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Home -> Merlin Harold Hunter -> Outlines of public finance -> Chapter 3

Outlines of public finance - Chapter 3

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



28. Many Bases Have Been Used in Attempting to
Classify Expenditures. The early classifications of ex-
penditures in Italy and France have been noted. These
were based upon the objects for which the money was
used, such as government and protection. Many other
bases have been attempted with a varying degree of satis-
faction as to results. Some have sought to divide ex-
penditures into ordinary and extraordinary, while others
have attempted to separate the necessary from the un-
necessary or to make the classes the necessary, the desir-
able, and the superfluous. Some have tried to distin-
guish between money spent productively and that spent
unproductively, while a merely historical evolution has
sometimes been used. The United States Census Bureau
has worked out a statistical and accounting classification
based largely on functional activities. A classification,
aside from a mechanical one, which is perhaps the most
interesting, is based on the method of conferring benefits.
It will be interesting to note some of the purposes and
difficulties of these classifications.

29. Some Attempts at Classification Have Been Un-
satisfactory. At any particular time, especially if the
budget system be in use, ordinary and extraordinary ex-
penditures can be rather closely distinguished. The
names, in reality, explain themselves. Ordinary expendi-
ture is that which is expected, while the extraordinary is
for the unanticipated demands Expenditure for war
would be extraordinary, while that for the maintenance of


a standing army or navy would be ordinary. While such
a classification can be made at a particular time, it will
not hold over a long period of time, nor often for even a
period of short duration. Government activities have
been increasing at such a pace that an extraordinary use
of funds five years ago may now be considered perfectly
regular. Even an extraordinary expenditure for war in a
particular year may be considered as a normal expenditure
the following year. It is seen, then, that the classification
has no permanency, and a particular item of state activity
cannot be referred to as " ordinary" with no reference to
the time element.

Much the same objection can be raised against the
" necessary, desirable, and superfluous" classification. A
superfluous undertaking at one time may become desir-
able at another and necessary at still another. Besides
the time element, the element of personal judgment plays
an important part in this classification. The terms are
at best relative, and what might be considered necessary
at a particular time by one official or voter might be
branded by others as superfluous and extravagant. The
difficulty of getting any standard of measurement is in-
surmountable. Although the distinction of productive
and unproductive expenditure held an important place
for early students, it has little significance at present.
The idea of production has changed from Adam Smith's
notion of making a " material and vendable commodity"
to that of a creation of utilities. The vast majority, if not
all, of public funds are thus spent productively, although
it might be impossible to justify them from the ethical
standpoint. A historical classification is interesting, pri-
marily, in showing the evolution of state activities.

30. The United States Census Bureau Classifies Ex-
penditures. While the census classification is largely for
mechanical purposes, American students should be in-
terested in the method of listing and handling the funds.
There are two primary classifications, those known as


governmental cost payments, and the nongovernmental
cost payments. The former includes all the costs of any
political unit, accrued, paid, or payable, for services, for
property, whether bought, rented, or constructed, and
all expenditures for public improvements. It also in-
cludes all costs of materials used for whatever purposes,
interest on funds borrowed for running the government,
and the costs of the different kinds of protection. All
expenditures for social activities are included, as well
as the costs of caring for delinquent, defective, and
dependent classes. The costs of other services per-
formed by governments which cannot be easily classi-
fied are also put under this head. As a matter of con-
venience governmental costs are divided into expenses,
interest, and outlays.

Expenses include all payments other than interest from
which no permanent or subsequently realizable value is
received. Such are salaries, rents, costs of materials used
in government activities, and the management of funds.
It would also include losses from fraud, failures, or similar
circumstances. Expenses are divided into two large
classes those for the general departments, and those for
public service enterprises. The former are subclassified
into the costs of the principal divisions under which the
work of the general departments is carried on.

Interest, of course, is the amount paid for borrowed
funds. Outlays designate the payments for land, build-
ings, public improvements, and other similar payments,
and are used in carrying on some government function or
business which possesses some degree of permanency.
Any revenue which may be secured from these enterprises
is deducted from the outlay expenditure.

Nongovernmental cost payments are all the expendi-
tures not included in the above classification. They are
items usually of minor importance as compared to the
above, which do not enter into the general activities.
Examples are cost of goods to be resold, paying of debts,


and the balancing of accounts between different depart-
ments. While this classification is more or less obscure
as to the exact nature of the expenditures, yet, should all
our political units adopt it, comparative figures of ex-
penditure would be more easily available.

31. Expenditures May Be Divided into Four Classes,
According to Benefit Conferred. None of the classifica-
tions which have just been noted indicate to any degree
the underlying motive in making expenditures. There has
been nothing to indicate whether many or a few citizens
have been the recipient of the funds spent, or whether
individuals benefited have helped to bear the expense of
the service. Obviously such a classification, while it could
not be exact, would be of interest to students of fiscal
problems. Professor Cohn has proposed a division of
state activities which readily lends itself into a classifica-
tion of expenditures on the basis of benefits conferred. 1

Four groups of expenditure may be distinguished ac-
cording to the degree in which individual benefit is the
motive. By far the larger part of the state's expenditure,
however, is not concerned primarily with individuals, but
with the population in general. Hence the most important
class of expenditures would be for the common benefit.
The state also undertakes activities which directly aid
particular classes, yet makes payment entirely from the
common fund. This class might be termed expenditure
for particular individuals, yet treated as a common benefit.
Many state functions, moreover, are undertaken primarily
for the common good, yet they also confer individual
benefits for which the recipient is required to make pay-
ment. This might be termed the rendering of a common
benefit, but at the same time a special benefit. It is con-
ceivable, too, that the state might undertake activities
which confer only special benefits, and this would make
a fourth class of expenditure on the basis of benefits con-

1 Finanzwissenschaft, p. 117.


32. Important State Services Are Found in Each Class
of Expenditure. It will be interesting to note some ac-
tivities which fall under each of the above classes, and
then consider the more important ones somewhat in de-
tail. A large number fall under expenditure for the com-
mon benefit. Among those that at once present them-
selves to the mind of the reader are the use of funds for
protection, for the general government, for education, for
highways, for maintenance of standards of coinage, for
weights and measures, for diplomatic and consular serv-
ice, for maintenance of public buildings, and for the
numerous aids to developing commerce and industry.
The most important of expenditures for individuals,
yet treated as common, are those for defectives and
dependents. Bounties and pensions could also be placed
in this class.

Most of the numerous services for which fees are charged
fall under the group of expenditures which confer some
special benefit along with the common benefit. The ad-
ministration of the courts, maintaining patent and copy-
right systems, and chartering corporations are examples.
Paving streets, laying sidewalks, and building sewers are
usually treated in a similar manner. The class of expend-
itures for individual benefits is composed of the industries
carried on by the state on a commercial basis, and of the
monopolies maintained primarily for fiscal purposes. The
importance of these items varies in different countries,
and from time to time in the same country.

33. Reference to Statistics Shows Relative Importance
of Principal Expenditures. There is no better way to
gain at a glance an idea of the importance of the various
classes of expenditures than to refer to statistical tabula-
tions such as those found in Chapter II. 1 These tables
will show this relation, as well as the general increase in
expenditures. The following table will show the relative
importance of the various items in the states, counties,

1 See pp. 31-34.


and incorporated places 1 for 1913, the latest figures avail-
able for all the units: 2


General Government:

States $ 40,496,000 Per capita $0.42

Counties 102,335,000

Incorporated places 68,941,000

Protection to Person and Property:

States $ 25,066,000

Counties 15,213,000

Incorporated places 140,697,000

Conservation of Health and Sanitation:

States $ 6,388,000

Counties 2,815,000

Incorporated places 60,434,000

Highways :

States $ 16,884,000

Counties 55,515,000

Incorporated places 87,170,000

Charities, Hospitals, and Corrections:

States $ 87,586,000

Counties 37,816,000

Incorporated places 32,896,000


States $132,575,000

Counties 57,682,000

Incorporated places 223,896,000


States $ 1,983,000

Counties 420,000

Incorporated places 21,438,000

Public Service Enterprises:

States $ 3,461,000

Counties 189,000

Incorporated places 64,194,000


Per capita $0.26

" 0.18

" " 3.08

Per capita $0.07

" " 0.03

" 1.32

Per capita $0.17

" " 0.65

" " 1.91

Per capita $0 . 90

" " 0.44

" " 0.72

Per capita .


Per capita $0 . 02

" 0.005

" 0.47

Per capita $0.04

" " 0.005

" " 1.41

Expenditures of States. The following figures for the
expenditures of states are more detailed than in the previ-
ous table or the comparative one in. the previous chapter.
The figures are for 1918:

1 Incorporated places include all those with a population of about 2,500,
and above.

2 The statistical compilations in this chapter have been made from re-
ports by the Bureau of Census. Sec note, p. 31.



Total expenditure of all states, $473,962,000.
I. General Government:

(a) Total $ 51,395,000

(b) Legislative 8,182,000

(c) Judicial 19,224,000

(d) Executive 19,589,000

(e) Elections 701,000

(f) Government buildings 3,610,000

II. Protection to Person and Property:

(a) Total $ 33,290,000

(b) Police 1,719,000

(c) Fire 586,000

(d) Regulating financial institutions 2,107,000

(e) Regulating public utilities 3,896,000

III. Charities, Hospitals, and Corrections:

(a) Total $118,084,000

(b) Poor in institutions 333,000

(c) Care of children 3,330,000

(d) Blind, deaf, mute 6,172,000

(e) Other charities 9,474,000

(f) General hospitals 5,762,000

(g) Hospitals for insane 49,950,000

(h) Adult Correction 33,000,000

(i) Minor Correction 8,471,000

IV. Education:

(a) Total $164,452,000

(b) Supervision 4,070,000

(c) State Institution 52,581,000

(d) Apportionments 104,841,000

(e) Libraries 1,268,000

V. Development and Conservation of Natural Resources:

(a) Total $ 21,634,000

(b) Agriculture 17,061,000

VI. Health and Sanitation:

(a) Total $ 12,249,000

(b) Tuberculosis 5,748,000

VII. Highways:

(a) Total $ 38,829,000

34. Expenditure for Protection Is an Important Item.
A glance at the statistics just given and at those in the

1 It will be an interesting gxercise for the reader to secure a copy of
Financial Statistics of States for the current year, and compare the various
expenditures of his state with the average, and with the expenditures of
other states.


preceding chapter will show that the expenses incurred
for protection to person and property are large. In the
Federal government a large part of such expense is for
the army and navy. The maintenance of these modern
instruments of war in time of peace is costly, while in
time of actual warfare their cost is enormous. This is
not only true of the United States, but of every important
country. In fact, the expenditure has been much greater
in European states than in the United States. This has
been due largely to the proximity of the European states
and the existing enmity caused by past wars. Even be-
fore the Great War attempts were being made to find
some other means of settling international differences, and
for upholding national honor, than by the commonly ac-
cepted one war. It was generally conceded that the
Hague conferences had proceeded far in this direction.
The Great War, of course, disillusioned the minds of those
who thought wars a thing of the past. It remains to be
seen what effect the League of Nations will have on ex-
penditures for armies and navies.

Cost of Maintaining Armies. An attempt to get satis-
factory comparative costs for maintaining the military
machine in different countries would meet with unsatis-
factory results. One important reason for this is the dif-
ferent systems used in maintaining armies. The system
which has been used in Germany, compared with England
or the United States, for example, will indicate the futility
of any close comparison of costs. Germany has followed
the plan of compulsory military training for all male citi-
zens. The standing army, then, is made up of this citizen-
ship which is serving without remuneration from the

In England and the United States, on the other hand,
the army is maintained on the basis of paid enlistment.
A part of the citizenship makes the army their vocation,
for which they receive pay from the state. From the
standpoint of direct cost the plan pursued in England


and in the United States would appear to be the more
expensive per man. Before total costs could be reckoned,
however, a number of other factors would have to be
considered. Such would be the expense of training under
the two systems, the effect of general training upon the
individual citizens, and the effect upon industrial and
commercial development. A real comparison of the first
item would be difficult because of different wage and liv-
ing standards in various countries. An enlisted army is
paid entirely from taxes, while in the other system services
are substituted for taxes. Rather than give the service,
large sums might be willingly given in taxes. Of course
there is no way of measuring this feeling of sacrifice.

Training, moreover, cannot but affect the individual.
Unless conducted in connection with an educational in-
stitution it means a postponement of preparation for
industrial and social activities. Where general services
are demanded, it is evidently impossible to conduct a
very large proportion of it in connection with other forms
of education. As a whole, it means the postponement of
a settled life until the period of military service is com-
pleted. Such a situation cannot but have a deleterious
effect on industry. Aside from the fact that men do not
get settled into their life tasks until comparatively late,
it must be remembered that industry is deprived of the
services of its entire citizenship during the period of
training. If all these factors could be measured on a
money basis the cost of the universal service plan would
no doubt prove to be much greater than is sometimes

Costs of War. The expenses of actual wars are not a
part of the costs of a standing army, but must be treated
as extraordinary. That they mount to almost unbeliev-
able figures is the common knowledge of everyone who
has observed expenditures due to the Great War. Legis-
lative bodies made appropriations day after day which, a
few years before, would have been greeted with horror,


A few comparative figures of the Great War will recall
the enormity of the cost. The direct cost of the war to
the United States from July 1 to December 31, 1917,
was about $5,992,000,000. If loans to the Allies were
added to this it would raise the figure to well over $9,-
000,000,000. Had the war continued through the fiscal
year in which the armistice was signed it is estimated that
about $25,000,000,000 would have been used.

From April 1, 1916, to March 31, 1917, England spent
for the war almost $11,000,000,000, a daily expenditure
of over $30,000,000. From January 1 to December 31,
1917, the cost of the war to France was about $5,820,-
000,000. The figures for the other belligerent coun-
tries are similar, and the total reaches an amount so large
as to have no real meaning. Modern war places such a
burden on a country that the efforts of a number of future
generations will be required to remove it. 1

Functions of Army and Navy. It would be impossible
to place the maintenance of the army and navy on a cost
and value of service basis. If they were useless except in
time of war, it would seem that a large amount is being
expended with little return. This would be true if only
the returns from war be considered. Other services, how-
ever, are rendered. The navy gives protection to ship-
ping, and thus aids the development of commerce and
industry. The existence of an army gives a sense of
security, and no doubt does much to keep down both
internal and external disturbances which might other-
wise arise. The services supplied by the expenditures
of the Federal government for army and navy, then,
are largely of a nature the value of which cannot be

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