CHAPTER II

CHARACTERISTICS OF PUBLIC EXPENDITURES

13. Revenue Has Received More Study than Expend-
itures. Only recently do we find fiscal students turning
serious attention to the problems of public expenditure.
Comparatively little literature can be found dealing with
this phase of Public Finance, while volumes have been
written on methods for securing revenue. The reason for
this condition is not far to seek. The exaction of revenue
has been considered an evil to be minimized as much as
possible, and one which comes much nearer home to the
general public than does the expenditure of funds once
secured. We have had, then, numerous studies in tax
reform, with little thought as to needed changes in the
way funds have been spent. It is impossible, however, to
segregate the two fields. If funds are squandered and
wasted, the best possible revenue system cannot give
satisfactory results. The increasing tax burden has led
the public to inquire what is to be given in return for
its sacrifice of funds. This growing burden has led to
a demand for reform in revenue laws. A further recent
demand is that the administration of public funds be
handled in an efficient manner. These awakenings of the
public account for the modern interest in other than the
revenue phase of Public Finance. Henceforth, no doubt,
a much larger proportion of our fiscal literature will deal
with the expenditure and the administration of public
funds.

14. Early Writers Did Not Entirely Neglect Public Ex-
penditure^, Widespread interest in public expenditure



CHARACTERISTICS OF PUBLIC EXPENDITURES 23

belongs to modern times, yet we do not find its importance
entirely ignored,, even at the beginning of the study of
fiscal problems. Carafa, the statesman of Naples, near
the end of the fourteenth century, became concerned
about the expenditure of the kingdom. He made three
important classes of the purposes for which public funds
were used: (1) for the defense of the nation; (2) for the
support of the ruler; (3) for contingencies. He contended
for a reserve fund to meet emergencies, and for close
official supervision of the public accounts.

Bodin, the first important French student of fiscal
problems, wrote in the latter part of the sixteenth cen-
tury, and contended that the public funds should be used
for the honor of the state. He recommended, further-
more, that an annual statement be made which would
show the condition of the state's finances. His classifica-
tion of expenditure was somewhat more definite than that
of Carafa, and included provisions for the care of the
poor as well as for improvements.

Sir William Petty, near the middle of the seventeenth
century the first English fiscal writer of note gave a
rather detailed classification of the important needs for
public funds. It will be interesting to compare the rela-
tive importance of the items in his list with a modern list
of expenditures, which will be given later. 1 His classes of
expenditures were for: (1) defense; (2) maintaining the
government; (3) religion; (4) education; (5) orphans;
(6) public works. Yet, notwithstanding the consideration
which fell to expenditure, revenue systems received the
major portion of the early study and investigation.

15. Early Systems of Expenditure Were Simple. The
methods of expenditure which developed in the early
state can scarcely be called systematic, because the ex-
penditures were made in a more or less haphazard fashion.
The state, in its early stages of development, was subor-
dinate to the family unit, where most of the personal

1 See p. 31.



24 OUTLINES OF PUBLIC FINANCE

needs were supplied. As the power of the state strength-
ened, more demands were made upon it. The first dis-
tinct public treasury in the different states was usually
for religious purposes. There were no expenditures for
protection, as the citizens protected the state. In foreign
wars the citizens furnished their own weapons and were
paid by the spoils of conquest.

Expenditures of Greece and Rome. The most lavish
of early public expenditure was found, perhaps, in Athens.
Large public buildings were erected, and huge sums were
spent on public works of various kinds. Expenditures for
religious fetes were often wasteful and extravagant. An
interesting feature of early Athenian expenditure is that
comparatively large sums were spent on the poor and on
war orphans.

In Rome, likewise, large sums were spent for religion,
while the maintenance of the government, the erection of
public buildings, and the construction of roads were items
of primary importance. Provision was made for poor
classes, and various kinds of public charities were estab-
lished. The system of expenditures in Rome displayed
more development than did that in Athens, since here
many citizens who were rendering services to the state
were receiving a direct payment from the state. This
development had gone so far, before the fall of the Empire,
that the soldiers were on the pay roll of the government.

Expenditures Under Feudalism. Under feudalism, a
study of the expenditures would be a study of the ex-
penditures of the prince. He was the owner of the lands
whence came the revenues. The public duties performed
by the officials were usually few, and these were performed
most often when a private benefit was entailed. Feudalism
presented a system in which the public expenditure was
primarily in the interest of the ruler. If his interests coin-
cided with the interests of the public, then only did the
public benefit from the expenditures of the government.
As constitutionalism grew, and as the public gained a



CHARACTERISTICS OF PUBLIC EXPENDITURES 25

voice in the government, this situation became radically
changed.

1 6. The Nature of Public Expenditure Differs from
Private Expenditure. The expenditure of a state is sim-
ilar to that of an individual in that both have to do with
the giving up of money. The principles which underlie
these expenditures, however, are somewhat different.
Eheberg, a German writer, has pointed out these differ-
ences under five heads, as follows: (1) the ends sought by
the state reach far beyond the sphere of individual ac-
tivity; (2) in private business the ruling principle is
special service and special payment; (3) the state cannot
compare the cost of the service with the value of the
product a necessary feature in private business; (4) a
state can undertake enterprises of unlimited duration,
which individuals would not; (5) the income of the state
is measured by its needs, while the expenditure of the
individual is limited by his income. 1

Some exceptions, of course, are found to these generali-
zations, but as a whole they indicate fundamental differ-
ences in state and individual activity. In these days of
huge combinations of capital, the sphere open to individ-
ual enterprise has materially widened. Yet there remains
to the state enterprises of a nature that individuals do
not care to enter. No individual cares to undertake the
task of supplying all the needed services of an immaterial
nature the value of which cannot be measured. Exam-
ples of this would be army, navy, and police protection,
establishment of systems of courts for maintaining jus-
tice, and the maintenance of public parks and libraries.
Even the magnitude of enterprises like the Panama Canal
would still have a deterrent effect on private undertaking.

Returns on Investment. The state is not so much con-
cerned about a special payment for a special service as is
the individual, neither is it so concerned about a compari-

ir This passage from Eheberg is quoted in Bullock's Readings in Public
Finance, p. 19.



20 OUTLINES OF PUBLIC FIXAXCE

son between cost of production and value of product.
This is because the state does not depend to any appre-
ciable extent upon its enterprises for its income. The
individual cannot continue to sell the products of indu
for less than the cost of production. The value of many
of the products of the state, on the other hand, does not
permit of financial measurement. Who would ventur
value the return from the millions of dollars expended
annually on education, on the judicial system, or on our
eleemosynary institutions? In a broad way the mot i vat ing
force of private business is profit, which necessitates pay-
ments for senices and a selling for more than cost of
production. The motivating force of the state's activity,
in general, is service, the value of which often cannot be
measured, and for which no direct payment is asked.

The individual is concerned, ordinarily, in quick returns
on his investment. Few individuals would undertake an
enterprise, no matter how much in public demand, if no
returns could be had for twenty, thirty, or forty years.
The state may often make expenditures on the basis of
distant future returns as well as on present returns.
Where the element of future service is large, the state may
justly borrow funds for the enterprise, and require the
future generations that enjoy the sen-ice to repay the
loan. While the state is a continuing entity, the individ-
ual lives only in one generation, and he is primarily con-
cerned with enterprises the fruition of which is not in
the distant future,

Measure cf State's Income. The statement that a str.
income is measured by its expenditure must be hedged
with proper qualifications. While it is true that the state
has the resources of its citizens upon which to draw,
these resources are not infinite, and thought must be had
for future as well as for present revenues. It would be as
destructive a fiscal policy to use up, for present revenue,
the sources capable of supplying a continuous stream of
funds, as it would be to cut down a tree to get the fruit.



CHARACTERISTICS OF PUBLIC EXPENDITURES 27

Fiscal officials should be concerned about the continued
existence of the state, and should not so act in the present
as to impair the future. While expenditure which en-
croaches upon the source of revenue is to be avoided,
parsimony on the part of officials should also be looked
upon as undesirable. Officials have sometimes curtailed
expenditures far more than the healthy development of
the state would justify, in order to make a good showing
to their constituency.

Political Restraint. Another important limitation upon
a state's revenue is the existing political restraints. The
form of government and customs which have come down
from the past must be considered. The same fiscal sys-
tem would not succeed in a monarchical state as in an
extreme democracy. The political restraints established
by constitutions and legislatures must, of course, be ob-
served. Export duties, graduated excise taxes, or other
than apportioned direct taxes, could not be used by our
Federal government because they are prohibited by the
Constitution. A number of the state constitutions con-
tain what is known as the "uniform assessment" of prop-
erty clause, which provides that all property is to be as-
d at the same rate. Frequently tax limitation laws

t which place a maximum on the amount of revenue
political units may collect. Evidently, then, fiscal officials
do not have absolutely a free hand in securing funds, but
must be concerned about future needs of the state, and
be governed by existing political institutions and laws.

17. The Nature of Expenditures Has Changed with
Changes in Forms of Government. It has been noted
that in the feudal regime the expenditures of the state
were the expenditures of the ruler. This was largely true
in all governments before constitutionalism began to grow.
An important factor which marked the growth of the
constitutional form of government was the increasing
control which the public gained over the purse strings.

.lually the expenditures of the ruler were curtailed.



28 OUTLINES OF PUBLIC FINANCE

These had been primarily for his own desires, and were
for the good of the state only if his desires coincided with
the welfare of the state. Expenditures now became justi-
fied only when they were primarily for the welfare of the
public. This change in the nature of the control of ex-
penditures has taken definite form in the constitutions of
many democratic countries. In the United States, for
example, bills for raising revenue must originate in the
House of Representatives that branch of the legislature
which was directly elected by the people at the adoption
of the Constitution.

Growth of Public Credit. The growth of public control
over revenues has also done much to strengthen public
credit. In the earlier states it was an ordinary occurrence
for the ruler to pile up heavy debts; and repudiation, in
whole or in part, was just as common. It was the regular
practice for a new ruler to repudiate the debts of his
predecessor. Under such conditions the institution of
public credit was indeed weak. As soon as the citizens
began to gain control they began to strengthen the credit
system. Since the citizens were the lenders, repudiation
was their loss, and it is easily understood why repudiation
of state debts has not been a practice under constitutional
government.

18. The Universal Tendency of Public Expenditures
Has Been to Increase. At the close of the eighteenth
century it was generally believed that the previous rise
in expenditures would cease, and a gradual lowering was
even expected and hoped for. That period marked the
overthrow of the old monarchical regime, with its lavish
expenditures for the courts of the rulers. The introduc-
tion of constitutionalism was expected to materially lessen
the cost of military support, which had been mounting
rapidly, and which had become particularly burdensome.
It was considered, too, that the citizenship, which at that
time was almost entirely agricultural, must necessarily be
freed from some of the tax burdens they had been attempt-



CHARACTERISTICS OF PUBLIC EXPENDITURES 29

ing to bear, in order that they could again secure a foot-
hold and provide the necessary increase in production.

_The old mercantilist^ idea of government was rapidly

\ /losing ground, and the laissez-faire policy was being sub-

V stituted. That government which governed least was, in

the future, to be considered best, and this would entail

the retraction rather than expansion of government

activities.

This line of reasoning, however, proved ill founded, and
public expenditures have continued to increase. While
government activities decreased in some lines, the result-
ing decrease in expenditure was more than offset by ex-
penditures for increased activity in new lines of enter-
prise. Commerce and industry soon took ranks of im-
portance with agriculture, and more revenue could easily
be secured with no increase in burden. All this was an
impetus to an extended activity on the part of the state.
It will be profitable to note some of the aspects of the
continual increase in public expenditures.

19. Increase in Public Expenditures Is Not Confined
to Any Political Unit. Some conclusions from the study
of statistical data will show that the increase in public
expenditures has indeed been general that the increase
has not been confined to autocracy or democracy, or to
Federal, commonwealth, or city units. In the European
states expenditures increased about 360 per cent for the
sixty-year period following 1830, while the per capita in-
crease for the same time was about 400 per cent. In the
same period the expenditures of France increased more
than 225 per cent, while England's expenditures were
nearly 110 per cent greater in 1902 than in 1866. In
twenty-seven years after 1874 German expenditures had
increased something like 225 per cent, while Russian ex-
penditures showed an increase of 125 per cent for the
twenty-year period after 1800.

Expenditures of smaller European states show the same
upward trend, as is illustrated by Belgium and Switzer-



30 OUTLINES OF PUBLIC FINANCE

land. The increase in Belgium for less than a fifty-year
period after 1850 was about 380 per cent, while in the
Swiss Federation, for the same period, the increase wa?
nearly 1,600 per cent. 1

The increase in some of the countries can be attributed
partially to wars, yet the countries which have been less
engaged in war have shown the most rapid increase in
expenditure. The conditions in Belgium and Switzerland
are examples of this situation. The expenditures of the
political subdivisions of European states have increased,
sometimes even more rapidly than those for the states.
Expenditures for the last few years show, of course, an
enormous increase, but they are so influenced by the Great
War as to give no comparison with normal increases.

20. Expenditures in the United States Show an Up-
ward Trend. A study of expenditures of the United
States and its political units will show that everywhere
there has been an increase. After a period of war, or some
other emergency expenditure, there may be periods in
which decreases can be found, but they never get back
to the pre-emergency basis. A somewhat detailed study
of the expenditures of the United States, and its political
divisions, will be of interest to American students of Pub-
lic Finance. In most of the following tables the items are
given for which expenditures have been made, so that
comparisons may be made between increases in the ex-
penditures for particular items as well as between the
total expenditures. Emergency expenditures show a
greater effect upon the figures for the Federal government
than upon those for the other political divisions. The
following are expenditures of the Federal government: 2

1 These illustrations of the increase of public expenditures are taken
from a treatment of this subject by F. S. Nitti. An extract of his work
may be found in Bullock's Readings in Public Finance, p. 32.

2 A detailed account of the growth of expenditures in the United States
may be found in an article by C. J. Bullock, in the Political Science Quar-
terly, xviii, p. 97. The expenditures for each year may be secured from
Cables given in Pewey's Financial History of the United

It is seen by these figures that state expenses have been
on the increase, and at a faster rate than the population.
The increase in population from 1903 to 1913 was about
20 per cent, while expenditures increased about 110 per
cent. The increase has been more marked in some fields
than in others, the most noticeable being in protection to
person and property, charities, and schools. Some ab-
normalities may be found in tables for particular years.
A decrease in expenditures for schools may appear, for
example, while expenditures for charities may take the
rank of first importance for this same year.

Comparative statistics of incorporated places, in so far
as they are available, show exactly the same trend of ex-
penditure upward. Not only is this true of cities of
small population, but it is evident in the increasing cost
of government as cities become larger. A study of the
following table is interesting, not only from the stand-
point of increasing expenditure as population increases,
but also from the standpoint of the relative importance of
the various classes of expenditure, which will be treated
in the following chapter.

It is seen that, with practically no exception, after a
city has reached a population of 50,000, a further growth
in size necessitates a greater per capita increase in every
line of its activity. When compared with preceding
tables, the magnitude of city expenditures is evident.
The corresponding burden on property is so great that a
comparatively small number of urban citizens can afford
to be property owners. The financial advantages of living
just outside the corporation limits, yet enjoying much
that the city has to offer, are quite evident when, in 1913,
the total per capita expenditure of counties was $4.49,
while for 146 cities it was $32.46.
bear the increasing burdens, there would be cause for
grave alarm. Had it been true, however, that this ability
were stationary, expenditures would not have reached
their present magnitude, for the tree would have been cut
to get the fruit long ago. But the facts that population is
increasing, and that wealth the source of revenue has
also been increasing, must be taken into account. In
Europe, it was seen, population was increasing less rapidly
than expenditure, which, of course, causes an increase in
the individual burden.

Expenditures in the United States. In the United States
the increase in population has more nearly kept pace with
the increase in expenditures, while the increase in wealth
has surpassed the growth of expenditures. This means
that, in spite of the great increase in state activity, the
individual burden has decreased. A lower percentage of
the national wealth was spent by governmental units in
1916 than in 1870. In 1850 our national wealth was esti-
mated at about $7,000,000,000, while in 1912 it had in-
creased to more than $175,000,000,000. In 1870 the Fed-
eral government spent about $13.2 per $1,000 of national
wealth; in 1912 the expenditure per $1,000 of wealth was
$5.3. The per capita change in expenditure from 1903 to
1913 was from $7.90 to $10.15. All other governmental
units spent $15.2 per $1,000 of the wealth in 1890, while
in 1912 the expenditure was but $13.3. The state govern-
ments spent, in 1903, $2.30 per capita, and $3.95 in 1913.
The rise in the per capita expenditure for 146 cities for
the same period was from $24.64 to $32.46.

In the United States as a whole, because of the increase
in population and wealth, public burdens have not been
increasing faster than the ability to bear them. This has
not been true, perhaps, of some of the political divisions,
especially the cities, where the enormous increase in ex-
penditure has outdistanced the increase in wealth. This
burden may be particularly heavy upon certain classes of
citizens, for it is a matter of common knowledge that all



36 OUTLINES OF PUBLIC FINANCE

property owners do not share the public burden in pro-
portion to their wealth. Since the wealth of individuals
in general is increasing at a greater rate than government
expenditures, there is no cause for the fear that increasing
government activity is crushing the individual. It would
further indicate that there is no pressing need for new
sources of revenue so far as securing funds is concerned,
no matter how imperative they may be to secure a more
just distribution of the fiscal burden.

The Value of Money. When attempts are made to com-
pare the increased services which come from increased ex-
penditure, it must always be kept in mind that the value
of money is not constant. For a number of years following
1873 increased services might have been given with de-
creased expenditures, because prices were falling and an
expenditure in dollars would give more services than
before. Since the late 'nineties, however, the other aspect
has been true, especially since the advent of the Great
War. In so far as a state is a purchaser of materials in
the open market, it is affected by rising prices as much
as an individual. On the whole, however, the effect is
less marked in the case of the state, because a larger
proportion of its expenditures is for salaries and wages,
which rise much slower than other prices. Because of
rising prices, then, expenditures may noticeably increase,
while the services rendered may remain the same or
decrease.

Expenditures for War. The proportion of public ex-
penditure which is due directly or indirectly to war is an
item of importance. Everyone is aware that during the
Great War all other expenditures were overshadowed by
those for war. In a few years, however, it may be for-
gotten that indirectly war expenditures still form a large
part of the total public outlay. Professor Bullock has
calculated the percentage of Federal expenditure due to
war for a number of years between 1870 and 1902, the re-
sults of which are almost startling. The costs due to war,



CHARACTERISTICS OF PUBLIC EXPENDITURES 37

he considered, were for the army, the navy, pensions, and
for interest on the debt arising from war. On this basis
80.7 per cent of the Federal expenditure in 1870 was due
to war; 74 per cent in 1880; 66.4 per cent in 1890; 68
per cent in 1897; 72.4 per cent in 1900; and 70.6 per cent
in 1902. 1 A somewhat detailed study of the cost of war
will be presented in a later chapter.

22. Many Causes Are Responsible for the Growth of
Public Expenditures. Many factors have contributed to
the rapid and continual growth in public expenditures.
States are not only undertaking new activities, but are
entering into former activities more extensively, or are
attempting to conduct these activities more effectively.
The mere fact that population is becoming more dense
has caused a number of expenditures to increase. On the
whole, governments are institutions of increasing cost a
large part of the services cost more per capita as popula-
tion increases. Reference to some of the preceding tables,
especially the one for cities, will indicate this tendency.

Army and Navy. Military and naval activities have
been one of the chief causes for increase in Federal ex-
penditures. The increase has been general, in democratic
as well as in autocratic governments. Wars are, of course,
much less frequent than formerly, but the daily cost of a
war, such as the Great War, would more than finance an
entire conflict in earlier times. A modern twelve-inch gun
or battleship would entail, perhaps, as much expenditure
as an early army or navy. Another important factor is
the maintenance of the large, modern navy and standing
army in times of peace. This means that peace-time
equipment represents a far greater expenditure than did
early wars. A review of the table on Federal expenditures
will show the importance of these items in the expendi-
tures of the United States.

Public Utilities, Highways, and Education. Among the
important services which modern governments supply,

1 Bullock, Readings in Public Finance, p. 50.



38 OUTLINES OF PUBLIC FINANCE

and which were formerly supplied by individuals, are the
various classes of public service enterprises, highways,
and education. Many countries have gone further than
the United States in supplying the services of public utili-
ties. In some countries the railroad, telephone, and tele-
graph are operated by the government, while these are
still privately operated in the United States. Yet the
events of the era when the state and Federal governments
were active in internal improvements are familiar to
every student of American history. The demand for pub-
lic ownership seems to be increasing, and the number of
public enterprises is rapidly growing larger. This is espe-
cially true in cities. The recent emphasis placed upon
education, and the supplying of this utility by the public
to such a large extent, has had an important influence in
causing expenditures to increase. The same has been
true with highway expenditures, since highways are no
longer supplied by individuals. The growth and relative
importance of these items can be seen by reviewing the
preceding tables on pages 32 and 34.

Regulative Activities. In recent years the public has
continually been demanding the extension of state enter-
prises. Catering to these demands has meant increased
costs. The most noticeable of these demands, perhaps,
has been for the various forms of regulation, and for the
development of health and sanitation. The old laissez-
faire policy of government is becoming more and more
antiquated, while the public is placing greater reliance on
the activities of the government to secure its desires.
This tendency is clearly shown by the rapid development
of functions under the police power. 1 In the matter of
health and sanitation governments have undertaken many
preventive measures in recent years, while formerly, if
they were concerned at all, it was with repressing epi-
demics which might arise.