CHAPTER IV

THE DEVELOPMENT OF PUBLIC REVENUE

47. Most Demands of the Modern State Are Monetary.
In supplying the various materials and services which
have been considered in the preceding pages, the state
has no superhuman power. The funds required for these
expenditures must be secured from some existing source.
The two most imperative needs of the state are the con-
trol over space, from which it can direct its activities, and
the control over services and commodities with which to
carry out its desires. The modern state differs vastly
from the earlier ones in the method by which this control
is secured. Under feudalism and other early forms of
government the ownership of the land was in the hands of
the state, and the first mark of citizenship was obligation
to render services to the state. Gradually the lands
passed into the ownership of individuals, and the obliga-
tion of service was no longer synonymous with citizenship.
The change has continued until the modern state must
act very much as an individual in supplying itself with
space, services, and commodities. If land is needed for a
public building it must be purchased in the open market.
Officials are secured to carry out the functions of the
state by paying them salaries. The powers of the state
are somewhat stronger than those of individuals, however,
in that it can commandeer land for its use, or for the use
of individuals it may designate, through the right of emi-
nent domain. It also has the right to coerce services of
its citizens. This always follows some well-defined plan,
and may be extended to include a large proportion of the



THE DEVELOPMENT OF PUBLIC REVENUE 75

citizenship, as in the case of conscription for army and
navy services.

The best example, perhaps, in normal times, of coercive
service, is in securing men for juries. This is a general
practice in the United States. Another form of coercive
service which is rapidly disappearing is the requirement
of a certain amount of work for the maintenance of high-
ways. With few exceptions, then, it may be said that the
demands of the modern state are monetary. It requires
its revenue to come in the form of money, and uses this
money to secure land, services, and commodities from
individuals or governments, instead of requiring them to
be supplied gratuitously.

48. Gratuitous Services to the State Are Unsatisfac-
tory^ The unsatisfactory character of gratuitous services
is one reason why they are so little used at present. In
the United States services are sometimes given on boards
of directors, or as visitors to public institutions, or occa-
sionally as mayors of small towns. The motives which
prompt citizens to offer such gratuitous services are pa-
triotism, distinction, or some such appeal. That patriot-
ism gives a strong appeal was evidenced by the number
and caliber of some of the "dollar a year" men in the
service of the United States government during the Great
War.

The difficulty with most of the motives for gratuitous
services is that they are not of sufficient permanence to
insure a continued efficient service. The patriotic flash
soon dies with the passing of a crisis, while a position of
honor may quickly lose such distinction. Men who re-
ceive nothing for their services can hardly be expected
to give much in return. It is only when they are put on
a "value received" basis that the public can successfully
hold them responsible for the proper performance of
duties. The motives for gratuitous service, moreover,
unless underneath there be a chance for individual gain
or pull and then the service ceases to be gratuitous



76 OUTLINES OF PUBLIC FINANCE

are ordinarily not strong enough to call men with marked
ability. Either they will have accomplished their goal in
private life, and are willing to ease off on the public, or
will be using the office as a stepping stone, neither of which
could give the best results. As a whole, political units
have gone to the basis of paying for men to render the re-
quired service, and it is the duty of the citizenship to hold
officials responsible for the proper conduct of their duties.

49. Public Revenues Received Many Early Classifica-
tions. Almost as soon as states began to rely upon rev-
enues to carry on activities, those interested in fiscal
problems became concerned about the importance and
justice of the various sources of revenues. Bodin, the
French scholar, gave one of the most interesting early
classifications. He enumerated seven sources for securing
public revenue wlu'ch, he said, included all that could be
thought of. They were: (1) landed domain; (2) con-
quests from enemies; (3) gifts from friends; (4) tributes
from subject states; (5) public trading; (6) customs
duties; (7) taxes.

Such a classification is interesting when compared with
the important modern sources of revenue. Bodin held
that the revenues from public domains were the most
just and certain, but that customs duties were wholly
just. His reason for the latter was the one commonly
held at that time if any foreigner was to gain by trading,
let him pay for it. Taxes were only to be used when all
other sources failed to produce a sufficient amount.

Adam Smith divided revenues into those coming from
a fund belonging to the state, and from a fund belonging
to the citizens. He was not in favor of the state entering
industry, and believed that most revenues should come
from the citizens. Most of the other early fiscal writers
were likewise concerned about the important sources of
revenues, and many of these sources were discussed, not
only from the fiscal point of view, but from the standpoint
of economic principle and ethics as well.



THE DEVELOPMENT OF PUBLIC REVENUE 77

50. The Question of Public Lands Has Been Important.
The public domain formerly held the most important
place in the source of revenues. Much discussion arose as
to the wisdom of this, and the result has been that modern
states have almost entirely disposed of their landed pos-
sessions. A number of reasons have been set forth why
the state should retain these lands, and also why the state
should dispose of them. The best summary of these argu-
ments has been given, perhaps, by Rau, a German fiscal
writer. Some of them are worthy of notice.

Disposal of Public Land. A state should give up its
public domain, he said, because it was not fitted to enter
industry. In private hands the domains would yield a
larger income because an individual owner is more ener-
getic in seeking to get profits than is a public official. As
a rule public officials are not so much concerned in making
improvements in methods of production as are individ-
uals. The public ownership of land, moreover, gives the
government a special interest of its own, which may lessen
its activity in undertaking projects which might be
needed for the general good of its citizens. Competition
with private industry might also lead to dissatisfaction.
Experience has shown, moreover, that states that have
given up lands have had an ample source of revenue from
the citizens, which shows that the retention is unnecessary.

Retention of Public Land. On the other hand, some-
thing may be said in favor of the state retaining lands so
as to have an independent source of revenue. An income
from such a permanent source can be depended upon, and
the state does not have to rely upon legislative enactment
to procure funds. When legislative enactment is neces-
sary, officials who desire to gain favor with a part of their
constituency may curtail the exaction of revenues far be-
yond legitimate needs. Recognition has sometimes been
made of the fact that particular officials may be hostile
to, or disinterested in, certain public enterprises, the use-
fulness of which could be hampered by retrenchment in



78 OUTLINES OF PUBLIC FINANCE

the revenues for their development. To prevent this
situation, provision is sometimes made that a certain
part of the revenue collected shall be used for a particular
purpose, as, for example, for the state university. If the
citizenship lacks public spirit, moreover, and resents the
exaction of funds, an independent source of revenue might
mean more harmony within the state. The problems of
inequality and injustice, which arise when funds are
secured from individuals, would also be minimized, it was
claimed.

Public credit would be strengthened, it was further
contended, if the state had public lands to offer as security.
Use was made of lands as a basis for credit to a relatively
large extent in the early development of governments.
One of the best examples of the use and failure of the
public domain as a basis for credit was in France, when
John Law used it as the basis for bank note circulation.
Not only were the notes based upon the public lands of
France, but also upon the lands in the Mississippi Valley.
Difficulty arose, however, when attempts were made to
redeem the notes.

The reasons set forth for the state's retention of public
lands would have more weight if they could be managed
as efficiently in the hands of the state as when turned over
to individuals. This, however, would seldom be true,
especially if agricultural pursuits were followed, since
this form of industry does not lend itself well to large
scale production. The state can draw upon the resources
of its citizenship, moreover, and it has usually gained by
disposing of its lands and allowing them to be managed by
the greater efficiency of individuals.

51. The United States Has Disposed of Her Public
Lands. More than three fourths of the continental area
of the United States has at some time been the property
of the Federal government. Ownership was acquired in
various ways. The original thirteen states ceded much of
their claims to the Federal government. The Louisiana



THE DEVELOPMENT OF PUBLIC REVENUE 79

purchase was the most important single acquisition. It
was purchased from France in 1803 for $15,000,000.
Florida was purchased in 1819 for $5,000,000. The Ore-
gon territoiy was obtained by treaty in 1846. Mexico
ceded a large portion of the Southwest in 1848, while a
small addition was made by the Gadsden purchase in
1853. An important purchase outside the continental do-
main was that of Alaska from Russia in 1867, for $7,500,-
000. Other small additions have been made in the form
of islands located in various parts of the world.

The government very early took the attitude of dis-
posing of its public lands. About three fourths of the
amount of land which has passed from the control of the
government has been in some form of a gratuity. A part
of this has been given to states for various purposes, some
to companies and individuals in order to foster internal
improvements, while much has gone to aid the develop-
ment of educational institutions.

Method of Disposition. A number of policies have been
followed in the disposal of public lands. At first the at-
tempt was made to dispose of large tracts of land for cash
payment. The scheme failed because of the lack of avail-
able funds for purchasing, and because land had not yet
entered into a category to appeal to speculators. The
opposite policy of the sale of small tracts on credit was
adopted about 1800. Greater success attended this policy,
since actual cash was not needed, and because it catered
to the speculating class. The net result, however, was
somewhat disappointing, since a considerable amount re-
verted to the government when payments could not be
made. About 1820 another method of sale was put into
force. Cash had to be paid for lands, but any amount
above a moderate minimum which the purchaser desired
would be sold. Sales were slow until just preceding the
panic of 1837. The deposit of the Federal funds in the
state banks, with the subsequent multiplication of bank
note currency, gave an abundance of cash, while public

6



80 OUTLINES OF PUBLIC FINANCE

lands formed a good speculative investment. This situa-
tion existed until Jackson issued his " specie circular,"
which prohibited the acceptance of bank notes in payment
for lands. The panic soon followed, which, of course,
stopped all purchases for the time being. Since then an
attempt has been made to dispose of lands to actual set-
tlers under different preemption and homestead acts.

The government has usually tried to prevent land grab-
bing and the accumulation of large tracts of land in the
hands of single individuals. This policy has often been
frustrated by various frauds and schemes, and by the lax
requirements of the government. Numerous cases of
fraud have arisen in securing and holding claims. Resi-
dents of Eastern states have frequently found themselves
owners of tracts of Western lands with which they have
had nothing to do except permit some acquaintance to
use their names in making the claim. The most serious
violation, perhaps, of the principle of breaking the land
up into small plots came in the disposal of the large gifts
made to the various states for educational purposes, and
through the gifts to railroad companies. Some individuals,
also, have succeeded in securing tracts which control a
much larger area than was intended by the acts of the
government. The best examples of this are claims in the
West which control the only available water for much
larger areas.

Success of Policy. Congress was severely criticized for
some of the purchases of public lands, while some officials
looked upon them as possible sources for immense rev-
enues. Jefferson looked upon the Louisiana purchase as
a source for the payment of the national debt. The poli-
cies used in distributing the lands, however, precluded the
materialization of any of these predictions. On the other
hand, the returns from sales of lands have lacked more
than $125,000,000 of meeting the expenses which the
government incurred on their account. These expenses,
in part, came from making surveys, extinguishing Indian



THE DEVELOPMENT OF PUBLIC REVENUE 81

claims, and maintaining the land offices. An extensive
domain still exists, but it is in large part the undesirable
land of the country, and will not likely be any source of
profit to the government.

If the land policy were judged on the business standard
of profit and loss, it would be considered a failure. From
the standpoint of expediency, however, in spite of the
frauds and evils which arose, the policy has been a wise
one. The rapid development of the country was an im-
portant result of the rapid disposal of lands. The possi-
bility of getting title to lands caused a flood of Western
immigration which would not have arisen had the gov-
ernment attempted to retain title and to lease the land,
or to sell at a profitable figure.

The grants of lands to transportation companies greatly
stimulated the building of railroads, which did much
toward hastening the agricultural and industrial develop-
ment. The wealth based upon the former public lands
has increased many fold since it has been turned over to
individuals. The wealth of the citizenship, after all, is
the resources of the state, and there is a much larger
source upon which the government can draw for support
than if it still retained much of the former public lands.
It is interesting to speculate whether the government
would have been as able to meet such a crisis as the Great
War had it followed the policy of retaining its lands as a
source of revenue.

Policy of the States. The policy followed by the various
states in disposing of lands which were in their possession
has been similar to that of the Federal government. To
dispose of them as quickly as possible has seemed to be the
general tendency, at least until a few years ago. The
number of frauds which arose has led to a somewhat more
guarded policy in managing and distributing what re-
mains. This has been most marked with the forest lands
of the North, the swamp lands of the South, and the arid
and mining lands of the West. Many statutes may be



82 OUTLINES OF PUBLIC FINANCE

found which deal with the use and disposal of such of
these as remain in the hands of the states, but as yet pub-
lic industry on the land is undertaken to only a limited
degree. More is done to govern individual ownership and
management.

52. Agitation for the Public Retention of Forests and
Mines Has Been Increasing. The justification of public
ownership of such domains as forest and mineral lands
stands upon an entirely different basis from public owner-
ship of agricultural lands. Management of forestiy and
mining projects is much simpler than agriculture, since
these industries can be conducted on a large-scale basis to
a much greater advantage.