home | authors | books | about

Home -> Merlin Harold Hunter -> Outlines of public finance -> Chapter 18

Outlines of public finance - Chapter 18

1. Preface

2. Chapter 1

3. Chapter 1 continue

4. Chapter 2

5. Chapter 2 continue

6. Chapter 3

7. Chapter 3 continue

8. Chapter 3 continue

9. Chapter 4

10. Chapter 4 continue

11. Chapter 4 continue

12. Chapter 5

13. Chapter 5 continue

14. Chapter 5 continue

15. Chapter 6

16. Chapter 6 continue

17. Chapter 7

18. Chapter 7 continue

19. Chapter 7

20. Chapter 7 continue

21. Chapter 9

22. Chapter 9 continue

23. Chapter 10

24. Chapter 10 continue

25. Chapter 10 continue

26. Chapter 11

27. Chapter 11 continue

28. Chapter 11 continue

29. Chapter 12

30. Chapter 12 continue

31. Chapter 13

32. Chapter 13 continue

33. Chapter 13 continue

34. Chapter 14

35. Chapter 14 continue

36. Chapter 14 continue

37. Chapter 15

38. Chapter 15 continue

39. Chapter 15 continue

40. Chapter 16

41. Chapter 16 continue

42. Chapter 17

43. Chapter 17 continue

44. Chapter 17 continue

45. Chapter 18

46. Chapter 18 continue

47. Chapter 18 continue

48. Chapter 19

49. Chapter 19 continue

50. Chapter 19 continue

51. Chapter 19 continue

52. Chapter 20

53. Chapter 20 continue

54. Chapter 20 continue

55. Chapter 20 continue



210. The Importance of Proper Fiscal Administration
Sas Been Underestimated. Previous chapters have indi-
cated that, during the first stages of the development of
fiscal systems, the question of revenue was of greatest
concern. Gradually, consideration has been directed to
the use to which the funds were put, until fiscal students
have become much concerned about public expenditures.
A third important phase of public funds their adminis-
tration has been recognized only recently as being of
any particular consequence. It is true that in the very
early development of fiscal systems much attention was
given to methods for handling revenues and expenditures.
As the pressure for funds became more pronounced, how-
ever, attention became concentrated on sources of rev-
enue, while little was thought or said concerning the man-
agement of the public funds. It is only recently that the
importance of this aspect has again begun to receive due

Various factors have caused modern fiscal students to
emphasize the importance of the proper administration
of public funds. Expenditures, in numerous political
divisions, have become so large that the burden of the
revenue charge is felt keenly. Many political units have
reached the limit of indebtedness, as well as the maximum
tax rate, while a scarcity of funds still exists. Under such
conditions the question naturally arises whether the rev-
enues and expenditures have been properly handled. The
increased emphasis which has been placed recently


proper methods of accounting in private business enter-
prises, has no doubt stimulated interest in the handling
of public funds. A modern business firm keeps in close
touch with revenues and expenditures through its skilled
accountants, and because of this demand the importance
of the accounting profession has increased many tunes.
Since this close management has proved so beneficial to
private enterprise, many have seen the need for a similar
policy in handling public funds. The continual increase
in the number of charges of graft and misappropriation
of funds on the part of fiscal officials has no doubt been
an important factor in leading citizens to demand a
stricter account of the services which these officials ren-
der. It is the purpose of this chapter to indicate some of
the deficiencies in methods that have been used in han-
dling public funds, and to suggest some improvements.

211. The Administration of Public Funds Should Har-
monize with Other Institutions. When the amount of
funds which fiscal officials handled was small, the method
in which they were administered was of little concern to
others than the officials. As the amount of funds began
to increase with the gradual extension of government ac-
tivity, it became quite possible that the method of han-
dling the funds would be of interest to others than the
officials into whose hands the funds were placed.

Adam Smith's axiom that taxes should be paid at a time
when it was most convenient is worthy of consideration.
In the supply of capital there are seasons of scarcity and
seasons of plenty. It is indicative of poor judgment on
the part of the fiscal officials, if the collection of revenue
is so arranged that the time for its payment comes when
the contributor is least able to meet it that is, at the
season when money is already scarce. If such an arrange-
ment exists, it will mean a still greater strain upon bank
reserves than what would nominally occur, with a corre-
sponding raise in the discount rate. If, on the other hand,
fiscal officials so arrange that substantial payments by


the government are made at times when money is already
plentiful, the difficulties of a cheap money are increased
by such action. In the formulation of fiscal plans, more-
over, the possible effects on individual industries have not
always been given due consideration.

Many illustrations of these difficulties have occurred in
the revenues and expenditures of various political units.
One of the outstanding examples, however, has been in
the fiscal machinery of the Federal government. In the
establishment of the first and second United States banks
consideration was given to their ability to aid individual
enterprise. President Jackson went to the extreme in
using the government funds for the aid of general indus-
try when he distributed them among the banks of his
choice. The resulting speculation, followed by the panic
of 1837, led to the adoption of the independent treasury
system. The system was not put into actual operation
until 1847, and has since remained in some form.

The Independent Treasury. The original intention of
the plan of the independent treasury was to keep all the
funds of the government in this treasury or the sub-
treasuries for which provision was made. The chief diffi-
culty with this arrangement was that large sums of capi-
tal, which might otherwise have been used as the basis for
bank credit, or for productive enterprise, were held in the
vaults of the government until they were needed to meet
some obligation. These payments were of course at ir-
regular intervals, and frequently had a noticeable effect
on the money market. After some years the Secretary of
the Treasury was authorized to make deposits, under cer-
tain conditions, with national banks. Such deposits were
made at the discretion of the Secretary, and the opinions
of all Secretaries were not the same, nor could a definite
policy of any particular one be relied upon.

The result has been an element of uncertainty in the
banking system and in the money market. It could not
be foreseen just what policy would be followed by the


Secretary of the Treasury. Banks did not know whether
to anticipate deposits or withdrawals. There was no law
which regulated these activities, and the practice was so
diverse that no definite action could be anticipated. As
there has been no uniformity in the receipts and disburse-
ments of the government from year to year, or from
month to month, so there has always been more or less
uncertainty as to how banks and other industries would
be affected by these variations in the operation of the
treasury. The result has been a constant speculation
among banks as to what the action of the Secretary of the
Treasury would be. The Secretary has been hi no way
connected with the banks or other industries, yet has had
control over a factor which vitally affected their w r elfare
a situation under which it has been impossible to ex-
pect satisfactory cooperation. The independent treas-
ury system still exists, but it has sunk into insignificance
to such an extent since the adoption of the Federal Re-
serve Banking System that its influence is scarcely felt.

212. The Expenditure of Federal Funds Is Carefully
Scrutinized. In the establishment of the Treasury De-
partment there was a diversity of opinion as to what form
it should take. Many felt that it would be unwise to in-
trust the handling of the nation's finances to any particu-
lar individual, and contended that the funds should be
handled by a commission. Many considered that it would
be impossible to secure a man who would be honest
enough to intrust with so much responsibility. After
much debate the Treasury Department was established
under one head, the Secretary of the Treasury. Unlike
other departments, this department is independent of the
control of the President, but is closely allied to Congress.
To obtain information on financial matters, Congress may
inquire directly of the Treasury Department, without the
consent of the President.

Organization of Treasury Department. The internal or-
ganization of the Treasury Department was carefully


worked out, and was designed to be a system of checks.
At times it has proved rather cumbersome. Besides the
Secretary there was to be appointed an assistant Secretary,
a comptroller, an auditor, a treasurer, and a register. As
the business of the department expanded it became neces-
sary to increase the number of some of these officers, and
to assign particular funds to their jurisdiction. It is the
duty of the comptroller to scrutinize the correctness of the
accounts, and to countersign warrants drawn by the Sec-
retary of the Treasury. The register must preserve
vouchers and bills, while the treasurer sees that no funds
are improperly paid. The auditor must see that the
accounts are properly kept. In order to secure funds
from the United States Treasury, it is first necessary that
an appropriation be made by Congress, and that the war-
rant be signed by the Secretary, countersigned by the
comptroller, and recorded by the register.

Later Modifications. As the business of the treasury
expanded, the number of auditors and comptrollers was
increased, and a portion of the accounts was distributed
to the different branches. To use all the checks, however,
which were first intended, began to prove too complex
and cumbersome. In 1894 Congress modified the system
by abolishing all the comptrollers except one. Such de-
tailed revisions of accounts as had formerly been practiced
were also modified. There now are six auditors, whose
duties are divided hi the following manner: the first
auditor takes care of the accounts of the Treasury De-
partment; the second auditor handles the accounts of
the War Department; the third auditor handles the ac-
counts of the Department of Interior; the fourth auditor
reviews the Navy Department accounts; the fifth auditor
is concerned chiefly with the accounts of the State De-
partment; while the sixth auditor looks after the accounts
of the Post Office Department.

Under the present arrangement the work of the auditors
is not reviewed by the comptroller, unless he has reason


to question it, or unless some claimant makes an appeal
which necessitates a review. The comptroller keeps a
record of congressional appropriations, and on the basis
of these appropriations opens a credit account with the
various departments of the amount of funds at then 1 dis-
posal. Warrants, when properly indorsed, are debited to
these accounts, and it is one of the duties of the comptrol-
ler to see that warrants are not drawn hi excess of the
appropriations. Claims against the government which
the Treasury Department refuses to recognize may be
reviewed in the Court of Claims, or carried from here to
the Supreme Court. Recourse may also be had, of course,
in petitioning Congress against any decision of the Treas-
ury Department.

There has been little question as to the integrity of the
Treasury Department, while the system of checks, cum-
bersome and time-consuming as it often is, has served the
purpose for which it was intended. The funds of the
government are closely guarded, and warrants are paid
only to those who are expected to receive funds. It has
not been deemed necessary, as in a number of countries,
to have the accounts of the department audited by a legis-
lative committee. Such an experiment was tried by the
House of Representatives in the early years of the depart-
ment, but was not continued. The fact that the depart-
ment officials may be called upon at any tune to make a
report to Congress, or may be subject at any time to an
investigation of then* affairs, has seemed to maintain the
efficiency and integrity of the department at a compara-
tively high level. An avenue is left open to fraud, how-
ever, which would be difficult to detect under the present

213. Revenues and Expenditures Should Be Closely
Correlated. The fact that some close relation should
exist between a government's expenditures and revenues
seems too obvious to mention. Yet fiscal officials have
often lost sight of this first principle of sound financiering.


Funds have often been voted in excess of ordinary rev-
enues, and without knowledge as to where revenue could
be obtained. Revenues, on the other hand, have fre-
quently exceeded the anticipated expenditures a situa-
tion which usually leads to the squandering of public
funds. The most common arrangement for a proper co-
ordination of expenditures and revenues has been through
the use of some form of a budget system.

Meaning of Budget. The term "budget" has no fixed
general meaning. Its origin is probably from the Latin,
bulga, meaning bag or purse. In the middle of the eight-
eenth century, when the Chancellor of the Exchequer in
England made his speech on the finances, he took his
accounts from a brugette (French for bag). Thereafter the
term budget was applied to this speech. A little later it
was used in France to denote an estimate of receipts and
expenditures. In some cases it is practically synonymous
with revenue and appropriation legislation.

A comprehensive budget system, however, should in-
clude more than this. It should be a definte plan to
include all the fiscal operations of a government for a
specified time. It may involve different features, one
logically following the other. A comprehensive budget
system, for example, might comprise, as an initial measure,
a careful estimate of expenditure and revenues by some
competent authority. These estimates should be given
the sanction of the legislative body through their incor-
poration into appropriation and revenue bills. Provision
should be made for the execution of the plan under legal
direction, while checks should be provided through proper
auditing and accounting methods. The fiscal, systems of
some countries possess some of these features and omit
others, while the officers to which the administration is
given in different countries are likewise not always the
same. For this reason mere reference to a budget system
is unintelligible.

The citizenship of a state has a right to demand the


most capable management of public funds. Government
expenditures necessarily mean public burdens. The more
the funds are squandered, the greater are the burdens
upon the citizens in proportion to the rendition of the
services for which the state was formed that is, the
things which can be done more efficiently by a collective
organization than by individuals. The use of a budget
a systematic administration of revenues and expenditures
such as that outlined above should, therefore, be de-
manded by every citizen hi order to make his government
susceptible to intelligent popular control and responsi-
bility, and so that each taxpayer may know where and
why he is paying.

214. England Has Done Much to Systematize Her Fis-
cal Operations. Great Britain has worked out a more
detailed system for handling her fiscal operations than,
perhaps, any other country, and her system has been
adopted almost in its entirety by India and Egypt. Be-
cause of the degree of perfection which is found hi this
organization, and because of the influence it has had m
the formulation of other fiscal programs, it deserves a
somewhat detailed exposition.

Formation and Passage of Budget. The British fiscal
year begins April 1st. Each year is complete in itself, and
no appropriations hang over from one year to the next.
The various departments of the government make esti-
mates of expenditures which form the basis for the figures
of the Treasury Department. These estimates are made
up at the request of the Treasury Department about
December 1st. They are then compiled and reviewed by
the Chancellor of the Exchequer, who has the power to
reduce them. Should the Chancellor not agree with the
Treasury Department, appeal is made to the Prime Minis-
ter as arbitrator.

With the list of revenues which has been prepared by
the Treasury Department, a balancing of possible receipts
and expenditures is undertaken. The result is some well-


formulated plan one which usually makes provision for
a rather large surplus. It then becomes the duty of the
King to lay the proposed fiscal scheme before Parliament.
The estimates are printed in well-organized and summa-
rized form, and placed in the hands of each member of
Parliament, where it becomes the duty of the Prime
Minister to pilot the bill, while its various items are de-
fended by the Chancellor, who is a member of the House
of Commons. 1

The various divisions of the budget, usually about one
hundred and forty hi number, are acted upon by the House
as a committee of the whole. Each section is discussed
and voted on. Items may be reduced but cannot be
increased except under closely restricted conditions.
Much debate marks the discussion of these items, and fre-
quently wanders far afield from the subject of the budget.
After the bills have been made acceptable to the com-
mittee, they are passed in Parliament proper, under the
title of the Consolidated Fund Act; this is usually ac-
complished before the end of the fiscal year. The pas-
sage of the appropriation measure is followed later by a
finance Act which levies the taxes for the year.

Classes of Expenditures and Revenues. The expendi-
tures of the United Kingdom are of two kinds, permanent
appropriations and supply appropriations. The former
need not be voted year after year, but have been voted to
continue until the Act under which they are authorized is
repealed. Examples of expenditures of this nature are
those for the sinking fund, pensions, debt charge, courts,
and the civil list. The supply appropriations, however,
must be voted repeatedly, and contain such items as the
appropriations for the army and navy, revenue depart-
ment, post office, railroads, and the civil service. Such an
arrangement not only simplifies the budget preparation,
but makes it possible to concentrate attention on the more
difficult and fluctuating items, while it tends to give a
feeling of security to activities undertaken by the state.

© Art Branch Inc. | English Dictionary