interest on the capital invested in them. It would be manifestly unreasonable to pay for such works out of taxation. To do so would unjustly burden the present taxpayer for the advantage 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 financiering. Useless wars are undertaken, premature and unproductive public works are entered upon. The expediency of particular loans, however, is a matter to be decided 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 from 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 enterprise, industry is not necessarily deranged. It makes some difference whether the loan is made at home or abroad. Owing to friction in the international flow of capital, a foreign loan may have far less effect upon national industry than a domestic loan.
Important political consequences frequently result 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 government 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.
Conversion or Refunding of Public Debt. Public debts are frequently created at a time of low national credit. To attract investors, it is necessary to issue bonds paying a high rate of interest. When national credit improves, it is possible to exchange high-interest obligations which are payable at the option of the Government for others bearing a lower rate of interest. The exchange may be a direct one, in which case the Government retains its former creditors; or a new loan may be issued to pay off the old obligations.
Almost every country which has a public debt has refunded it at various times. The refunding operations of the British Treasury extend through two centuries. Conversion has been frequent in the United States, in both national and local finance.
The investor in public funds is naturally opposed to conversion. Part of the inducement for investing in bonds consists in the expectation that they will continue to bear a high rate of interest, and so rise above par value after normal conditions return. In the United States the investor is usually insured against early conversion by the provisions of the loan; in other countries the same end is reached by the adoption of a settled policy of converting only after a considerable lapse of time. One method of insuring the investor against conversion is to issue low-interest bonds below par. Redemption of such obligations entails a heavy cost. This practice is generally regarded, however, as bad finance, and is not resorted to in the United States.
Repayment of Public Debt. Some parts of the public debt are so constituted as to be automatically extinguished. Such are the terminable annuities of British finance. Each payment includes, besides interest, a partial repayment of the principal. It would obviously be inconvenient to pay a large part of the public debt in this way, since payments would have to be made whether revenues were plentiful or not. Most frequently debt is paid by redeeming obligations which are due, or which are payable at the option of Government, or by purchasing bonds in the open market and canceling them.
The policy of repaying public debts has often been called into question. In order to redeem a debt, a greater sum must be taken from the people by taxation; and it is the last portion of the taxes which is hardest to collect and which causes the greatest distress. Almost all modern States are growing in wealth and population; consequently, it is to be expected that a debt which at present would be very difficult to pay will in the future be relatively insignificant. So long as gold was depreciating in value, the burden of debt was automatically growing less; and the application of science to mining and economy in the use of gold may bring about another period of declining value of gold which would again reduce the burden of public debt without resort to taxation.
When a State is insufficiently provided with capital, its bonds are likely to be held by foreign capitalists. In repaying the debt, the State may diminish the scanty supply of capital and so injure its own industries.
There are, however, cogent reasons for the redemption of public debts. A future generation may indeed be more able to pay a given sum than the present generation; but the future will doubtless have correspondingly heavy obligations of its own. Gold may indeed depreciate, but it may also appreciate. The payment of debt may derange industry, but it unquestionably strengthens the credit of a nation and places it in a condition to meet emergencies. On these grounds the weight of modern authority favors the gradual redemption of public debts.
Debts of Leading Nations. The national debt of England is dated generally from the year 1693, with the loan to the Government of the entire capital of the Bank of England, amounting to £1,200,000. In return for this loan the Bank received its charter and privileges. The needs of the Government were pressing, and the debt, once started, grew rapidly, as the result of the vigorous foreign policy of William III. At the accession of the House of Hanover, in 1714, it had reached £50,000,000, and it grew throughout the following century, as a result of the several wars in which England found herself engaged. When, in 1793, the great struggle with France began, the debt was £260,000,000, and when it terminated with the Treaty of Vienna, in 1815, it had reached the sum of £885,000,000. The example set by England was followed by the other European countries, although before the closing years of the eighteenth century few of the States had contracted debts upon any considerable scale. The Napoleonic struggle, which involved all Europe, inaugurated an era of debt for modern States, and the nineteenth century witnessed a rapid growth of national indebtedness. A table
