The New International Encyclopædia/Finance
FINANCE′ (Lat. finantia, payment, derivative of finare, to pay a fine, from Lat. finis, end, settlement). A term which is popularly applied to the management of transactions involving large sums of money, such as the floating of great corporate enterprises and the stock-exchange transactions incident thereto; or, on the other hand, the administration of the receipts and expenditures of nations, States, or cities. The operations first named are frequently designated ‘private finance,’ while the latter is spoken of as ‘public finance,’ or simply finance. The rules of private finance, it such there be, have not yet been formulated, and it is indeed only in recent years that economic writers have sought to coördinate the rules and principles of public finance into a science of finance. Scientific usage restricts the term public finance to questions affecting the expenditure, revenue, and debt of governments, although in a popular sense it is applied to questions of monetary and banking policy.
The science of finance is much younger than the art of finance, and this dates only from the rise of the modern State. In the latter, public needs are met by an expenditure of money drawn from the people by taxation and other methods, while in the mediæval State such needs were largely met by direct personal services. These have been almost entirely superseded by the obligation to pay taxes, and by the payment in money from the public treasury for such services as are required; but there are reminders of the older system at the present time. Of these the most conspicuous is the obligation to bear arms; but a homely illustration is found in the road taxes of rural communities, which are so often satisfied by actual labor upon the roads.
While questions of public policy respecting the fiscal operations of the Government form a large part of the literature of economics, it was not until the latter half of the nineteenth century that the general use of the term finance became common among English writers to designate this group of phenomena. The importance of this development lies in the fact that before it took place all these questions were regarded from the standpoint of the individual, instead of that of the State. The former is apt to be one of hostility, the latter at least of sympathy. While earlier writers emphasize the dangers of taxation, the oppression which it causes, the disturbances in the economic life of the community which it involves, later writers recognize certain normal activities for the Government, the satisfaction of its needs by taxation as appropriate, and look upon the payments of the citizens, not as sums wrung from them by extortion, but as assessments for the maintenance of a system essential to the general well-being. This attitude has led to a fuller investigation of the facts concerned, and furnishes a central point about which they can be coördinated.
The development of a science of finance as here indicated has pointed out the contrasts as well as likenesses between the management of the money affairs of States and individuals. To both the rule of economy and caution applies equally, however great the temptation in public affairs to neglect it. By its sovereign power over the citizens, the State seems to be in a position to take all it wants. This has led to the hypothesis laid down by certain writers that in private economy expenditure is measured by income, but in the economy of the State income is measured by expenditure. The epigrammatic statement is wholly true, since among individuals expenditures are made by inroads upon capital when income does not suffice, while in the State expenditures are sometimes curtailed and more frequently postponed for lack of sufficient income. Yet, within limits, such a contrast exists, and marks the divergent tendencies of public and of private economy.
Public Expenditure. It is through the expenditure of public money that the State works in all of its activities, and it is the first duty of the science of finance to determine their nature and scope. Finance accepts public expenditures as a fact. It is not concerned with justifying them, either in whole or in detail. Whether a given expenditure is proper is in part a question of political philosophy, in part a question of practical expediency. The former may influence general lines of policy in this respect, though in practice each proposed public expenditure is apt to be judged on its own merits. The grounds upon which such proposals are approved or rejected lie outside the domain of finance. But the fact that expenditure is made is of prime importance, and, scrutinizing the expenditures which are actually made, finance seeks, by classifying them, to arrive at the laws of their development.
Classification of Public Expenditures. Formerly economists classified public expenditures as necessary and voluntary. This classification, based upon a definite theory of the functions of the State—a subject beyond the province of finance—obviously fails to meet the requirements of modern financial theory. A fairly satisfactory classification is that of Prof. Henry C. Adams, who classes public expenditure as protective, commercial, and developmental. The first class includes the preservation of internal peace and the defense of the nation against foreign aggression. In the second class are placed expenditures entailed by the performance of a number of functions in which the State takes the place of the private capitalist, as in the management of enterprises such as the post-office, telegraphs, and railways. In the third group, developmental expenditures, are included those which the State undertakes to promote its own interests, or those of its inhabitants, such as expenditures for education and other outlays which are designed to improve general conditions among the people. It is not to be understood that the boundaries of these groups can be sharply drawn. Legislative expenses, for example, fall under all these heads. Such a classification has its value in pointing out that, besides the expenditures for protection which are essential to existence, there are others equally natural and equally unavoidable which are incident to growth and progress. The precise form which the latter take depends on local necessities and historical antecedents.
Growth of Public Expenditures. Whatever may be the theoretical justification of expenditures, however they may be appropriately grouped, finance must take cognizance of the fact that in volume expenditures are growing at a rapid rate. The evidence upon this point is cumulative, but not comprehensive. The division of authority between national and local governments materially enhances the difficulty of ascertaining the aggregate expenditures for all public purposes within a given nation. The distribution of expenditures between the national and local governments differs widely in the various countries; and for this reason it is necessary to exercise great caution in comparing the national expenditures of modern States. For national expenditures the figures are generally available. We borrow from Professor Adams a table giving the national expenditure in millions of dollars for a number of States from 1830 to 1890, to which we have added, from the latest sources, the figures for 1900:
National Expenditure in Millions of Dollars
So far as these figures go they show steady advance, though it is by no means uniformly rapid, for the various countries. The significance of this advance in national expenditure can be fully understood only by a detailed study of each of the countries involved. The first consideration is the relation of expenditure to population. For the United States this is shown by the following table, taken from the Report of the Secretary of the Treasury:
(Net expenditure, i. e. all national expenditures except payment of the national debt. In the nomenclature of the Treasury report ‘net expenditure’ includes ‘net ordinary expenditure’ and interest on the public debt.)
These figures show a marked difference between the period which preceded the Civil War and that which followed; they also illustrate the disturbing influence of war on the national finances. Both the earlier and the later period manifest a general tendency toward an advance of expenditure slightly more rapid than that of population. In some States, however, as, for example, Great Britain, per capita expenditures have remained nearly stationary. The most that can be said is that in recent years national expenditures have outrun the population considerably in the United States, but only slightly in Great Britain and France.
But the vital point is whether expenditure has outstripped wealth. Owing to the extreme uncertainty of all calculations of national wealth, this is a point which cannot be determined with absolute accuracy. They appear, however, to have kept pace with national wealth in France, but to have fallen slightly behind in the United States, and considerably behind in Great Britain.
Respecting local expenditure our information is less explicit. Figures cannot be presented for as many countries. In the United States we have census figures on this point up to 1890, but no investigation into local expenditure was made in the census of 1900. In 1870 local expenditures were 47 per cent. of all public expenditures, and in 1890 they had reached 61 per cent. In Great Britain the share of local expenditure rose from 34 per cent. in 1870 to 44 per cent. in 1890, while in France it rose from 21 per cent. in 1876 to 30 per cent. in 1890. This increase in local expenditures is to be accounted for chiefly by the fact that the rapidly increasing developmental expenditures fall in great part upon the local governments. To estimate their true significance for the general welfare and for the financial outlook of a nation, the expenditures should be weighed as well as measured. In general, the growth of military expenditure is to be deplored. Yet even this has its compensations, since the army, especially in some of the more eastern parts of Europe, contributes by its training in discipline to industrial efficiency. On the other hand, the increase of the developmental expenditures must, if wisely directed, be a clear national gain. The facts can only be surmised from the general statements of public expenditure which are classified statistically by administrative departments rather than by classes of expenditure. We may cite a few facts for the national expenditure of the United States, tabulated from the Treasury statements:
Expenditure in Millions of Dollars
The nomenclature of the Treasury report is here adopted, though the interest on the public debt, a permanent charge on the revenues, might appropriately be included among the net ordinary expenditures. The table displays in condensed form some tendencies of expenditure in recent years. The fall in the interest charge is compensated by the rise of other expenditures, the aggregate ordinary expenditure here given doubling from 1870 to 1895. In thii rise of 160.8 million dollars, pensions had the largest share, leaving but 47.7 million dollars to be distributed among the other item named. The combined military and naval expenditures were practically unchanged in the two years compared, while the increase fell in some degree to the Indians, but in larger measure to the miscellaneous expenditure of the Government. This growth in miscellaneous expenditure is largely for developmental functions. In times of peace a considerable part of the military expenditures, namely, the improvement of rivers and harbors, belongs to the same class. The influence of war expenditures is shown in the comparison of 1895 with 1901, when we find military and naval expenditure comprising 124.5 million dollars in an aggregate increase of 152.4 million dollars, the remainder falling again to the miscellaneous expenditure.
Comparison of National Expenditures. A comparison of the budgets of leading nations to show the place occupied in each of the several classes of expenditure is an inquiry which tempts the student, but which is confronted with well-nigh insurmountable difficulties. The most serious is the fact that while data for the finances of the several local governments are frequently missing the distribution of functions and therefore of financial responsibility between the nation and the various subordinate governments differs greatly in the several States. This distribution rests upon constitutional provisions and administrative regulation. In comparing national budgets we find little that is common to all except the expenses of foreign intercourse, national defense, and public-debt charges. To ascertain, therefore, the proportional costs of the several items of public expenditure would require a compilation of all the expenses of all the local governments in addition to the figures for national expenditure. The lack of figures for such local expenditure renders a statistical study of national budgets, without note or commentary, valueless. The proportion of military and naval expenditure in the budgets of the Great Powers, as shown in the following table, reflects quite as much the distribution of functions as it does the importance of these expenditures:
In Austria-Hungary the Government whose expenditures are here noted exists only for the purpose of the common defense and foreign intercourse. Russia and France as compared with the German Empire represent highly centralized countries, many of the functions performed by the several States of the latter being carried out by the central Government in the former. Again, in all the countries named, except Great Britain and the United States, the military and naval expenditure represents a peace footing.
Another obstacle to a simple comparison of national budgets lies in the varying extent to which the nations concerned undertake industrial functions. The inclusion of the postal expenditures adds 116.6 million dollars to the aggregate for the United States in 1901. In the States above compared, except Austria-Hungary, postal expenditures are included, to which the cost of operating the telegraph system is added, excepting the United States. Moreover, the French national budget is charged with the expenses of operating the tobacco, matches, and gunpowder industries, together with the expenditures due to the management of the State forests and domains and the rather limited system of State railways.
The Russian budget bears the costs of operation of the alcohol and tobacco monopolies, of the railroad system, and of the State domains, which swell the aggregate expenditures of the ministries of Finance, Agriculture, and of Ways and Communication to 645,000,000 rubles. A more common illustration is offered by Prussia, where in an aggregate ordinary expenditure, by estimates of 1902, of 2431 million marks, the cost of operating domains, mines, and railways is given as 1080 million marks, a sum which is more than offset by receipts from operation, but which swells the budget in comparison with States with less varied industrial functions.
Local Expenditures. It has already been pointed out that local expenditures grow more rapidly than national expenditures, and a few figures indicative of the extent and nature of such local expenditures may be adduced. Rather than single out particular localities, it is better to have resort to the figures furnished by the census of 1890, as no general compilation of later date is available. It appeared that the expenditures for all purposes by all grades of government in 1890 were as follows:
|National Government, incl. postal service||$352,218,614|
|States and Territories and District of Columbia, except for public schools||77,105,911|
|Counties, except for public schools||114,575,401|
|Municipalities, except for public schools||232,988,592|
|Public common schools||139,065,737|
The expenditure for schools is distributed among the States, counties, and municipalities. The character of expenditure of the National Government having been already noted, we may cite from the census the following statement for local expenditure:
|Penal and reformatory||12,381,423|
|Buildings, including care and maintenance||17,950,177|
|Water-works and other enterprises||5,517,193|
|Salaries (separately reported)||37,552,655|
|Roads, runs, ditches, and bridges||72,262,023|
|New buildings (separately reported)||$34,513,020|
|Public parks and places||2,962,697|
Public Revenue. The revenues of the State are chiefly derived from taxation, but this is not the exclusive source of income. Omitting minor or casual sources of income, such as fines and gifts, the State derives a revenue from the management of its own property, from its industrial activities, and from other services which it renders to the community. Nomenclature is by no means fixed, but we may designate the sources of income as prices, charges, fees, and taxes.
(1) Prices.—Under the head of prices we may include the revenue arising from the sale of public property, such as land or its products. By price we mean a return fixed in the main by private competition. Such a return can be obtained when there is no monopoly of the property to be sold. Whether or not such shall be the aim of the State depends largely upon questions of public policy. As an owner of property the State is trustee for the people, and a wise policy may, in some eases, dictate the neglect of commercial interests, while in other cases it may require that they be strictly adhered to. Wherever the State has possessed large domains fitted for agricultural uses, as in the public lands of the United States and of Australia, such lands have been used rather to promote national development than to insure public revenue. Products incidental to the functions of government, such as the lumber from State forests or goods produced in penal establishments, must, if brought into the market, be sold at market prices, lest the State should injure its own citizens. The revenues from these sources are but a small portion of the income of modern States.
(2) Charges.—Charges may serve as a general term for the amounts paid for specific industrial services which the State performs. These include the operations of the post-office, the telegraph, the telephone, the railroad, municipal gas and electric plants, and the sale of certain products such as liquors, tobacco, matches, etc. The range of industrial activity represented, though, of course, not equally extensive in the various modern States, is varied and comprehensive. In all there is a common feature, public monopoly, which makes the term charges for public service more appropriate than prices. The determination of the charge rests upon the motives which lead the State to enter upon a specific kind of industrial activity. That motive is seldom to obtain the largest possible revenue from the enterprise, although this characterizes fiscal monopolies, such as tobacco and match monopolies, which are frequent upon the Continent of Europe. The liquor monopoly as it exists in Switzerland is not wholly fiscal in its purpose, as it seeks to eliminate some of the abuses which grow out of the private production of spirituous liquors. Far more obvious are the social interests involved in the Government management of gas and electric-lighting plants, railroads, telephones, telegraphs, and the postal service. In the measure in which these social interests are regarded in fixing charges must the revenue-producing character of the industry be superseded. Hence the tendency under Government management to render services at cost. This is well illustrated in the history of the postal service, which in some States has ceased to be a source of net revenue. This feature should be carefully considered in all proposals for the assumption of various branches of industry by the State. From a purely fiscal point of view there is generally greater advantage in private ownership subject to taxation than in public ownership.
(3) Fees.—Fees are payments for definite services rendered by public authorities in the administration of public business. Such are court fees, license fees, and the like. They are based upon the theory that a special service is rendered to those who pay them over and above the general social service which the operations of government imply. As the benefit derived by the individual is intangible, there can be no question of an exact equivalence between the payment and the service rendered. The only rule which can be fixed is that they should not be so oppressive as to interfere with the orderly conduct of public affairs. Thus marriage fees, either to the State or Church, should not he so high as to promote unions not legally sanctioned. Court fees should not deprive the poorer classes of the protection of the law. Similar to fees in their nature are the taxes called special assessments in American finance. When a street is opened or a highway improved, while the public receives a benefit, yet the chief advantage is frequently enjoyed by the owners of the abutting real estate. For this they are compelled to pay by a special rate levied upon such real estate. Special assessments, like fees, contain therefore an element of commensurable private advantage. Unlike fees, they are levied upon real estate and are applied for the purpose of enhancing the value of that real estate. See Tax and Taxation.
(4) Taxes. — In the three kinds of payment thus far discussed, there is in general a direct benefit to the individual, and the payment is only made in exchange for a direct service of the State. In this they differ radically from taxes. The latter are forced contributions to the public treasury. In practice, as in the most advanced financial theory, taxes rest upon the duty of citizens to support the State. The benefits which the citizen enjoys from the existence of government are general and not specific, and no attempt to establish a parallel between such benefits and tax payments can be successful. Writers on finance have indeed frequently attempted to justify taxation on the ground that Government renders an equivalent service in protection to person and property; but there is obviously no demonstrable relation between the payments which may be exacted from individuals in taxation and the protection afforded them. Taxes are based, then, upon the duty of citizens to support the State of which they are members; and the measure of such duty is found in their ability to bear a share of the burden. For a comprehensive treatment of the theory and practice of taxation, see Tax and Taxation.
Revenues of the United States. In modern nations taxation greatly overshadows all other sources of revenue. This is brought out in a detailed statement of the revenue of the United States for the fiscal year ending June 30, 1901, in which the sources of income are arranged, so far a practicable, by classes.
Revenues of the United States for the Fiscal Year Ending June 30, 1901
|Prices, from sales of|
|Lands and buildings||236,897.53|
|Consular, letters patent, land||3,414,933.49|
|Customs fees, fines, and penalties||711,791.43|
|License fees, Alaska||84,087.90|
|Revenues, District of Columbia||3,986,176.19|
|Sealskins and rent of seal islands||232,655.75|
|Profits on coinage, bullion deposit||12,731,256.94|
|Navy pension, hospital, clothing, and deposit fund||1,778,464.91|
|Interest, Pacific railroads||1,316,516.62|
|Trust funds, Department of State||537,621.58|
|Soldiers' Home, permanent fund||492,623.66|
|Deposits for surveying public lands||247,258.90|
|Prize money to captors, Spanish War||217,490.60|
|Prize money to Navy pension fund||217,477.76|
|Proceeds of Arkansas bonds redeemed||85,000.00|
|Depredations on public lands||75,977.70|
|Part payment Central Pacific R. R. debt||4,576,247.10|
|Sale of claim against Sioux City and Pacific R. R.||2,122,841.24|
|Dividend for debt, Kansas Pacific R. R.||183,942.89|
The foregoing statement reveals the multiplicity of Government revenues. A considerable group is not classed; though some of the items are related to the foregoing groups. Thus, all the items relative to Pacific railroad indebtedness are akin to the industrial operations of the State, as the Government subsidized in one form or another the construction of these roads. Perhaps another considerable item, profits arising from coinage operations, should be placed in the same class. It is obvious that the statement here made is one of gross revenues, for otherwise the postal service, which in the year in question was operated with a deficit of $4,954,762.21, could not figure in the table. In like manner the figures for receipts from taxation are aggregate returns without deduction of the costs of collecting the revenues, which, like the costs of the postal service, figure among the national expenditures.
Receipts of the United States in Millions of Dollars
Eliminating the postal revenue, the Government receipts were in round numbers 587.7 millions of dollars, of which customs duties and internal-revenue taxes produced 545.8 millions of dollars, or 92.7 per cent. of the total. These have been from the beginning the main dependence of the Federal Government, but they have not always occupied the same relative place. The preceding table shows the aggregate net ordinary receipts of the Treasury, and those from customs and internal revenue for selected years.
Internal taxes had been out of vogue since the War of 1812, but during the Civil War they became a more important source of revenue than customs duties. A like result followed the war with Spain, while in time of peace customs duties were the more important.
Revenues of Various Nations. The comparison of revenues of foreign countries is beset with difficulties similar to those which are encountered in comparing their expenditures. Just as there are certain unquestioned functions of national States, so there is at least one unquestioned source of national revenue, namely customs duties. But with it are found associated other forms of taxation, both indirect and direct, and other forms of income, according to the scope and variety of the functions exercised by the National Government. The most marked contrast between the United States and Great Britain on the one hand, and the Continental countries on the other, is in the extent among the latter of industrial income.
Local Revenues. As in discussing local expenditures we are forced to go back to the figures presented by the census of 1890, so we must draw our exhibit of local revenues from the same source. In the total they were distributed as follows:
|National Government, incl. postal service||$461,154,680|
|States, Territories, and District of Columbia||116,157,640|
The sources of local revenue are given as follows:
|Ad valorem taxes on real and personal property||$143,090,574|
|Penal and reformatory institutions||3,154,520|
|Income from funds and investments||14,546,352|
|Water works and other enterprises, net||5,635,408|
|Sale of property||3,071,732|
|Fees, fines, and penalties||7,253,370|
|Special assessments, streets and bridges||13,196,991|
|Special assessments, sewers||8,254,978|
|Interest on deposits||986,656|
|Reimbursements and miscellaneous||27,870,245|
Public Debt. A third division of the subject of finance concerns public credit and its use. As the creation of public debt often required by the exigencies of national life rests upon the public credit, a complete theory of finance must concern itself with the means by which public credit is established and maintained, as well as the methods by which it is drawn upon for the support of the public finances.
Like the credit of individuals, public credit rests upon confidence; and, like the credit of individuals, such confidence rests upon past performance of obligations incurred. Without a sacrifice of sovereignty the State can offer no other guaranty to its creditors. It is true that in certain cases the obligations of one Government have been guaranteed as to interest and principal by the Government of another State, as in the case of the Egyptian bonds guaranteed by the English Government. But in such a case the power which guarantees tends to extend its sovereignty over the Government which contracts the obligations. Again, governments have sometimes set aside the receipts from certain revenues, as, for instance, customs, for the payment of interest obligations; but without good faith this guarantee is of little value with a foreign administration of the revenues, which is again an abdication of sovereignty.
The basis of public credit is therefore the ability of the State to fulfill its contracts, and the punctiliousness with which it actually does so. Public debts are therefore bonds without mortgages or similar security. They are primarily contracts to pay interest, but may include also an obligation to pay the principal, either in whole or in part. Usually, in European countries, no fixed date is set for the repayment of public debt. A different policy is pursued by the United States. See Debt, Public.
Sinking Fund. Provision for the payment of public debt is sometimes made by the establishing of a sinking fund. A sinking fund contemplates the gradual extinction of a debt, provided by the law authorizing the debt, and while it has been discarded in the practice of the more advanced nations, is sometimes used by the nations of weaker credit. It is needless to say that the faithful fulfillment of the condition when it exists tends to support public credit. Sinking funds may assume various forms, but the principle is simple. The State guarantees an annual appropriation, as, for instance, 1 per cent. of the principal of the debt, which is used to repurchase a part of the debt in the market. The bonds so purchased are not destroyed, but are set apart in a separate fund or sinking fund, and continue to draw interest. The interest of the first year's instalment to the fund plus the second year's instalment is used to purchase bonds. By this process carried out the Government in time acquires possession of all its own bonds, which are then destroyed and the debt cancelled. This plan seems very simple and in the early part of the nineteenth century was widely adopted. Its defects are, first, that the State has not always the money available for such an appropriation; second, that it is not always expedient to purchase bonds in the market because of the premiums upon them, and third, that such a reserve of unredeemed securities can with difficulty be maintained inviolate in times of emergency. In view of these defects, sinking-fund arrangements planned in this way by statesmen like Pitt and Hamilton have never been followed to their logical conclusions. Modifications of one sort and another have been introduced which have left of the original institution little more than the name. This is shown in the history of the sinking funds in the United States, especially that of 1862. By the law of February 25, 1862, it was provided that, after the gold receipts from customs had been used to pay the interest, they were to be applied “to the purchase or payment of one per centum of the entire debt . . . to be made within each fiscal year, which is to be set apart as a sinking fund, and the interest of which shall in like manner be applied.” No obligation could be more formal, yet it was not formally observed. No attention was paid to this provision after the war, and at its close the payments and purchases did not proceed in the orderly fashion prescribed by law. The surplus revenues which for a time were abundant were used for the cancelation of debt far more rapidly than had been contemplated by the law. Nor were the bonds called in or purchased retained as a fund, for by the law of July 14, 1870, it was ordered that they be canceled and destroyed, and that an amount equivalent to the interest upon such canceled bonds be paid annually into the sinking fund. In the subsequent history of the country there were epochs in which there was no debt cancelation, others in which it proceeded rapidly, just as the condition of the revenues permitted. Congress and the Treasury Department have been satisfied by the explanation that the aggregate debt reduction has been far greater than that contemplated by the law. The sinking fund to-day therefore stands practically as an expression of the policy of debt reduction, and of the authority of the Secretary of the Treasury to purchase bonds in the market for this purpose, and has no other significance. The expression occurring in our financial reports of purchases for the sinking fund means simply for debt repayment.
Whenever the financial condition of the nation warrants a repayment of debt there are simpler methods of proceeding than sinking fund arrangements. Bonds may either be called in or may be purchased in the market. Theoretically purchase in the market is preferable when the bonds are below par, but as this condition is not likely to occur in any State which has a surplus for debt payment, the case is of no practical importance. On the other hand, the terms of the contract may be such as to prohibit calling in the bonds, as has been the case in the United States, and leave no way of redemption open except purchase at a premium. In such a case the premium paid is to be compared with the saving of interest which would have to be paid during the unexpired term of the bond before redemption becomes optional. Much more suitable, therefore, for the purposes of fiscal administration are bonds which are not limited as to term of payment, but which can be redeemed at their face value at the will of the Government.
When there are no specific sinking-fund attachments to public debts, the repayment of public debt might be regarded, so far as the contract with creditors is concerned, as a work of supererogation. But just as a business man gains in credit by prompt or anticipated payments, so a policy more liberal to creditors than legal requirements demand redounds to the credit of the State. Repayment of the principal is not essential, as we have seen, to the maintenance of public credit, as States whose debt continues to increase stand in good repute, but is a policy to be recommended. Of its utility as an outlet for surplus revenues we shall speak in discussing financial policy. For conversion of public debts, see Debt, Public.
Having considered public debt in relation to public credit, we may briefly outline its relations to fiscal operations. The creation of debt is a source of revenue which serves to equalize the difference between public expenditures and ordinary revenue. This difference may be caused by irregularity of revenue or casual deficit. Loans are then required in anticipation of revenue, and in such cases they should be temporary, of short duration, subject to redemption at will or in a brief period. If at the expiration of this period there is no accumulation of funds available for payment, the only alternatives are an extension of the loans or their incorporation in the funded debt. The difference between ordinary revenue and expenditure may be caused by a national emergency, such as war, to provide for which the ordinary sources of income, however stretched, are wholly inadequate. Or, again, the difference may be caused by the investment in great public works, which either in their effect on the general tax-producing capacity of the people, or by revenues appropriate to themselves, are expected to pay for themselves in the long run. In the cases named a resort to funded debt is the only way open by which to meet such expenditures. For a further development of these principles, see Debt, Public.
Financial Policy. The aim of financial policy can be summed up as the attainment of adequate revenue, a revenue adequate to fiscal needs and responsive to changes in them. This involves the questions of distribution of sources of revenue and elasticity of income.
The separation of government into national and local authorities, with the interposition of a third class of regional authorities in the case of Federal States, brings with it a division of expenditures and the need of adequate revenues for each form of government. The ideal of independence in action within their several fields can only be realized when to each are assigned certain independent sources of revenue. Without such revenues these authorities become mere disbursing offices lacking vitality. The problem of proper revenue is the most serious one which confronts the maintenance of a distribution of authority sanctioned by usage or proposed by legislation. It is a question of practical statesmanship, which must in each country take into consideration the facts of national dvelopment, and cannot be decided upon general financial or political principles.
The question at issue is partly one of law and partly one of fact. What sources of income does the law allow to the several bodies, and are these in fact suitable? In the United States the Constitution gives the Federal Government the power to collect taxes, duties, imposts, and excises, but prohibits it from imposing a capitation or other direct tax except in proportion to the population. This in fact excludes the Federal Government from the field of direct taxation, which is left to the States. Should the nationalization of railroads demanded in many quarters ever become a fact, it would withdraw from the States an important and remunerative object of taxation. Given the present functions of the Federal Government, the revenue opportunities have proved ample for its purposes.
In the States the revenue question is more perplexing. Except that they may not impose customs duties, there is no limitation upon the power of the States. But since the needs of the State governments are relatively small as compared with those of local governments, the relation of the two is of great importance. It cannot be said that there is anything like a system in the actual distribution of revenue sources between the two forms of government. It must, however, be obvious that the orderly development of each requires that well-defined sources of income be assigned in such a way as to satisfy the more rapidly increasing necessities of the local governments.
A revenue system should therefore supply current needs, should increase in productiveness as those needs increase, and should moreover be regular in its returns and capable of meeting the fluctuations of financial necessities. The customs revenue is peculiarly subject to fluctuation, and a State which relies solely upon it is exposed to serious embarrassment. This is well illustrated in the financial history of the United States, and depicted in the table of receipts of the United States, given above.
Imports on which these revenues are based follow the vicissitudes of trade, and reflect the hope or fear of tariff changes. Far more regular has been the productiveness of the internal revenue taxes imposed by the United States. To meet these fluctuations of revenue from certain sources, as well as to meet fluctuations in the need for money, the financial system of every nation needs some elastic element, some tax whose productiveness can be reduced or augmented, as the case may be. The United States may be said to have such a source of revenue in the internal revenue system. When drawn upon for the increased expenditure for the war with Spain, the effect upon the revenue was rapid and considerable. But nowhere else has this element of elasticity attained the importance which it has assumed in England, where the income tax is used for this end. In the United States it has not been necessary to increase or reduce taxation frequently, since in the past thirty years there has generally been a surplus revenue which has been applied to debt reduction.
Finance, Local. As a result of the division of authority and functions between central and local governments, a distinction is coming to be clearly drawn between general and local financial operations. The extent of the latter has been treated at the beginning of this article; it is here necessary to emphasize some of the chief principles of local as distinguished from general finance.
Expenditures.—Those expenditures which result in purely local advantages are most naturally borne by the local government. Such, for example, are those which are incurred for local improvements and the costs of local administration. Besides these expenditures, there are some which are of general interest, but are best placed under the control of local bodies, so as to be more nearly under the supervision of the public. Examples of expenditures of this kind are those which are incurred in the support of primary education, and for poor relief and the administration of justice. It is these classes of expenditures which are increasing most rapidly.
Revenue.—If local government is to possess real autonomy, it must possess independent sources of revenue. Certain classes of taxation cannot be employed by local governments. Such, for example, are the income and general excise taxes; import and export duties; taxes on bequests and inheritance. These forms of taxation are difficult to collect by local authorities; and if practice is not uniform throughout the State individuals and industries will escape taxation by shifting from one locality to another. There remain taxes on real property, and on local occupations. Neither of these objects of taxation can escape the local assessor. Franchise taxes frequently afford a considerable local revenue. Further revenues may be secured through charges for special benefits, e.g., water-rates, and special assessments (q.v.) may be employed to cover the outlay for some of the more burdensome local improvements. It remains true, however, that the revenues which can be obtained from local sources are frequently insufficient to cover the expenditures which are incurred by the local government. In many countries it has become customary to supplement local revenues by grants from the central treasury. In England, up to 1887, many grants for specific purposes were made; since that year various duties, collected by the central authority, have been marked off for local uses. In the United States the most familiar application of this principle is the grant of State funds for educational purposes.
Debt.—The local government, even more than the central authority, is often compelled to incur debts to cover the cost of undertakings which are too extensive to be paid for out of current revenues. A large proportion of local expenditures are productive, and should therefore be met by loans which distribute the cost over a long period. Local authorities are, however, frequently inclined to be reckless in the expenditure of resources thus gained. For this reason the central government usually exercises close supervision over the creation of local debts. In the United States, State constitutions frequently fix a limit beyond which localities cannot go in incurring debts; in many cases debt-limitation is provided in municipal charters. In Great Britain a special act of Parliament is required in order to authorize a municipal loan; and a similar practice is followed in France and other Continental countries. In England the central government acts as an intermediary in securing loans for local bodies, thus giving to the latter the advantages of the national credit; in Belgium the national treasury keeps a fund out of which loans are made to municipalities; and in Germany the funds reserved in the public treasury for the relief of invalids are loaned in this manner. See Tax and Taxation; Municipal Government.
Bibliography. The principal comprehensive works in English are Bastable, Public Finance (New York, 1898); Henry C. Adams, Science of Finance (New York, 1898); W. M. Daniels, Elements of Public Finance (New York, 1899); and C. C. Plehn, Introduction to Public Finance (New York, 1896). See Budget; Debt, Public; Customs Duties; Internal Revenue; Tariff; Repudiation; Independent Treasury.