Other Conditions. The success of a loan, where all the
conditions are predetermined by the fiscal authorities,
depends upon their ability to judge the money market
and the desires of the prospective purchasers. Frequently
these predetermined conditions are designed to attract
buyers for the securities. Freedom from ordinary taxes is
perhaps the most general privilege attached to govern-
ment securities. Tax privileges are not always the same,
as is evidenced by the various issues of the Liberty Loans.
The method of interest payment is made as attractive as
possible. Frequently bonds of the same issue are partially
of the registered type, and the remainder coupon bonds.
Registered bonds appeal to investors who seek protection
from loss and theft, while the others are more convenient
to the general investor.

In determining the clientele of purchasers, the size of
the bond is an important item. Where it is desired that
the subscribers come from the general population, the de-
nominations of the bonds will be comparatively small.
The fifty dollar "baby bond" used in the Liberty Loans
is a familiar example of appeal to popular subscription.
The war saving stamps and war certificates were designed
to appeal to still smaller investors. The length of time
the bond is to run has much to do with its desirability as
an investment, therefore this feature is often varied to
appeal to different classes.

Disposal of Securities. Where comparatively small
sums are desired, the state need not predetermine the
interest rate, but has the alternative of accepting bids for
the supplying of the needed funds. The fiscal authorities
can make it known to banking and brokerage houses, and
the general public, if considered desirable, that a certain
amount is needed for a certain length of time, that the
securities will bear certain privileges, and let the compe-
tition of the prospective lenders decide the interest rate.
In this case the burden of the speculative element in the
money market rests to a greater extent on the purchaser
of the securities. If the market for securities becomes
more favorable within the period of the loan, the purchaser
may sell and be the gainer; should the market become
less favorable, the loss must be his.

In disposing of a bond issue, government officials may
make use of a number of agencies. The need for different



404 OUTLINES OF PUBLIC FINANCE

methods of appeal varies with the size of the loan as well
as with the number and classes of citizens whom the offi-
cials desire to interest. Everyone is familiar with the
various methods of approach which the Federal govern-
ment used in selling the different Liberty Bonds, Adver-
tising campaigns were carried on by the use of billboards,
in magazines, and in the newspapers. Literature was
mailed to the individual, while appeals were made in the
churches and theaters. The features of patriotism, duty,
sound investment, and even loyalty, were emphasized.
Different forms of banking institutions were used exten-
sively as government agents in disposing of the securities,
while many other business houses, as well as individuals,
gave unstintedly of their time and energy to push the
sales. In short, practically every method of salesmanship
is open to the government, and extensive use has been
made of the various methods of approach.

207. Administering a Public Debt Presents Complex
Problems. We have already noticed that public credit
may take the form of perpetual bonds, a principal and
interest charge, or some form of annuity payment. In
administering these various forms, especially the princi-
pal and interest charge, perplexing problems often arise.
Problems occasionally arise when a state with perpetual
bonds or life annuities decides to reduce its indebtedness,
but these do not occur as frequently as the problems of
conversion or payment of a terminable debt.

Conversion of Debt. A state may frequently desire to
change the nature of a bond issue. It is not able to cancel
the indebtedness, but has an opportunity to put it into
a more favorable form. It often happens that the exten-
sive government borrowings are made in times of strin-
gency, and the rate of interest is necessarily high. Had
it been possible to wait a few years much better terms
might have been secured. It is the problem of the fiscal
authorities, while they cannot cancel the debt, to refund
or convert it into an issue of more favorable terms. Most



PUBLIC INDEBTEDNESS 405

modern government bonds are so drawn as to aid this
procedure. A 5-30 bond, for example, is one which may
be paid any time after five, and before thirty years from
the time of issue. If, after five years, a loan can be con-
tracted for on much better terms than the original one,
the fiscal authorities need but float a new issue of securi-
ties and use the proceeds to take up the old obligations.
It often happens that a number of conversions of the same
original debt may take place until satisfactory terms are
the result. The holders of the old obligations are fre-
quently given the privilege of exchanging them for issues
of the new, at a fixed rate of exchange. These processes
are not designed to reduce the indebtedness, but simply
to change its form.

Use of Sinking Fund. The general tendency has been
for countries to adopt the policy of debt extinction. The
use of this policy creates the problem of securing funds to
meet the debt obligation when it falls due. Conversion
may be used to postpone payment, but it does not cancel
it. A scheme for debt payment which was developed in
England, and which is widely used, is known as the sink-
ing fund. Under this scheme, in order to meet a debt
obligation when it matures, there is set aside a certain
sum from the general revenue each year, so that the sum
of the accumulations will equal the debt.

The early use of the sinking fund was very popular
in England because of the fallacious idea that it provided
a burdenless method of paying indebtedness. A small
amount of bonds were to be purchased and retained by
the government, and the interest on these bonds the next
year was to be used in buying more bonds. This was to
continue until these interest payments canceled the debt.
The scheme, no doubt, would eventually cancel the debt,
but the burden of doing so would still fall on the taxpayer.
The annual interest charge which made the purchasing
power had to come from somewhere, and taxation was the
only source.



406 OUTLINES OF PUBLIC FINANCE

Any justification for the use of a sinking fund does not
come from the reduction of burdens, but from providing
the assurance that a source of funds will be on hand, out
of which the payment of debts can be made when they
fall due. The maintenance of such a fund may even en-
hance burdens. The administration of the fund must be
provided for. It must be kept separate from other gov-
ernment funds, so that the treasury will not be subjected
to the evils of a surplus, and so that the fund will not be
used for other purposes than the cancellation of the debt.
The fund should, of course, be used in some productive
capacity, or it will entail the burden of putting capital
out of use. Yet it must be kept absolutely safe or the
scheme fails. The administration of such a fund grows
into a task of no little magnitude.

Sinking Fund in the United States. The various politi-
cal units in the United States have made extensive use of
some sinking fund arrangement. At the end of the Revo-
lution the early English scheme of an accumulating in-
terest fund was adopted. A little later specified revenue
receipts were added to this. Much the same provision
was made during the Civil War to insure debt payment.
Customs receipts were to go to the payment of interest
and to redeem a part of the debt. The redeemed debt, as
well as its interest charge, was to be used as a sinking
fund.

The sinking fund arrangement has again been invoked
to take care of the liquidation of the Liberty Loans. The
period required by the arrangement is twenty-five years.
Experience has shown, however, that such arrangements
have not been needed by the Federal government, for its
debts in the past have been canceled more rapidly than
the sinking fund provision anticipated. American states
and cities have made, of necessity, a wide use of this prin-
ciple of debt payment. State constitutions generally
make it obligatory that, upon the contraction of a debt
by the sta,te or its cities, provision for the payment of the

debt must immediately be made through the establish-
ment of some sinking fund arrangement.

208. A Study of Indebtedness in the United States Pre-
sents Interesting Conclusions. Statistics of indebtedness
of the Federal government and some of the minor political
divisions, inaccurate as they may be, present some inter-
esting comparisons. The following table gives the com-
parative net indebtedness of the Federal, state, and city
governments for five successive years.
A comparison of these figures shows a general increase
in indebtedness, and an enormous increase in the indebted-
ness of the Federal government, a part of which can be
accounted for by the Great War. In normal years the
national indebtedness has been much more than double
that of the states. The city indebtedness, on the other
hand, has been more than double that of the Federal
government.

Indebtedness of States. No uniformity can be found in
comparing the indebtedness of individual states. The
following table, which shows the indebtedness of some of
the states, indicates that the Eastern states and newer
Western states have an indebtedness far exceeding that
of the Central states. This can be explained readily when
due cognizance is taken of the fact that in the Eastern

states much public improvement is being undertaken,
while in the newer states the process of initial develop-
ment is still present. In the Central states, however, the
developmental stage is past, and they have not as yet
begun the stage of intensive improvements. The state of
Pennsylvania appears an exception to this generalization.
This situation is explained by the fact that it is a part of
her fiscal policy to avoid as nearly as possible the creation
of indebtedness.

The growth of the indebtedness of a progressive state
such as New York, over a period of years, is interesting, as
is also the growth in a central state, such as Illinois, which
has not as yet undertaken such extensive public works.
The comparative tables follow. Illinois is now beginning
road building, so that in the future it is possible the wide
differences in indebtedness may disappear.


Indebtedness of Cities. The indebtedness of cities is
found to vary directly with the size of the city. In nearly
every case the floating debt is less than the funded. The
limitations placed upon the indebtedness of some munic-
ipalities prevents figures from indicating the extent to
which borrowing would be used if the restrictions were
absent. The following table shows the indebtedness of
some cities, the population of which varies:


Many cities in the various groups will have a total and
per capita indebtedness out of proportion to the popula-
tion. The city of Chicago, for example, has a remarkably
low indebtedness for its size. If space permitted to show
figures for a large number of cities, the tendency for in-
debtedness to increase in proportion to the population
could easily be traced.

209. The Indebtedness of Many Countries Has Reached
Vast Proportions. The indebtedness of the principal na-
tions of the world has become so large as to be almost
incomprehensible. The Great War was responsible to a
large extent, of course, for this situation. The following
table of the approximate indebtedness of a few nations,
before and after the war, will indicate to what extent
this was responsible for the present situation.

The real meaning of such an immense indebtedness can
be understood only when the burden upon the citizenship
is considered. The indebtedness of the United States was
contracted through the four Liberty Loans, the Victory
Loan, and by issuing thrift stamps and war saving cer-
tificates. The interest rate, conditions of payment, and
other items, varied with the different loans, the details of
which will be discussed in the chapter on Financing an
Emergency. The figures in the above table are so large
as to be beyond comprehension. A debt is important and
burdensome to a nation, however, only as it affects par-
ticular factors. Some of the important items to be con-
sidered are the burdens placed upon each individual, as
well as upon the national wealth or the national income
of a country. The real significance of the present vast
indebtedness can best be appreciated by attempting an
estimate of some of these classes of burdens.

It is estimated that the national wealth of the United
States is between $275,000,000,000 and $300,000,000,000.
If this be correct, the indebtedness amounts to between
5 and 8 per cent of the national wealth, and is a per capita
burden of about $225. An item exists, however, which
should be deducted from this. About $10,000,000,000
was loaned to foreign countries under the stipulation that
its liquidation should be used to cancel an equal amount
of the national debt. This amount of the debt, then,

1 These figures are taken from a booklet, The World's War Debt, published
by the Mechanics and Metals National Bank,

should entail no burden upon the citizenship of the United
States.

The burden of the annual charge upon the national
income is no less significant. It has been estimated that
the annual social income of the United States is approxi-
mately $60,000,000,000. The interest charge alone
amounts annually to about $1,000,000,000. To meet this
a little more than $1.60 must be taken from each $100 of
the national income. In addition to this the burden of pro-
viding for the sinking fund must be added. This entails
nearly another half billion dollars. This, added to the
interest charge, would take a little less than $2.50 from
each $100 income, or about $15 per capita. Here, again,
the loan to foreign countries has a significant effect.
When the interest and sinking fund burden of the $10,-
000,000,000 is deducted, it leaves an annual per capita
burden of something less than $10, or approximately $2
from every $100 income. In other words, the actual an-
nual burden of indebtedness on the people of the United
States amounts to a little less than 2 per cent of the
national income.

This charge may appear large to a people that has been
accustomed to practically no debt burden, but it sinks
into insignificance when it is compared with the burden
that the debt of other countries is placing upon their
citizenship. The debt of Great Britain is about $36,-
000,000,000, or a per capita burden of about $780. Her
national wealth is somewhere around $120,000,000,000,
with a national income of about $15,000,000,000. This
means an annual interest charge of about $10 out of every
$100 income, or what would be equivalent to a 10 per
cent income tax on the entire national income. Great
Britain, however, has loaned about $5,000,000,000 to her
allies, the payment of which would lower proportionately
her burden.

The burden upon France and Germany is still more
startling, while that upon Italy is somewhat less. France

has a debt about the size of that of Great Britain, but with
a national wealth only about three fourths as large, and
an annual income about four fifths as large. This makes
her per capita debt between $900 and $1,000, with about
$15 out of every $100 of her income needed to meet the
interest charge. Germany's debt is something less than
$40,000,000,000, her wealth between $75,000,000,000 and
$80,000,000,000, and her income something over $10,-
000,000,000. This makes her per capita indebtedness
about $600, while the annual charge requires nearly $20
out of every $100 income. Italy's per capita debt is ap-
proximately $350, and the annual burden about $7.50
out of every $100 income.

These figures will hold as approximately correct for the
middle of 1919, when the indebtedness of most countries
had reached its maximum. The relative status of the
various countries under consideration may be gained
readily from a glance at the computations in the following
tabulated form. A few other calculations have been
added because they show interesting comparisons.

A moment's reflection upon these figures causes one to
realize the pressing burden of indebtedness which rests
upon these countries, especially the European nations.
It must be remembered, too, that only the national in-
debtedness has been considered, and that the minor polit-

ical divisions generally have a heavy debt charge of their
own. This, added to the enormous interest charge, makes
the total burden of public indebtedness so large that it
can be materially lessened only after a considerable lapse
of time.