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Home -> Charles Francis Bastable -> Public Finance -> Chapter VIII

Public Finance - Chapter VIII

1. Preface

2. Chapter I

3. Chapter I a

4. Chapter II

5. Chapter II a

6. Chapter III

7. Chapter IV

8. Chapter V

9. Chapter VI

10. Chapter VII

11. Chapter VII a

12. Chapter VIII

13. Chapter VIII a

14. Book II Chapter I

15. Chapter II

16. Chapter II a

17. Chapter III

18. Chapter III a

19. Chapter III b

20. Chapter IV

21. Chapter V

22. Book III Chapter I

23. Book III Chapter I a

24. Chapter II

25. Chapter III

26. Chapter III a

27. Chapter III b

28. Chapter IV

29. Chapter V

30. Chapter V a

31. Chapter VI

32. Book IV Chapter I

33. Chapter II

34. Chapter III

35. Chapter IV

36. Chapter V

37. Chapter VI

38. Chapter VI a

39. Book V Chapter I

40. Chapter II

41. Chapter III

42. Chapter IV

43. Chapter IV a

44. Chapter V

45. Chapter Va

46. Chapter VI

47. Chapter VIa

48. Chapter VII

49. Chapter VIIa

50. Chapter VIII

51. Chapter VIIIa

Local Indebtedness.

THE rapid increase of the debts of local governing
bodies has been noted in an earlier chapter as likely to
give rise to serious financial difficulties in the future. A
national debt, whatever be its evils, is open and conspicuous;
it is under the control of the government of the whole
people, and is based on the total wealth of the country. It,
moreover, has usually been incurred for objects of general
interest, the ultimate value of which can be measured, and
its treatment can be affected by public opinion guided by
judicious criticism. In all these respects local indebtedness
is less favourably placed. Instead of the single State, there
are many bodies of very different character and importance,
and with altogether diverse requirements. Each distinct
administration borrows on the security of its special revenue,
which may be adversely affected by local conditions. The
expenditure of the innumerable loans is very hard to
follow, and intelligent criticism is almost wholly wanting.
Sectional interests and ignorance of financial principles
have the same influence on borrowing that they have on
taxation and expenditure : they tend to lower the pro-
bability of attaining either economy or just distribution.
Under such circumstances it is the more important to
examine the chief features of the system of local borrow-
ing that has spread so widely in the last fifty years.

2. As regards the fact of increase there is the most
positive and convincing evidence. In 1875 the local debt


of England and Wales was 92,000,000. Six years later
it came to ,144,000,000. By 1888 the total was 19 2, 000,000,
or an increase of 100,000,000 over the amount in 1875;
giving for the period of thirteen years an annual increase
of nearly 8,ooo,oco. This general growth is made up of
special increases, which in such an insta<$ as that of
London are very striking. The metropolitan debt now
touches 40,000,000, showing a steady advance in the last
twenty years.

The Irish and Scotch local debts, though insignificant in
comparison with those of the English towns, are also be-
coming greater, and are now over 40,000,000.

Other countries show the same tendency. The debt of
the French communes (excluding Paris) has risen from
13,600,000 in 1862 to nearly 23,000,000 in 1869, and to
30,300,000 in 1878. The Parisian debt is by itself a
formidable sum. In 1870 it was 59,000,000, by 1876 it
had nearly reached 80,000,000. At the end of 1890 the
various debts of the French capital after allowing for re-
demption were over 98,000,000.

Many of the Italian communes are also falling into greater
debt. At the close of 1885 the total due by them was
35,300,000, and both Florence and Naples have been
forced to compromise with their creditors.

But by far the greatest development of local (and par-
ticularly urban) debt is to be found in the United States.
As Professor Adams has pointed out l , the great creation of
municipal debts was after the opening of the Civil War.
He estimates the total indebtedness of the smaller division
in 1860 at $100,000,000, of which over one-half was due by
towns having over 7500 inhabitants. Ten years later (1870)
this liability came to $515,800,000, and in 1880 had further
increased to $822,100,000.

3. The causes of this general movement are not diffi-
cult to trace. Local, like national, borrowing is dependent
on the existence of favouring conditions ; and these are to be

1 Public Debts, 343 sq.
S S 2


found, first in the greater power conceded to local bodies, or
rather in the extension of their administrative functions
during the present century. Another cause is the far
greater amount of disposable wealth seeking investment,
and the natural desire of its holders to get good security,
which most public bodies undoubtedly afford. Thirdly,
the needs of city life call for the creation of works involving
large capital outlay. Drainage, water-supply, lighting and
transport agencies, have, at the lowest, a semi-public char-
acter, that has led to their being placed in many instances
under the suitable regulative body which had to employ its
credit in order to procure the required funds. It is in this last
respect that local and national debts present the greatest
contrast, though some of the latter have been created in the
same way 1 . The defenders of the modern system of local
borrowing point to the valuable estate formed by its use.
Waterworks, gasworks, tramway lines and market buildings,
may all be looked on as sources of revenue, which, after
meeting their liabilities, will in some cases give a surplus
for other objects 2 . The element of truth contained in this
mode of regarding debt has been already considered, but it
is here desirable to indicate the qualifications to which it
should be subjected. Granting the superiority of ' repro-
ductive ' over 'unproductive' debt, it does not follow that
the former is in itself desirable. That public property, if
revenue-yielding, is an asset to be set off against liability
has been already explained. Whether either item should
be preserved in the financial system is a distinct and
separate question. Thus the various municipal industries
are obviously a great aid in meeting the local debt charge,
which, however, would not exist except for them. The real
point at issue is the expediency, socially, economically and
financially, of the conduct of such industries by public
authorities. If public is superior to private management

1 Prussia, India, and the Australasian Colonies may again be given as
3 See the articles in The Times ,May i8th, 1891, on 'Local Debt in England.'


a financial gain may be looked for, though it by no means
holds good that all profitable industries should be taken
up by the public powers l .

There are, however, some further considerations which tend
to limit the use of borrowing for this object. The loan
system involves the interposition of the credit of a public
body between the lender of capital and the actual invest-
ment. Whether gas or water works be economically success-
ful or not, the interest on the debt incurred for them has to
be met. There may be a gain, but, then, there may be a
loss, in which case the burden falls on the contributors to the
particular revenue affected. It is in this undertaking of risk
that the borrowing system appears to show its weakest side.
Speculation is a task altogether unfit for public bodies. In
another way the local revenue may suffer. The absorption
of a class of industries in the public property reduces the
amount of private wealth that remains to be taxed, and it
is quite possible that the loss in this way may exceed the
supposed gain on the working of the industries. The
burden of proof rests on those who favour the process of
forming a municipal domain, and they are bound to es-
tablish (i) the strong probability that the community runs
no financial risk, and (2) the superiority of their method to
all alternative ones. The control of special industries, as
indicated when considering the industrial domain 2 , is a less
pretentious, but in many cases a more effective, method.

4. But though the policy of using public credit in a
systematic way for the establishment of profit-giving in-
dustries should not be hastily adopted, and, if attempted,
should be kept within comparatively narrow limits, there
nevertheless remains a legitimate field for local borrowing.
The needs of any modern community are such as to make
increased expenditure unavoidable, and that expenditure is
largely devoted to the supply of educational, sanitary, and
social requirements. Schoolhouses, baths, drainage, libraries,

1 Cp. Bk. i. ch. i. 2 for the limitation of public activity in this respect.

2 Either by special taxation or sale of concessions, Bk. ii. ch. 3. 6.


and museums have to be provided by heavy immediate
outlay, and as under the circumstances they cannot directly
yield a revenue, it falls within the province of the public
power to take them in hand l . The economic conditions
impose the necessity of getting such works done quickly,
as otherwise the earlier expenditure would be for a long
time useless. Loans are accordingly the only available
means ; for taxation must be kept within bounds, so as
not to swallow up the nett revenue of a single year. The
burden is by this contrivance distributed over the time
during which the works are of service, or at least over a
fairly long period.

A great deal of the modern local debt has been incurred
for such objects, some of which, e.g. waterworks, pass im-
perceptibly into the strictly reproductive part of local
expenditure. In the case of London, for example, almost
the whole of its liabilities has been so created. Paris in like
manner borrowed for the ' improvements ' of the second
Empire, and to repair the damage of the war of 1870-1.

This process of anticipating revenue has greater justifica-
tion in the case of a local, than in that of the central, govern-
ment. The former deals with a smaller revenue on which
any extraordinary outlay has greater effect, and it is re-
stricted in its taxing powers, while the national government
can more easily distribute its outlay from year to year, and
has full control over its means of revenue. As a general
rule, therefore, it is true that loans are a convenient, indeed
an indispensable, part of the financial machinery of the
smaller bodies.

5. The forms or classes of local borrowing may next be
considered, and here also its difference from that of the
State is noteworthy. The absence of sovereign power
brings the town or district more nearly on a level with the
industrial or trading company, while its necessary sub-

1 Even on the assumption that Adam Smith's ideas as to the limits of state
action should be observed, ' The duty of erecting and maintaining certain public
works ' is one of those prescribed .by him, Wealth of Nations, 286.


ordination to the central government makes control and
regulation by the latter, expedient. Just as local ex-
penditure and taxation need the watchful care, and at
times the restraining hand of the Sovereign *, so does
local borrowing. There is besides a financial benefit
in the interposition of state credit to assist the smaller
subdivisions. Local loans, therefore, fall into two classes,
viz. (i) those raised directly by the borrowers, and (2)
those obtained by advances from the State. The former
until recently gave evidence of the undeveloped character
of local credit. Mortgage loans or floating obligations were
the usual kinds. Now, however, the funding system is
making rapid way, and nearly every important town has its
consolidated stock, modelled on the type of the national
debt. Corporation stocks form a distinct class of securities
in the money market, and stand at a high rate. This
higher organization has the great advantages of procuring
loans on better terms, and of bringing the amount of borrow-
ing before the public. So long as a town or district debt
is broken up into several separate forms its real amount
is hard to ascertain, and it may be increased without attract-
ing notice.

Local stock is sometimes redeemable by annual drawings,
(like the French 3 per cents,) or more often it is automatically
worked off by a sinking fund, the established method in the
second class of loans those provided by the instrumentality
of the State. For very small divisions the issue of separate
stock would be impossible, and any ordinary loan could
only be obtained at a high rate of interest. The central
government can, without inconvenience, make advances
in such cases, and arrange for repayment by instal-
ments at suitable times. In Great Britain the Treasury
acts as the intermediary, and makes the advances from
capital, which is really a part of the national debt-.

1 For expenditure and taxation, cp. Bk. i. ch. 7. 7, and Bk. iii. ch. 6. 9.

2 The separation of the local debt carried out by Mr. Goschea marks this very


Belgium also has a special fund for this purpose, and in
Germany the fund for invalids one of the assets of the
Imperial treasury has lent more than 10,000,000 to the
commtmes. The convenience of thus providing local bodies
with advances on reasonable terms is very great, and it, at
the same time, enables the central government to exercise
a complete supervision over the borrowing so conducted.
^ 6. Repayment of local debt has to be regulated in
accordance with its general features. As it is generally
incurred for objects that are useful, or at least assumed to
be such, the time of redemption may be adjusted to the
duration of the utility created. Some improvements are
much more speedily exhausted than others, and it cannot
be well to have a debt charge which represents no present
benefit. Again, local debt does not ordinarily arise from
any pressing emergency. Its use is rather to get the work
quickly completed, and therefore a sinking fund that will
remove the charge within a definite number of years is
often serviceable, since at the conclusion of the term new
objects of outlay can be dealt with in the same way. The
larger bodies may prefer the issue of stock, redeemable in
parts or by annual sections, or even take the chance of
further reductions of interest and the power of conversion
thence arising 3 . The danger of this course lies in the
possible neglect of the necessary provisions for repayment,
and in the undue accumulation of debt. A sinking fund
that makes repayment compulsory has decided advantages.
A difficult question, however, arises in connexion with the
determination of the proper period for redemption. If it is
very short the immediate taxpayers suffer, while their suc-
cessors in after years are disburdened. When a longer
time is fixed the pressure may fall chiefly on those who
hold leases extending over the time, leaving the benefit to
a reversioner who has perhaps contributed nothing to the
payment of the charge 2 . This failure in just distribution

1 Many of the larger British towns are favourably situated for this purpose.

2 Cp. Fawcett, Political Economy ', 629-31.


is, however, primarily a question of taxation. We have
seen that local charges should be distributed on different
grounds from those that regulate general taxation J , and
that the chief reasons for making this distinction are the
predominance of the economic element in local expenditure,
and the necessity of taking the several interests benefited
into account. The use of loans enables a just distribution
to be more closely attained, since future interests come
under liability as they are realized. But at the same time
their service in this respect must be subordinate to their
general working. Direct taxation of reversionary property
may also be desirable, though this course is limited by the
practical difficulties that it gives rise to. A still better way
of reaching justice is to maintain a steady policy with
regard to expenditure. By so dividing outlay as to keep
it in a nearly constant proportion to the rateable value of
the wealth liable, it is clear that in the great bulk of cases
the partition of charges between holders of property at
different times will not be an unjust one, though some ex-
ceptional instances may occur. Very heavy and irregular
expenditure by means of loans will be almost certain to
cause serious practical grievances, which would, however,
also be found if taxation were employed in the same way.

7. Up to the present our attention has been chiefly
directed to the urban and smaller rural divisions, and they
are no doubt the most important. But the indebtedness of
intermediate bodies, such as the English Counties, the
French Departments, the Prussian and Italian Provinces,
and on a higher scale the German and American States,
deserves some notice. Special conditions have prevented
the counties in the United Kingdom from coming forward
as borrowers. A different reason has closed the loan
market to the American States, but there are general
causes for the smaller development of provincial borrowing.
The works of utility for which local debt has been incurred
are for the most part confined to small areas, or are of
national importance. They fall either into the hands of the
State, or into those of the commune. The duties of the
province are such as can be, generally speaking, met out
of revenue.

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