The New International Encyclopædia/Debt, Public
DEBT, Public. National debt has become a marked feature in the finances of modern States. In any strict sense the public debt designates all of the outstanding obligations of the government. These are of many kinds. Among them, for instance, in those States which conduct government savings banks must be included the sums due depositors. In countries which, like France, require the collectors of taxes to make payments at specified times, advancing if need be from their own resources the amount required, such advances must for the time being be regarded as part of the national debt. But it is not with these informal obligations, which correspond somewhat with the book debts of merchants, that the phrase ‘public debt’ is generally concerned. It refers rather to the more formal obligations undertaken by governments and represented by formal instruments of indebtedness.
This formal debt may be divided into short-term and long-term obligations. To the former is frequently applied the expression ‘floating 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 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 compiled by the Bureau of Statistics of the United States Treasury Department, here reproduced, gives the indebtedness of some of the principal nations, and of all the nations of the world combined, since 1800. The table shows that the progress of debt in most countries has been constantly forward, and that, with the exception of the United Kingdom and the United States, there has been no conspicuous reduction of the debt. The debt of Great Britain reached its maximum in 1857, when it amounted to £839,000,000. In the forty-three years since that date the total has been reduced by £199,000,000; but the process of debt reduction has been checked for the time being by the complications in South Africa.
Debts of Principal Nations, and Aggregate for all Nations of the World at Various Dates from 1800 to 1900
American National Debt. The public debt of the United States was first reported, 1791, two years after the organization of the Government, as $75,463,476.52. In 1812, at the commencement of the second war with England, it had fallen to $45,209,737.90. That war brought it up to a total of $127,334,933.74. After peace the reduction was from $3,000,000 to $10,000,000 per year until in 1836 it reached its lowest point, being only $37,515.05. Thenceforward it increased one year and decreased the next, until in 1860—the year before the Civil War—it was $64,842,287.88, and the annual interest was $3,443,687. This was a rate per capita on the whole population of $1.91 debt and 11 cents interest. The outbreak of the Civil War made the raising of enormous sums of money an imperative necessity. Two small loans had been made just before—in 1858, $20,000,000 in 5 per cents., and in 1860, $21,000,000 in 6 per cents.—the first to run 15 and the last 20 years. Of the last loan, only $7,022,000 was issued. Of the loans made necessary by the Civil War, the first was February 8, 1861, $25,000,000 at 6 per cent., to run 20 years, of which $18,415,000 was reissued. March 2, 1861. 6 per cent. Treasury notes were authorized and $35,364,450 issued. Same date, $1,095,850 reissued to pay the Oregon war debt. July 17, 1861, $250,000,000, at 7 per cent., to run 20 years, with authority to issue any part in the form of Treasury notes running three years at 73 per cent. interest, or on notes not bearing interest, but payable on demand, or in Treasury certificates for one year bearing 365 per cent. interest; the whole amount of demand notes not to exceed $50,000,000. An act of August 5, 1861, authorized the issue of 6 per cent. bonds, running 20 years, to exchange for the one and three year notes just mentioned, with accumulated interest, at any time before their maturity; and the demand notes were made receivable for all dues to the Government. Before the close of the year the demand notes, at first rejected by the banks, were at a premium, and the interest-bearing notes were readily convertible into permanent 6 per-cent bonds. On February 12, 1862, $10,000,000 more of demand notes were issued. In the same month a great war loan was authorized—$500,000,000 of 6 per cent. bonds, redeemable after 5 and payable after 20 years. The loan was readily taken, and the full amount was issued. In 1864-65, $15,000,000 more was authorized of the same loan. In February, 1862, $150,000,000 of legal-tender notes were authorized, of which $50,000,000 were to take the place of demand notes. In July, 1862, $150,000,000 more were authorized, and an equal amount in addition in March, 1863, making $450,000,000 in all. These issues formed the currency known as ‘greenbacks,’ from the color of the paper. An act in February, 1862, authorized the acceptance of $25,000,000 of deposits, increased in March to $100,000,000, on which 5 per cent. interest was paid. In June, 1864, $50,000,000 more was authorized at 6 per cent. This was a temporary loan, to be repaid on ten days' notice, and was all redeemed before the close of 1866. In March, 1862, Congress authorized the issue of certificates of indebtedness to public creditors in the adjustment of claims, running 1 year at 6 per cent. There were $561,753,241 issued, all redeemed before 1866. In July, 1862, postage stamps were issued for currency, and made a legal tender for sums less than $5. In March, 1863, fractional currency was authorized in place of postage stamps, the amount limited to $50,000,000. In March, 1863, a loan of $900,000,000 was authorized, principal and interest payable in coin; but only $75,000,000 was issued. The same act authorized $400,000,000, in one, two, and three year Treasury notes, interest not over 6 per cent., payable in ordinary money, and to be a legal tender for their face value. The actual issues were: Of one-year notes, at 5 per cent., $44,520,000; two-year notes, at 5 per cent., $166,480,000; three-year notes, at 6 per cent., $266,595,440; making the whole issue $477,595,400; all canceled or exchanged before May 15, 1868. In March, 1864, a loan of $200,000,000 was authorized at 5 or 6 per cent., principal and interest payable in coin; $196,117,300 were issued at 5 per cent., to run 40 years (the 10-40s of 1864); and $3,882,500 at 6 per cent. Most of the 5 per cents. brought premiums from 1 to 7 per cent. In June, 1864, a loan of $400,000,000 was authorized at 6 per cent. (the 5-20s of 1864), of which $121,561,300 was issued. In June, 1864, Congress authorized the issue of $200,000,000 in 7-30 Treasury notes, and in March, 1865, the sum was increased by $600,000,000 more. The whole issue was $829,992,500 of 7-30 interest-bearing notes, and the whole loan was redeemed by the middle of July, 1868. In March, 1865, a loan was authorized of $600,000,000 in 6 per cent. 5-20 bonds, to be used only for the payment of Treasury notes or other obligations of the nation. Two issues were made: July 1, $322,988,950 and $379,616,050, and in July, 1868, $42,539,350, all to redeem Treasury notes and other obligations; but in no case to increase the public debt. In March, 1867, and July, 1868, there were issued $85,150,000 of temporary loan certificates of deposit, bearing interest at 3 per cent., to redeem compound-interest notes. In July, 1870, the great refunding act was passed. The Secretary of the Treasury was authorized to issue $200,000,000 at 5 per cent., $300,000,000 at 4½ per cent., and $1,000,000,000 at 4 per cent. of thirty-year bonds, principal and interest payable in coin, to be used only to redeem the 6 per cent. or other early bonds. Besides these issues, there were guarantee bonds issued to the Pacific and other railroads, secured by mortgage on the roads. In January, 1871, the 5 per cent. bonds were increased to $500,000,000.
These enormous financial transactions have no parallel for extent in the world's history. Yet for a time there was much fear that such loans could not be floated; but when they were proved possible without recourse to the capitalists of foreign countries, the loyal people of the Union had abundant cause for congratulation. The loan of 1862 ($515,000,000) was the greatest in amount and the most successful thus far attempted. Afterwards, however, loans were not easily made, and the Government was compelled to resort to currency and Treasury notes, and also compound-interest notes and certificates of indebtedness. The greatest test of the financial strength of the nation fiercely struggling to maintain its political existence was in 1864. On July 11, in that year, gold touched its highest point, $2.85, and a paper dollar was worth in gold about 38 cents.
From the period of the Civil War the surplus of revenue was applied to the public debt. As the bonds bearing the higher rates of interest were first extinguished, the interest burden diminished even more rapidly than the principal. Thus, while in 1865 the total interest-bearing debt amounted to $2,381,000,000, and the annual interest charge to $151,000,000, at its lowest point, in 1892, of $585,000,000 principal, the interest charge was, in round numbers, but $23,000,000. As the population had increased rapidly during the interval, the interest per capita had declined from $4.39 to 39 cents. After 1893 the amount of public debt was increased by the issue of bonds for the purpose of securing the Treasury against the drain upon its gold reserve. This issue of 5 per cent. bonds was followed in 1898 by a further issue of 3 per cent. bonds for the purpose of meeting the expenses of the Spanish War. By the act of March 14, 1900, the 3, 4, and 5 per cent. bonds were made convertible into 2 per cent. bonds, which resulted in a considerable diminution of the annual interest charge. The interest-bearing debt of the United States on July 1, 1900, was made up of the following:
The annual interest charge upon this debt is $33,545,130. The following is a statement of outstanding principal of the public debt of the United States on January 1 of each year from 1791 to 1842 inclusive, and on July 1 of each year from 1843 to 1900 inclusive:
|1791, Jan. 1||$75,463,476.52|
|1792, Jan. 1||77,227,924.66|
|1793, Jan. 1||80,358,634.04|
|1794, Jan. 1||78,427,404.77|
|1795, Jan. 1||80,747,587.39|
|1796, Jan. 1||83,762,172.07|
|1797, Jan. 1||82,064,479.33|
|1798, Jan. 1||79,228,529.12|
|1799, Jan. 1||78,408,669.77|
|1800, Jan. 1||82,976,294.35|
|1801, Jan. 1||83,038,050.80|
|1802, Jan. 1||80,712,632.25|
|1803, Jan. 1||77,054,686.40|
|1804, Jan. 1||86,427,120.88|
|1805, Jan. 1||82,312,150.50|
|1806, Jan. 1||75,723,270.66|
|1807, Jan. 1||69,218,398.64|
|1808, Jan. 1||65,196,317.97|
|1809, Jan. 1||57,023,192.09|
|1810, Jan. 1||53,173,217.52|
|1811, Jan. 1||48,005,587.76|
|1812, Jan. 1||45,209,737.90|
|1813, Jan. 1||55,962,827.57|
|1814, Jan. 1||81,487,846.24|
|1815, Jan. 1||99,833,660.15|
|1816, Jan. 1||127,334,933.74|
|1817, Jan. 1||123,491,965.16|
|1818, Jan. 1||103,466,633.83|
|1819, Jan. 1||95,529.648.28|
|1820, Jan. 1||91,015,566.15|
|1821, Jan. 1||89,987,427.66|
|1822, Jan. 1||93,546,676.98|
|1823, Jan. 1||90,875,877.28|
|1824, Jan. 1||90,269,777.77|
|1825, Jan. 1||83,788,432.71|
|1826, Jan. 1||81,054,059.99|
|1827, Jan. 1||73,987,357.20|
|1828, Jan. 1||67,475,043.87|
|1829, Jan. 1||58,421,413.67|
|1830, Jan. 1||48,565,406.50|
|1831, Jan. 1||39,123,191.68|
|1832, Jan. 1||24,322,235.18|
|1833, Jan. 1||7,001,698.83|
|1834, Jan. 1||4,760,082.08|
|1835, Jan. 1||33,733.05|
|1836, Jan. 1||37,513.05|
|1837, Jan. 1||336,957.83|
|1838, Jan. 1||3,308,124.07|
|1839, Jan. 1||10,434,221.14|
|1840, Jan. 1||3,573,343.82|
|1841, Jan. 1||5,250,875.54|
|1842, Jan. 1||13,594,480.73|
|1843, July 1||32,742,922.00|
|1844, July 1||23,461,652.50|
|1845, July 1||15,925,303.01|
|1846, July 1||15,550,202.97|
|1847, July 1||38,826,534.77|
|1848, July 1||47,044,862.23|
|1849, July 1||63,061,858.69|
|1850, July 1||63,452,773.55|
|1851, July 1||68,304,796.02|
|1852, July 1||66,199,341.71|
|1853, July 1||59,803,117.70|
|1854, July 1||42,242,222.42|
|1855, July 1||35,586,956.56|
|1856, July 1||31,932,537.90|
|1857, July 1||28,699,831.85|
|1858, July 1||44,911,881.03|
|1859, July 1||58,496,837.88|
|1860, July 1||64,842,287.88|
|1861, July 1||90,580,873.72|
|1862, July 1||524,176,412.13|
|1863, July 1||1,119,772,138.63|
|1864, July 1||1,815,784,370.57|
|1865, July 1||2,680,647,869.74|
|1866, July 1||2,773,236,173.69|
|1867, July 1||2,678,126,103.87 |
|1868, July 1||$2,611,687,851.19|
|1869, July 1||2,588,452,213.94|
|1870, July 1||2,480,672,427.81|
|1871, July 1||2,353,211,332.32|
|1872, July 1||2,253,251,328.78|
|1873, July 1||2,234,482,993.20|
|1874, July 1||2,251,690,468.43|
|1875, July 1||2,232,284,531.95|
|1876, July 1||2,180,395,067.15|
|1877, July 1||2,205,301,392.10|
|1878, July 1||2,256,205,892.53|
|1879, July 1||2,349,567,482.04|
|1880, July 1||2,120,415,370.63|
|1881, July 1||2,069,013,569.58|
|1882, July 1||1,918,312,994.03|
|1883, July 1||1,884,171,728.07|
|1884, July 1||1,830,528,923.57|
|1885, July 1||1,863,964,873.14|
|1886, July 1||1,775,063,013.78|
|1887, July 1||1,657,602,592.63|
|1888, July 1||1,692,858,984.58|
|1889, July 1||1,619,052,929.23|
|1890, July 1||1,552,140,204.73|
|1891, July 1||1,545,996,591.61|
|1892, July 1||1,588,464,144.63|
|1893, July 1||1,545,985,686.13|
|1894, July 1||1,632,253,636.68|
|1895, July 1||1,676,120,983.25|
|1896, July 1||1,769,840,323.40|
|1897, July 1||1,817,672,665.90|
|1898, July 1||1,796,531,995.90|
|1899, July 1||1,991,927,306.92|
|1900, July 1||2,136,961,091.67|
For discussion of theory of public debt, consult: Adams, Public Debts (New York, 1890); Bastable, Public Finance (London, 1895); for statistics of public debts, Fenn, The Public Funds (London, 1898); Monthly Summary of Commerce and Finance of the Bureau of Statistics of the United States Treasury Department, March, 1901 (Washington). See Finance; Bank, Banking; Annuities; Refunding; Money.
- Prussia prior to 1870; figures for 1889 and 1900 are exclusive of State debts, which in 1899-1900 amounted to $2,013,958,000.
- 1847 (figures for Sardinia).
- Chiefly former debt of North German Confederation.
- Total debt less cash in the Treasury.