THEORY OF PUBLIC DEBTS. In the eighteenth century it was held by many writers on finance that a public debt increased a nation's wealth. Public bonds were regarded as a net addition to capital. The claim was also advanced that a public debt was a matter of indifference to the State, since it merely represented money owed by one set of citizens to another. Adam Smith and his followers, on the other hand, were inclined to regard public debt as an unqualified evil. Modern opinion recognizes that the debts of a State, like those of an individual, are necessary or wise or foolish, according to the circumstances under which they are contracted. The expenses of a State are incapable of sudden contraction; its revenues, however, fluctuate to a considerable extent. Unless a large surplus is put by in favorable times, a deficit is inevitable at times when revenues fall off. Since the ac cumulation of a surplus seriously disturbs com merce and industry, the creation of floating in debtedness is frequently expedient. In time of war, when the honor and possibly the very exist ence of a nation is at stake. it is imperative that immense sums of money should he raised to meet the expenditures attendant upon mobilizing and equipping armies, building fleets, and preparing defenses. At such a time the ordinary sources of revenue fail; taxation sufficient to cover the abnormal expenditures would amount to a virtual confiscation of property, and would so derange industry as to impair the capacity of a State to withstand a long-continued struggle. The rais ing of a Ioan shifts the burden to a period when industry will be better prepared to endure it. In the peaceful competition for commercial as eendeney, great advantages are gained by those States or communities which are first to develop their It is. therefore, often expedient to umlertake public improvements which would he ton costly to he paid for out of increased taxation. Such improvements, moreover, create new sources of revenue, and therefore may im pose merely -a nominal burden upon posterity.
Certain classes of public works—e.g. State rail ways and telegraphs—yield a direct revenue which may be sufficient to cover depreciation and interest on the capital invested in them. It would be manifestly unreasonable to pay for such works out of taxation. 'lo do so would un justly burden the present taxpayer for the ad vantage of future generations.
While there are circumstances, then, under which the creation of public debt is abundantly justified, it remains true that in practice, debts are often contracted to national detriment. The ease with which money is raised by loans leads often to reckless linanciering. Lseless wars are undertaken, premature and unproductive pub lic works are entered upon. The expediency of particular loans, however, is a matter to be de cided by practical politics, not by financial theory.
The effect upon industry of the creation of a public debt has received thorough discussion from economists. When the Government enters the market as a bidder for money, capital is drawn away front productive enterprises, and industry is in so far hampered. It may, however, happen that the demand for more capital will encourage saving, so that the loss to industry will not be measured by the whole extent of the public loan. If the loan is for productive purposes which would otherwise be undertaken by private enter prise, industry is not necessarily deranged. It makes some difference whether the loan is made at home or abroad. Owing to friction in the in ternational !low of capital. a foreign loan may have far less effect upon national industry than a domestic loan.
important political consequences frequently re sult from the creation of a public debt. When the creditors of a State are its own citizens, a party vitally interested in the stability of the govern ment is created. When a weak State incurs a large debt to foreigners, it may endanger its own autonomy. Egypt is a classical example of a State which has fallen under foreign control in this way.