE. [BOOK V.

the same effect. We cannot therefore adopt, as a sweeping
and absolute rule, the proposition that the State should
never at any time obtain funds by borrowing.

8. The opposite theory, which puts forward the loan as
a normal process of meeting expenditure of the extra-
ordinary class, is open to quite as weighty objections. The
expenses of the State do no doubt vary from year to year,
and any sudden increase which has to be met by taxation
may prove inconvenient, but on the other hand we have to
remember that so-called ' extraordinary ' expenditure is
itself recurring *. To treat all fresh claims as extraordinary,
and to meet them from loans is an easy but a dangerous
course. There is also the further consideration, that in the
long run the revenue from economic receipts and taxation
must, if the State is to remain solvent, balance the outlay.
So far as debt is not redeemed it is a permanent charge on
the revenue, while its redemption must come from that
source. If by taking a somewhat lengthened period we
find that the ordinary state revenue meets expenditure,
there is no reason why special emergencies excepted it
should not do so in each financial year. Sudden changes
in taxation may be more or less inconvenient, but the
arrangement should be such as to secure some elastic
sources of revenue. The English income-tax is capable of
discharging this function, and the duties on commodities
would also allow, in case of need, of large increases. The
theory that so markedly separates ordinary from extra-
ordinary expenditure, and assigns different funds for their
immediate payment, errs by unduly emphasizing a non-
essential distinction.

That borrowing is justifiable to meet ' reproductive ' out-
lay is a further part of the theory, which is at once true or
false according to the meaning given to the term. Actual
purchase of productive property or creation of revenue-
yielding works may fairly be defrayed by loans. The

1 Cf. Bk. i. ch. 8. i.



CHAP. V.] THE THEORY OF PUBLIC DEBTS. 587

property or particular work may be regarded as the
primary object of the debt, and is at hand to pay the
interest on it. What we have called ' economic ' outlay
has a claim to be met by borrowing that does not hold in
respect to other forms. Taxation imposed for the purpose
of adding to the domain has the disadvantage of taking
the citizens' wealth for the purpose of accumulation, and
should be employed sparingly if at all. To meet the cost
of the purchase of the Prussian railways, or even the
English telegraphs, by immediate taxation would not, were
it practicable, be correct.

This concession to the policy of borrowing should not be
stretched to include the cost of works or other state action
that yields no revenue. Non-economic expenditure is
primarily to be met out of the annual revenue, and unless
it can be so dealt with ought not to be incurred. National
culture, education, the promotion of social progress are all
most desirable ; but their attainment is not so pressing as
to need the use of borrowing by the public powers. It is,
indeed, true that much of state expenditure may be re-
garded as indirectly productive, and as adding to the
national income in the future. A loan for the purpose of
extending education or for improving the housing of the
workers, though it does not directly provide the interest
needed, may yet so increase the income of the community,
as to make the tax receipts greater, without any increase
either in rates or in rigour of collection. Regarded in the
abstract such a proceeding seems defensible : the real
objections to it arise from the difficulty of application. The
results of expenditure of the kind are hard to trace or
measure, and any statement respecting them must rest in a
great degree on conjecture. The cost of the loan is definite
and precise, and it constitutes a real burden on the re-
sources of the society. Prudence seems accordingly to
suggest that borrowing should hardly ever be adopted
except for strictly economic expenditure, and then only
where the extension of the state domain is clearly advisable.



588 PUBLIC FINANCE. [BOOK V.

Political and social conditions come in to limit the purely
financial action of the public powers 1 . With an individual-
istic organization of society the extension of public
industries has naturally to be kept within narrow bounds,
and will not comprise all possibly gainful employments.

One great objection to the use of borrowing, unless
there is an equivalent revenue obtained by its application,
is the necessary curtailment of future power of spending.
Large immediate outlay may, as we shall see, be requisite
in certain cases, but for most of the usual forms of
state activity the funds obtainable by taxation are quite
sufficient, and can be continually renewed. Each year
meets its own expense without causing any unevenness in
the employment of the fund to be devoted to the purpose.
Heavy borrowing, on the other hand, if persisted in for
several years, so cripples the ordinary revenue as to compel
retrenchment or further borrowing on disadvantageous
terms, until the limit of solvency is touched. This ap-
propriation of resources that will surely be needed in the
future is a grave weakness in the borrowing policy.

9. We have now to examine the real effects of the
system of borrowing, and for this purpose it is requisite to
clearly distinguish between the mere mechanism of a loan,
and the actual economic phenomena that are its outcome.
Reduced to its simplest form, a loan is a transfer of so
much of the wealth of private holders to the State or other
public body. By its aid the borrower obtains the disposal
of the wealth in question, and as a consequence affects, or
can affect, the production, distribution, and consumption of
wealth. Thus we cannot doubt that the enormous English
loans during the Revolutionary and Napoleonic wars had
a powerful influence on the economic condition of the
country, and we must believe that other cases of borrowing
so far resembled this particular one. The application of
public loans is, therefore, to be taken into account when

1 See Bk. i. ch. i. 2 for this peculiarity of public economy, and cp. Bk. ii,
ch. 3. 21.



CHAP. V.] THE THEORY OF PUBLIC DEBTS. 589

seeking to estimate their effects. If contracted for a purely
industrial purpose say railroad construction it is quite
conceivable that their influence on the state economy may
be almost imperceptible. It may even happen that the actual
application will be the very one that private capitalists
would have selected for their investment, in which case the
public credit is only interposed as an intermediary between
the real investors and the industry in which the wealth is
placed. There are, of course, the additional complications
of public management, and the special rate of public
borrowing, but in essence the State is an unnecessary
additional wheel in the mechanism l . The expediency of
borrowing for reproductive purposes accordingly depends
on the policy to be pursued in reference to public industries.
Where, as in Australasia, there is a decided tendency to
keep certain classes of works under the public authorities,
the policy of borrowing is by that fact justified 2 .

Turning to the opposite case of loans applied unpro-
ductively, the first effect is the diminution of capital and
the resulting loss of wealth. The typical example is that
of a loan for carrying on war. Its use is turned from the
support of productive industry to the purchase of com-
modities and services to be employed unproductively. It
is, however, important to note that this distinction is not
the consequence of borrowing, but of the circumstances
that have led to its destination : it results from the extra
expense, not from the particular mode of meeting it.

But granting that the primary cause of the economic
disturbance that accompanies extensive public borrowing
is to be found in the forces that have produced the increased
state expenditure, it does not follow that the system of
meeting that outlay by loans, instead of by taxation, has not
a serious influence on the economic conditions of the society,

1 The profitableness of such a method is, generally speaking, more than
doubtful, but the Prussian railways may again be cited as an exceptional case.

3 The present depression in colonial securities is a good illustration of the
danger that attends such a system, and of the need for caution in its use.



590 PUBLIC FINANCE. [BOOK V.

especially as there are, beyond dispute, some pointed con-
trasts in the action of loans and taxes respectively. The first
of these has been already emphasized in Chalmers' theory.
A loan, it is said, comes from the nation's capital ; taxes
from its annual income ; the former reduces the fund that
assists production ; the latter curtail immediate enjoy-
ments. By borrowing we are sacrificing the permanent
interests of the country for the sake of immediate relief.
That there is some truth in this position is undeniable, but
it is very easy to exaggerate its importance. The sharp
line thus drawn between revenue and capital does not, in
fact, exist, as there is an evident reaction of each on the
other. Revenue is, indeed, the spring from which capital
is fed, or rather at any given time ' revenue ' and ' capital '
are but names for different applications of the collective
wealth of the community 1 . Large public borrowing stimu-
lates saving, and thereby checks expenditure on enjoy-
ments : oppressive taxation reduces the fund from which
new savings are made, and so far hinders the accumulation
of capital. A loan for unproductive purposes is not always
a pure destruction of national capital. Though the debt
charged on the national wealth is increased, there may be
some compensation in the larger available assets.

A second point of contrast is in favour of borrowing. A
loan is voluntary, and supplied by willing givers : taxation
is levied on the willing and unwilling alike, and, if heavy,
is sure to cause discontent. The former has, therefore, the
advantage of putting less immediate pressure on the indi-
vidual citizen, though on the other side there are the future
charges, and the effect on borrowers and labourers through
the increased value of loanable capital.

Thirdly, the equitable distribution of heavy taxation is
not easily attained. Where very high imposts are laid,
some classes and persons are likely to suffer unduly. The
division of the charge over a longer time by the use of

1 Cp. Bk. iii. ch. 2. 5, and for a discussion of the conception of revenue
see Marshall, Principles, Bk. ii. ch. 6.



CHAP. V.] THE THEORY OF PUBLIC DEBTS. 59!

borrowing makes the proper apportionment of the burden
far easier, and more especially allows of sufficient time for
its full consideration. Great and sudden changes in taxa-
tion particularly if they are increases are always evil.
Some time is needed for the definitive incidence of a tax
to become settled ; a truth exaggerated in the doctrine of
Canard, but still having much weight in this special con-
nexion. To avoid disturbance, it might even be said that
taxation should always be maintained at a level sufficient
to meet the average outlay over a long period. Excessive
expenditure in some years would be compensated by the
surpluses of others, and complete equilibrium between in-
come and outgoings would be the final result. The utter
impossibility of forecasting the future course of expenditure
makes this method quite impracticable. The effort to carry
out such a plan would end in the accumulation of debts
that would not be paid off in the prosperous periods. But
though so thorough an adjustment is not to be reached, the
diffusion of the burden of loans, in opposition to the imme-
diate pressure of taxes, is a difference to be taken into
account in considering their respective operations.

The contrast may also be turned the other way. Just
as direct taxation is often advocated on the ground that
it brings the real cost of the State more clearly before
the contributors, so has the policy of paying all expenses
out of taxation been regarded as 'a salutary and wholesome
check ' on the natural disposition to indulge in extravagant
outlay. To make things smooth for the present at the
cost of the future is not the duty of the wise and far-seeing
statesman.

Loans for war expenditure are particularly open to this
objection, and it was in reference to them that Mr. Gladstone
pronbunced his forcible condemnation of the policy of bor-
rowing 1 . There can be no doubt that the immediate

1 ' The expenses of a war are the moral check which it has pleased the
Almighty to impose upon the ambition and the lust of conquest that are in-
herent in so many nations. There is pomp and circumstance, there is glory and



592 PUBLIC FINANCE. [BOOK V.

increase of taxation will to some extent damp the ardour
of a people for war, which, however, is sometimes a doubt-
ful advantage. From the point of view of the administration
the method of borrowing is decidedly preferable ; as, where
taxes have to be imposed, it is compelled to exercise
economy and to keep expenditure within bounds, while by
the use of loans it may even secure favour with the
monied interest, and at the same time become popular
among other classes by profuse outlay.

Lastly, there is, or may be, an opposition between
borrowing and taxation in respect of their ultimate in-
cidence. With proportional taxation increased to meet
abnormal expenditure there is very heavy pressure on the
receivers of industrial, or more generally of temporary,
incomes, which may not be in existence when the burden is
removed. In the succeeding period of low expenditure the
same class of incomes escapes lightly, though the recipients
have benefited by the sacrifices previously incurred. This
failure in just distribution between different times may be
met by the loan system, the interest on debt being paid by
those who would otherwise have escaped altogether, but,
as we saw ] , it can also be avoided by the use of taxes
falling on property, such as e.g. the succession duties, or
direct duties on realized wealth, though this course is sur-
rounded by difficulties of its own.

10. So far the contrast of the borrowing and the tax
systems, as modes of meeting extraordinary expenditure,
does not seem to lead to any very decisive result. Some
broad considerations favour the use of taxation : others
of no slight weight give support to, at least, a moderate

excitement about war, which, notwithstanding the miseries it entails, invests it
with charms in the eyes of the community, and tends to blind men to those evils
to a fearful and dangerous degree. The necessity of meeting from year to year
the expenditure which it entails is a salutary and wholesome check, making
them feel what they are about and making them measure the cost of the benefit
on which they may calculate.' Hansard, March 6th, 1854. Cp. the useful
criticism in Northcote, Financial Policy, 259-264.
1 Bk. iii. ch. 3. ii.



CHAP. V.] THE THEORY OF PUBLIC DEBTS. 593

use of loans. But, in truth, there is not quite free choice.
After expenditure has passed a certain point, borrowing
becomes, if not necessary, at all events highly expedient.
The productiveness of every separate tax has its limits, and
so has that of the tax system taken as a whole. Each
additional charge implies a more than proportional sacri-
fice by the contributors and greater difficulty in getting in
revenue on the part of the State. The existence of a law
of ' diminishing returns ' in public receipts is a valid
ground for the employment of loans, when, all things
considered, they will be less onerous than further taxation.
It appeared that 15 per cent, was probably the largest pro-
portion of the national income that, under ordinary condi-
tions, could be taken for the state services, and though
the limits of productivity are capable of being expanded at
times of trial, we can hardly doubt that an income-tax of
five shillings in the pound would prove too much for even
the United Kingdom.

This principle admits of more extended application. If,
when taxation is exhausted, a loan has to be employed, it
is evident that before that extreme point is reached,
borrowing may advantageously be combined with taxation,
and that the exact extent to which it may be used will
depend on a complicated calculation of the different elements
involved. The cost of taxation, varying as it does accord-
ing to its forms and amount, must be weighed against the
burden, present and future, of the loan. This is no easy
matter, and it can only be approximately, worked out, if,
indeed, it has not to be decided at once by the insight and
instinctive knowledge of the statesman, who will be guided
by the political, as much as by the purely financial, con-
ditions.

The practical solution is not, however, so difficult as
would appear from the preceding paragraph. A good tax
system requires as one of its qualities a considerable amount
of elasticity, and as far as possible the first appeal should
be made to taxation. The English Income-Tax is a

Qq



594 PUBLIC FINANCE. [BOOK V.

valuable instrument for this purpose as its employment
in the Crimean War shows and its place in this respect
is with difficulty filled by other taxes. Still, the customs
and excise when moderately well administered will allow
of increases for a special emergency. Tea, wine, and beer
would bear much heavier duties in England, and sugar
would, if again taxed, be a productive object. Some of the
duties on ' acts ' could also be advanced in case of need,
and would soon yield a larger return l . Thus, even if the
actual expenses are at first met by creating a floating debt,
the new duties will speedily pay off what has been incurred.
But when the limits of ready expansion are reached, a loan
is the suitable mode of obtaining further supplies. Where
there is a pre-existing debt in course of redemption, the
suspension of that process will add to the available funds 2 ,
while if there is no debt, the smaller taxation previously
levied will bear very large additions. This last consider-
ation suggests a disadvantage in the existence of a per-
manent debt, in that it brings future borrowing nearer by
imposing so much additional charge on the annual revenue
and thereby reducing the disposable balance.

The probable duration of extraordinary expenditure is
an important element in determining the mode of provid-
ing for it. A sudden and large demand for a single year
may well be met by borrowing (unless the moveable taxes
and the suspension of debt redemption suffice), as it would
not be desirable to disturb the whole tax system for such
a purpose. Where there is a fair prospect of continuous
outlay on the increased scale, a readjustment of taxation at

1 Professor Adams (Public Debts, 94) objects to the use of the income tax
for the purpose described in the text, but it seems on insufficient grounds.
He hardly makes due allowance for the speedy yield of new taxes. ' The
financier,' he thinks, ' may hope for assistance from his new taxes within eighteen
months of their levy,' ib. 140. The first duties would surely come in much
sooner.

3 In England, e. g, the suspension of the terminable annuities and the new
sinking fund as actually happened in 1885 would provide over 6,000,000
for meeting the fresh expenditure.



CHAP. V.] THE THEORY OF PUBLIC DEBTS. 595

the outset is the prudent course \ Failure in this cardinal
point of sound Finance was the cause of the great accumu-
lation of debt in England at the opening of this century,
and was also noticeable in the treatment of war expenditure
by the United States both in 1812 and 1861, to which
instances the .treatment of the French expenditure on the
Crimean war may be added 2 .

On the whole, then, the rules applicable to the treatment
of abnormal outlay for other than economic purposes may
be stated as follows : (i) Expenditure should, so far as is
possible, be met out of the annual receipts, and therefore
increased outlay should be balanced by heavier taxation.
(2) In the case of non-recurrent expense of large amount, a
loan is preferable to a serious disturbance of the normal
tax system, and may fairly be employed. (3) Where the
abnormal expenditure extends over a series of years, the
various forms of taxation should, speaking generally, be ad-
justed to meet it. (4) This general principle, however,
fails where either (a) it would be impossible to secure an
equitable division of the heavy taxation necessary, or (b)
where the limit of productiveness with regard to the several
taxes would have to be exceeded, or finally (c) where for
political reasons it is inexpedient to press heavily on the
taxpayers. Under any of these conditions resort to loans
as a supplement to the tax revenue even for a somewhat
lengthened period is defensible.

11. The fact that a good deal of the funds that are
obtained by public borrowing are derived from abroad is
of some weight in judging the loan policy. Not that a
foreign loan is in its purely financial bearings so different
from a home one as is sometimes supposed, but that the
possibility of drawing on the capital of other countries
weakens the argument in favour of taxation on the ground

1 For the passage of ' extraordinary ' into ' ordinary' expenditure see Bk. i.
ch. 8. i.

2 For the weak treatment of the English debt see Bk. v. ch. 3. 4 ; for the
American instances, Adams, 112-133 > f r the French one, Bk. v. ch. 4. 2.

Q q 2



596 PUBLIC FINANCE. [BOOK V.

that in any event the expenditure must be met from the
national resources. When taxation fails to respond to new
demands, a foreign loan may supply the necessary sums,
and the competition of alien with native lenders will enable
the State to borrow on better terms, and with less effect on
the rate of interest, and therefore to the advantage of the
labouring class. But from a purely financial point of view
the source of a loan is really immaterial. In any case it is
an immediate relief to the taxpayers, counterbalanced by
greater charge in the future. Whether the wealth to be
consumed in the outlay that is the primary cause of
borrowing be derived from the stores of home or foreign
lenders may have some immediate influence, but when we
bear in mind the close connexion of all the countries of the
world, and the great mass of private borrowing from
foreigners, it is evident that the distinction may easily be
made too much of.

The political and economic effects of the much freer
movement of loan capital in recent times are highly im-
portant and deserving of study, but they do not belong to
Public Finance. The possibility of political complications
in consequence of a default in the payment of foreign
creditors has been previously noticed l .

12. Very important questions arise respecting the
absolute amount of public debts, the pressure that they
impose on the borrowing States or other bodies, and the
best mode of measuring that burden. For this purpose
very different methods may be used. The most obvious
is that which takes the nominal capital of the debt as the
basis of measurement. Thus, in 1870, France and the
United States had approximately the same capital debt 2 ,
and therefore, it might be said, an equal liability. The
defect of this method is evident from the fact that it takes

1 Bk. v. ch. 2. 3.

2 France had 550,000,000 ; the United States, including 'State debts,'
532,000,000, as their respective capital liabilities. Leroy Beaulieu, ii. 597.
The French debt, so far as the central government is concerned, is probably
here placed too high, but it serves as an illustration of the principle.



CHAP. V.] THE THEORY OF PUBLIC DEBTS. 597

no account of the interest on the borrowed capital, which
latter is moreover not payable at the creditors' demand.
' The public debt,' as Lord Grenville put it, ' consists not
in capital but in securities V and the amount of capital is
therefore no guide to the actual weight A second method
might be employed by which the actual, instead of the
nominal capital value, or in other words the market price
of the stock would be used as the test, but this again is
open to the objection that the real value is incessantly
fluctuating, and at any actual time only gives the
value of the small amount sold, not of the total mass of
stock 2 . A third mode takes the interest charge as the
measure, by which a very different result will usually be
reached ; e.g. in the case of France and the United States,
as the former had most of its stock at 3 per cent., while the
latter paid 6 per cent, on much of its obligations, the com-
parison was altogether in favour of France.

All the foregoing methods deal with the absolute amount
of the several public debts, and of themselves furnish but a
slight clue to the sacrifices undergone by the people of the
country. For this purpose a further combination is neces-
sary, and the most popular plan is to divide the capital or
the interest charge by the number of the population, and so
get the charge ' per head.' How fallacious any test of the
kind must be, has been already shown in respect to ex-
penditure 3 ; and it is equally plain here, as a comparison of
England, the United States, and Victoria against India,
Italy, and Russia, suffices to prove. The mere population
of a country is no measure, any more than its area, of its
wealth and financial capabilities, which must depend on so
many different circumstances.

A far better test would be the relation of debt to the
national revenue or, again, to the collective wealth of the

1 Essay on Sinking Fund, 29, quoted by M c Culloch, Note 33 to Wealth of
Nations, 632.

2 Cp. Jevons' Theory 119, 120 for this distinction.

3 Bk. i. ch. 8. 4.



598 PUBLIC FINANCE. [BOOK V.

society. Such comparisons are, however, by no means easy.
The annual income and especially that part of it which is
disposable must be always more or less doubtful, and
estimates of national wealth, whatever method be em-
ployed 1 , have even less chance of approaching accurately
the real position. Nevertheless inquiries of the kind give
a good rough result, and in relying on them we may fairly
compare the annual charge of the debt with the national
revenue, and in like manner its capital value with the sum
of national wealth. The annual charge of 19,000,000
for the English debt should be compared with the
.1,000,000,000 or 1,200,000,000 of national income, as the
680,000,000 of capital subject to whatever deduction
may be required for its being under par value should be
placed against the 10,000,000 ,000 or 11.000,000,000 which
may be taken as the sum of British wealth 2 . In this way
we get about 2 per cent, as the proportion of income, and
about 6 per cent, as that of capital assigned to the public
creditors.

The great discrepancy indicates the omission of some
important element in the capital estimate, which can be no
other than the capitalized earning power of the human
beings who make up the community. Wages, industrial
and professional earnings are a part of the revenue, but not
of the ordinary capital account of the nation 3 .

For practical purposes it is often convenient to take the
proportion of the total state expenditure required for the
payment of the annual debt charge as measuring its weight.
Thus the smaller percentage of the English expenditure on

1 The best methods are : (i) that of Mr. Giffen, which capitalizes income, and
(2) that of M. de Foville, which takes the property changing hands by succes-
sion as the base of calculation. Giffen, Growth of Capital ; De Foville, La
France Economiqiie (1887), 437 sc l-

If we assume that the annual increase of wealth has not changed since
1885 we can add ^"900,000,000 to Mr. Giffen's estimate of 10,037,000,000
for that year.

3 Cp. Prof. Nicholson's article on ' The living capital of the United King-
dom ' {Economic Journal, i. 95-106), in which the highly conjectural value of
47,000,000,000 is assigned to this factor, or group of factors, of production.



CHAP. V.] THE THEORY OF PUBLIC DEBTS. 599

debt in the total outlay as compared with any earlier year
in the present century shows so far a reduction in the
burden. The relations of public outlay to national revenue
and the amount of service performed by the State are both
elements to be considered before this ready test can be
used with any accuracy.

Finally, in estimating the weight of public debt, it is
necessary to take account of the public assets that are
available for its liquidation. The property employed in
the various public functions cannot be regarded in this
light. The buildings and other non-revenue yielding pos-
sessions of any government could only be sold at the cost
of abandoning the normal administrative duties. Such
property is an essential condition of state activity 1 . Very
different is that part of public property the domaine prive
of French administrative law which supplies revenue.
Land, forests, mines, railways, and other industrial enter-
prises have all a market value, and would by their sale
provide funds that could be employed in paying off debt.
The real value of all such state property is therefore fairly
to be set off as a deduction from the debt before computing
its capital amount, as for precisely similar reasons its
annual yield must be regarded as a mitigation of the
interest charge. The importance of this consideration
comes out very strongly in respect to countries in the
situation of the German States, the Australasian Colonies,
and the Indian Empire 2 . The greater part of the debt
incurred by all these countries has been for the creation of
public works, which be their value more or less than the
wealth expended in their creation are undoubtedly worth
very large sums, and if in the hands of private individuals
or companies would be regarded as constituents of national
wealth. The real debt burden of the countries so situated
is much less than the apparent one. It may even be
altogether removed.

1 Cp. Bk. ii. ch. 5. I for this position.

2 Its application in local Finance will appear in Bk. v. ch. 8. 3.



600 PUBLIC FINANCE.

For the purposes of this allowance it is quite immaterial
whether the property has been created by means of loans
or obtained in other ways. Revenue from the rent of land
is as much an aid towards the payment of debt as receipts
from railways constructed by loans. The economic re-
venues of the State are a compensation, more or less
effective, for debt expenditure. It is in connexion with
the original application of loans that the distinction between
property obtained by their employment and that otherwise
derived comes up for consideration.

Estimates of the real weight of public debts are, it is now
plain, by no means easily formed ; the considerations to be
taken into account are too complex to be dealt with in a
ready and off-hand manner. The only way of arriving at
a satisfactory result is by the use of each of the different
methods of calculation, and a combination of their results
with the due allowances previously pointed out. Where
all point in the same direction a conclusion is easily
reached : where they differ the selection of the proper ones
depends on the object for which the inquiry is made. If
annual pressure is to be ascertained, interest is more impor-
tant than capital ; if the cost of redemption is wanted,
capital or market value should be the primary object of
investigation.