DEBTS, Public. Public debts are essen tially a modern phenomenon, for before they could appear, private credit with its accompany ing mechanism of banks, brokers and credit instruments had to be developed. Certain pre conditions had to be met before states could resort topublic borrowing on any considerable scale, and these conditions have been fulfilled only in comparatively recent times. These con ditions are, first, the existence of a money market where capital can be obtained in ex change for the promises to pay in the future which constitute a public debt. The capital itself, the machinery for carrying on these transactions, and lastly the willingness on the part of capitalists to lend their money must all exist. This last necessity points to the second of the pre-conditions mentioned above, namely the existence of some adequate security by which the lender may be induced to make the desired loan. At first the promise of a needy monarch was backed up by the pledge of some tangible security, as the crown jewels, or land, or the revenues from some impost. But with the development of constitutional government a more adequate guaranty has been given the lender, and with the development of public credit has gone on the expansion of public debts. The greater security afforded the lender under constitutional government consists, as Prof. H. C. Adams has pointed out, in the power and influence exerted by the propertied classes upon the legislative bodies to prevent them from re pudiating public obligations. The public creditors in effect lend to a corporation — the government — which they themselves control.
Public debts were first created on any con siderable scale in the 18th century, but the 19th century saw an enormous increase in the num ber of countries making use of public loans and in the sum total of these loans. It has re mained for the opening years of the 20th cen tury, however, to demonstrate the to which states can make use of their credit in times of national emergency. The following brief table shows the growth of the public indebtedness of the civilized nations of the world for the last two centuries: Purposes, Temporary Necessity.— The purposes for which governments may properly incur debts are in the main reducible to three— temporary necessity, special emergency and the construction of public works. The first of these
arises when the actual revenues fall below the estimated revenues and a deficit ensues. It is, of course, impossible that the budget should exactly balance every year, and either a surplus or a deficit is likely to result. Constant sur pluses are dangerous as tempting the legislative body to extravagance, and should be avoided. We have only to point to congressional extrava gance in the United States between 1888 and 1892 for illustration. Occasional deficits may, therefore, be regarded as a normal incident, and provision should be made for meeting them by the issue of short term treasury notes, payable, as in the case of the Federal government, in three years, or an even shorter period. These should be met out of taxes which may be in creased for this purpose, or the necessary funds be met by greater economy on the part of the legislative body for the next two or three years. It is only when these temporary deficits become recurrent and when accumulated deficits are converted into permanent obligations, as in Austria from 1904 to 1914, that this practice becomes dangerous. This method of treating temporary deficits must be condemned, as they should never be allowed to become a part of the permanent debt.
Special Emergencies.— By far the greatest part of existing national debts has been incurred to meet special emergencies, of which war has been the chief. An emergency arises when the need of the government for money is immediate and pressing, so that it cannot wait for the tardy returns of new taxes. There are several conceivable ways in which such a situation might be dealt with which may be briefly de scribed. In the first place a nation might ac cumulate in prosperous times a reserve fund or for use in emergencies. Such a method has been followed by Prussia since the time of Frederick the Great; since 1871 this war chest had consisted of $25,000,000 in specie, which in July 1913 was increased to $60,000,000, in addition to which there were various securi ties. It may be conceded that such a reserve fund renders the first mobilization of the troops somewhat easier, but as a substitute for borrow ing the enormous sums necessary in a modern war it is ludicrously insufficient. Moreover, there are various serious financial weaknesses in this method.