There remain for consideration two other forms of
state liability, that are both in contrast with the classes of
debt previously described. These are : (i ) the floating debt,
and (2) the issue of inconvertible paper money. The for-
mer is perhaps the oldest kind of debt, and comes into
being in the most natural way. In the management of so
large a business as that of the public Treasury it must
often come to pass that the payments for services or com-
modities will not be made at once, and that at some periods
of the financial year the outgoings will exceed the revenue
received. As a necessary consequence, either the actual
persons who supplied requirements are for a time unpaid
or others advance the funds. Whichever it be, there is
a temporary or floating debt. As the modern State is
engaged in various business transactions and is a lender of
money to local bodies 1 , it will always have a number of
outstanding accounts against it, with corresponding assets
on the other side. Should there be a series of budget
deficits, the floating debt will, unless it is funded, speedily
accumulate to a formidable amount, as has been the
case in several countries. A failure in national credit
generally drives a government to increase its floating
obligations, which attract less notice than the regular issue
of a loan ; and in all countries war or other special pressure
may cause a temporary expansion of this kind of debt.

As a general principle of Finance it is unquestionable
that the floating debt should be kept within the narrowest
limits possible. The ordinary working expenses of the
administration can be covered within the year, and usually,
with the steady influx of the duties on commodities, in a
far shorter period. The special liabilities in connexion
with savings-banks or advances to local bodies allow of
being dealt with as distinct accounts, and the latter can be
managed by a funded debt. A growth of floating charges
is at best a mark of weakness in the treatment of the state
liabilities. Though it may not always be convenient to
fund a mass of temporary debt, and a little delay may be
admitted, this case is too exceptional to qualify the general
rule.

The great evil of a floating debt is its uncertainty. To
be open to the risk of a sudHen demand for payment is to
be in the position of a banker without the securities with
which he provides himself; and it is precisely in times of

1 Cp. Bk. ii. ch. 4. 4, and Bk. v. ch. 8. 5.



CHAP. VI.] THE FORMS OF PUBLIC DEBTS. 6ll

commercial difficulties that the call is most likely to be
made.

Among examples of unduly swollen floating debts the
cases of the United States at the close of the Civil War, of
England after the French War, when its amount was over
^"60,000,000, and of France at present, may be taken.
Both England and the United States remedied their posi-
tion by funding, and the same course is doubtless advisable
in France. It might indeed be suggested that the floating
obligations should never exceed a year's interest on the
funded debt, but where the latter is very small this rule
could hardly be applied, and that of keeping the temporary
charges under one-fourth of the annual revenue might be
substituted.

7. Inconvertible paper issues and their effect on eco-
nomic and social life have been abundantly considered in
works dealing with political economy and with monetary
and currency questions. The present would be no place
for such topics. Here we have only to examine the use of
a forced paper currency as a financial expedient. A country
with a stock of the precious metals in circulation has a store
of wealth which it can obtain for use by the expedient of
substituting paper for metallic money and making it legal
tender. A loan up to the value of the gold and silver in cir-
culation is thus procured free of interest, and to a hard-
pressed government this is no inconsiderable attraction.
Actual and historical illustrations readily occur. England,
France, the United States, Austria, Russia, Italy, not to
speak of smaller States, have employed this agency, and
have realized therefrom an immediate gain. The ulterior
effects are not so desirable. The tendency to over-issue is
too strong to be resisted, and therefore we can hardly find
a case of inconvertible paper permanently keeping its
nominal value. This almost inevitable depreciation in-
volves a disturbance of the standard of value, and a nominal
rise of prices that is on the whole injurious to the most im-
portant interests. Carried to a great height the issue of

R r 2



6l2 PUBLIC FINANCE.

paper money is ruinous to national credit, while it makes
the return to specie payments more expensive. At the
utmost all that can be gained by the policy is the saving of
the interest on a sum equal to the metals in circulation and
reserve in the country, which can never be very large in
proportion to the total revenue 1 . Excessive issues on the
other hand mean a heavy tax, levied on the creditor class,
and a disturbance of the tax receipts of the government,
which will be in depreciated paper 2 , and immense loss to
all holders if the forced currency is not redeemed at its
' face ' value, or expense to the State if it is.

There seems to be a great body of evidence in support of
M. Leroy Beaulieu's view that the outbreak of war will in
nearly every case lead to a forced currency 3 , but this does
not in the slightest change our belief that such a course is
both unnecessary and pernicious. The modern system of
international borrowing is quite capable of supplying what-
ever loans may be required, and these, as already argued,
need not be much in excess of what is raised by taxation.
An inconvertible paper currency, if it secures a somewhat
paltry gain, is, on the whole, an expensive, dangerous and
unjust form of forced loan.

In a work like the present there is no occasion for further
considering the technical forms of loans, whether by in-
scription, by coupons, or other instruments. To keep in
accord with the actual money-market system will be the
aim of the prudent financier, who will naturally adopt all
suitable expedients to make the stock as easily transferable
and as secure as possible.