Disadvantages of Public On the other hand, there are undeniable disadvantages and dangers connected with the constantly in creasing tendency to resort to public credit to meet all unusual or large expenditures. Per haps the greatest danger is connected with the last argument cited in favor of public debts. It is so easy to impose the burden of an unusual cost upon the next generation by borrowing the money instead of levying heavier taxation that there is danger that this may be done when there is no real Justification for it. Many a local community in the United States to-day is paying the interest on bonds issued to pay for im provements that either never were constructed or wore out before the debt was paid.
Another clanger lies in the effect which the raising and spending of large sums obtained by the sale of government bonds may have upon private industry. This will be keenly felt if the need of the government is great and it raises e rate of interest in order to attract the needed supply of capital. Then the capital which would normally have replaced losses through depreciation, or have provided for ordinary growth of the business, may be di verted from private industry into the public purse. But before describing even such a di version as an evil we shall have to know the use to which the money will be put. It may be that the government expenditure will bring advan tages so great as far to outweigh any losses that may be inflicted upon private industry; unhap pily the reverse has generally proven to be the case in the past.
Classification of Public In the creation of a public debt various technical ques tions arise which it is necessary to describe if we are to have a clear idea of its character. The classification of public debts may first be considered, and here there are several lines of distinction. A usual distinction is that between 0 • f o=4,Inaas • .,..as-kgaLoney, and vatimam loans orformer may more properly be discussed under the title paper money, we shall pass on to the further classification of bonds. With reference to the character of the security behind them, these may be classified as floating or funded; the former consist of unpaid accounts charged against the state, while the latter are debts which have been formally acknowledged by the government and their payment provided by law.
Funded debts again may be classified with reference to the time they have to run, into terminable and perpetual debts. By the former is meant debts which run for a certain specified term upon the expiration of which they are redeemable or convertible at the option of the government. By a perpetual debt is meant one whose contract mentions no time at which pay ment can be demanded by the creditor; while the government theoretically may pay off such a debt at will, it seldom exercises the privilege, and the debt becomes practically a perpetual one.
Such is the form in which most of the French debt has been thrown, while the favorite form for debts incurred by federal, state or local governments in the United States has been the terminable bond.
One great advantage which the latter has is the fact that the government is thereby given the power, when the bond matures, of convert ing it into another one bearing a lower rate of interest. Inasmuch as most loans are created in times of crisis or of urgent necessity, the rates of interest have probably been higher than they will be subsequently. Moreover the tend ency of the whole 19th century was toward lower interest rates. Short term bonds with frequent conversions would, therefore, lower the national interest charge and set free income which could be used to pay the principal of the debt. Sometimes the debt is thrown into a form intermediate between the terminable and per petual, namely the annuity. This is really paid in installments, for the obligation of the gov ernment is terminated upon the expiration of the term agreed upon, whether a certain definite time or the life of an individual.
Rate of Another technical ques tion to be decided when the debt is created is whether loans shall be placed at or below par. The general verdict is that the government should fix the rate of interest at a point that will approximate the market rate as closely as possible, for if it is fixed any lower the bonds will sell for less than par and the government will then have to pay back a larger sum when it extinguishes the debt than it receives at the time of sale. Usually only those nations which have a practically perpetual debt have preferred to sell their bonds at a discount in order to secure the lower interest rate.
Should a Public Debt be The final problem, but probably the most important of all after the debt has been incurred, is that of debt payment. Should a nation endeavor to pay off its debts? The policy adopted by the United States from the very beginning of its national existence has been one of debt payment, but this policy has not been generally adopted by other nations. England was practically the only European nation which reduced its national debt during the 19th century. This difference in practice reflects two very different theories as to the desirability of debt payment. The one school holds that the only way to get rid of or reduce the burden of a debt is to pay off the principal; the other wishes to accomplish the same purpose by so developing the resources of the country that the burden of the debt be comes negligible.