debt,’ and the analogy which this suggests with the transactions of corporations indicates the general nature of such indebtedness. These short-term obligations are normally used to anticipate revenues, and resemble the promissory notes issued by merchants in the course of their business transactions. As the latter frequently have a certain aggregate of outstanding notes, though individual notes be promptly paid when due, so the floating debt of the State may readily become a permanent feature in its finances by the creation of new debts running parallel to the payment of the old. When such debts become too numerous and the obligation of repayment a source of embarrassment, it is not infrequent for them to be converted into funded or permanent debt.
The funded debt consists in obligations which mature at a more or less distant date, or which are payable at the option of the Government. Bonds maturing within a fixed period are familiar in American finance—e.g. the so-called ten-forties of the act of March 3, 1863. But more commonly no time is set for the ultimate redemption of public obligations. In the national finance of European States it is usually understood that the Government will not soon avail itself of the privilege of repayment. So much is this the case that on the Continent of Europe the debts are spoken of as rentes, the emphasis being thereby wholly laid upon the fact that the payment of interest alone is expected, while in England the greater part of the public debt is regarded as a series of perpetual annuities. A further form of public debt consists in irredeemable paper money. In essence it is a debt without interest, payable at the option of the Government. See Money.
The public debt, in the sense in which it is known to-day, is essentially a creation of modern times. Emergencies in the mediæval State were met by enforced contributions from the people, and in part by contraction of debt by the monarch. But the debt so contracted was a debt of the crown, and not of the State, and rested upon the personal credit of the ruler. With the growth of parliamentary power and the control of supplies by representatives of the people, State debts appeared. They were originally confined to States like Holland and England, where loanable capital was plentiful, and where the commercial classes were sufficiently influential with the Government to insure against repudiation. Later they were extended even to States under despotic and irresponsible rule. In the beginning public debts frequently assumed the form of life annuities; but as these varied of necessity with the age of the persons who advanced money to the State, the complications of accounting were excessive; moreover, the amount of the advances which could be obtained in this way was necessarily limited. It was a simplification to issue so-called perpetual annuities with a definite annual payment, and the computation of life annuities gave way to the simple operations of interest. In Great Britain terminable annuities are still common; but they form a comparatively insignificant proportion of the total indebtedness of the Government. The term public debt usually refers to the national debt alone. In its widest sense, however, it includes local indebtedness also. It is only within the past century that the municipalities have become debtors to any considerable extent; but at present the aggregate of municipal debts in the United States rivals the national debt in magnitude. See Finance.
Causes of Debt. Public debt arises under three distinct sets of circumstances: (1) War expenditure. A modern war demands the expenditure of an enormous sum of money, and this sum is usually raised through loans. Debts of this class are naturally borne by the national Government. (2) Public works. The increase in commercial intercourse and the rise in standards of national and civic life have required a great development of public improvements. The cost of these has been met partly by taxation, partly by the raising of loans. The debts incurred are borne sometimes by the national Government, sometimes by the localities. Practice differs in the various States—a fact which must be taken into account in comparing the national debts of different countries. (3) The funding of floating indebtedness. The presence of a large volume of demand obligations embarrasses the workings of the treasury and impairs the credit of a government. When it is not convenient to pay them out of revenue, it is customary to change them into funded debt.
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 unnecessary, 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 accumulation of a surplus seriously disturbs commerce and industry, the creation of floating indebtedness is frequently expedient. In time of war, when the honor and possibly the very existence of a nation is at stake, it is imperative that immense sums of money should be 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 raising of a loan shifts the burden to a period when industry will be better prepared to endure it. In the peaceful competition for commercial ascendency, great advantages are gained by those States or communities which are first to develop their resources. It is, therefore, often expedient to undertake public improvements which would be too costly to be paid for out of increased taxation. Such improvements, moreover, create new sources of revenue, and therefore may impose merely a nominal burden upon posterity. Certain classes of public works—e.g. State railways and telegraphs—yield a direct revenue which may be sufficient to cover depreciation and
