A review of the history of the national debts of various countries indicates the fact that there are a variety of factors which cause both the growth and reduc tion of national debts. Perhaps the most important single element influencing borrowing by nations is war. Usually the huge finan cial requirements for carrying on warfare result in large bond flotations by countries. In the United States the national debt first arose out of the Revolutionary War. In the War of 1812, the Mexican War, the Civil War, the Spanish-American War, and the World War, sharp increases occurred in the national debt. The effect of the World War can be seen by the rise from a national debt of approximately one billion dollars before the war to more than $26,000,000,000 in 1919. During the Civil War, the national debt rose nearly 4o-fold from approximately $75,000,000 to more than $2,750,000,000, a staggering total at that time. In the early stages of national development, some countries have incurred substantial indebtedness in the promotion of economic progress. Such undertakings as directly subsidizing new industries and facilitating the development of natural resources by providing new roads, equipment, and special privileges have often resulted in national indebtedness. There is also historical evidence of national debts increasing during periods of business depression, primarily as a result of reduced tax revenues rather than in creased public expenditures. However, during the world wide depression of almost unprecedented severity which began at the close of the 1920's, national debts in a great many countries, particularly in the United States, rose not only because of re duced revenues, but also because of marked expansion in govern ment disbursements for both relief and recovery purposes. Na tional debts usually decline during periods of business prosperity when government receipts are high. Occasionally national debts are reduced or wiped out through monetary inflation or default.
The internal part of the national debt of a country can usually again be sub-divided into funded, short term and floating debt. Normally the greater part of any national debt of any magnitude such as that of Great Britain for example, is funded or (see CoNsoLs) is in stock virtually irredeemable other than at the option of the State. In the case of a great increase in debt due to a war, however, it is not unusual to find a great part of the debt in short-dated form and even in floating obli gations. The former term generally applies to debt where ma turity dates range roughly from anything between five and thirty years, while floating debt is usually applicable to bonds of not more than 3 years' duration, Treasury bills of a few months' dura tion or to ways and means advances. (See FLOATING DEBT.) Internal and External Debts.—The national debt of a coun try can usually be divided into internal and external debts. A moment's thought will show that large external, even more than internal, debt, may be a handicap to a State. If a country has a large internal debt, it may mean that much money has been expended either in war or in unproductive enterprise and that by reason of high taxation to pay the interest, considerable income shifts occur. Still the money represented by the interest remains, as it were, in the family, the payments constituting a transfer from one pocket to another. In the case of an external debt,
however, whatever advantages may have accrued from the original employment of the sum borrowed—and if the cause has been a great war, the advantage other than political is seldom of an enduring kind—there remains during the lifetime of the loan a large annual payment to the creditor country which may prove a serious embarrassment to the debtor owing to the effect on the exchange between the two countries. In old-established countries, such as Great Britain, external indebtedness was unknown to the present generation until the World War, when considerable debts to foreign countries were incurred. However, in the case of Great Britain most of these have been repaid, with the exception of the large debt of about £900,000,000 to the United States. In newer countries, however, external debt often constitutes an outstand ing feature, the older and wealthier countries having financed the development of the natural resources of the new areas, thereby creating conditions of prosperity enabling the borrowing country to meet the annual interest and sinking funds. Prop erly conceived such loans are an instance of capital creating new and real wealth. Not infrequently, however, such borrowing pro ceeds too rapidly and a country although rich in resources is unable for a time to meet its debt charges. Speaking generally, it should be the aim of a country to raise its loan requirements as far as possible internally, even if a slightly higher rate of interest has to be paid.
In arriving at the total national liabilities of a country, it is necessary to turn to the statement of assets which is usually presented separately. The total is not usually deducted from the national debt, but it has nevertheless to be borne in mind. In the case of countries where undertakings such as rail ways and harbours are owned by the State and are revenue pro ducing, such assets constitute a very important item in the na tional balance sheet and it is not infrequent to find that when such countries are raising external loans, great emphasis is laid upon these assets as an offset to the national debt. A considerable por tion of the national debt created in the United States in the 1930's represented loans for the purpose of building roads, schools, dams, airports, and numerous other types of publicly owned evi dences of national wealth. It may not appear obvious that such structures are wealth in the same sense as privately owned assets, but these assets do yield income in that individuals and business enterprises enjoy better travelling, educational, and domestic liv ing facilities as a result of such public assets. If Government books were kept like business books, the capital outlays would not be set off against current receipts, thereby showing large budget deficits. Such outlays are investments and not current expenditures. Of course, in order for the entire public to own these assets outright, the debts incurred in their construction or purchase must be repaid through taxation. The United States against its greatly increased internal debt has offsets of enormous sums due from Great Britain and her Allies in the World War.