National Debt.

National Debt. National or public debts although of early origin were relatively of small importance before the development of the modern system of banking and credit, and it is only during the present century that they have become almost universal on a considerable scale (see Gilbart on Banking, sect. i.). So long as it was necessary either to give pledges such as crown jewels or to assign specified revenues, it was not possible that public debts could attain any great magnitude. As soon, however, as governments were able to borrow simply on credit, national debts in the modern sense of the term grew rapidly. In less than a century after the foundation of the Bank of England (1694), when for the first time in English history the item 'Interest and Management of the Public Debt' appears in the national accounts, Adam Smith felt compelled to enter a protest against 'the progress of the enormous debts which at present (1776) oppress, and will in the long-run probably ruin, all the great nations of Europe.' At that time the public debts of the civilised world were, however, only about one-tenth of their present aggregate amount, which exceeds five thousand million pounds sterling, exclusive of local obligations. Although the English national debt received its greatest augmentation during the great Napoleonic wars, the general indebtedness of civilised nations has increased most rapidly since 1848. In fact since that year it has been calculated that there has been an annual average deficit in the public accounts of the world of over £100,000,000. In 1862 there were quoted on the London Stock Exchange foreign public stocks to the amount of nearly £700,000,000, whilst ten years later these quotations had increased to nearly £2,500,000,000. At the present time there are more than one hundred and fifty public securities dealt in the London market (see Adams on Public Debts, part i. chap. i.). Seeing then that national debts are now practically universal in the civilised world, and that the amounts and conditions under which they are held are constantly changing, a purely historical or statistical account is plainly out of the question in the limits of the present article. It will only be possible to indicate the most general characteristics and principles involved, and also some of the leading points of controversy. As regards origin, undoubtedly the most important cause of public indebtedness is, and always has been, war-expenditure. Thus the Napoleonic wars increased the English debt by over £600,000,000, the United States civil war cost the victors £450,000,000, and the Franco-German war added £390,000,000 to the total of national indebtedness.

In recent years, however, governments have added largely to their indebtedness by borrowing for various public purposes of an industrial or social character. In France especially, in spite of great changes of government, expenditure of this kind has gone on increasing at an alarming rate; the amount of taxation per head of population has increased by seventy per cent., and this is largely due to the growth of administrative functions on the part of the state. In the British colonies also the rapid increase of public indebtedness must be ascribed principally to the same cause. The progress of civilisation necessarily imposes, as Adam Smith, Mill, and other economists have pointed out, new industrial functions upon governments, and it is impossible that these can in all cases be fulfilled in a directly remunerative manner. But, apart from this natural growth, in recent years a quasi-socialistic tendency has become pronounced, which has involved a large increase in public expenditure. The full importance, however, of this element can only be seen when account is taken of local taxation and indebtedness, which would require a separate investigation. It must also be observed that money spent on debts incurred for public purposes may in some cases—e.g. railways, docks, &c., be directly profitable, and in others—e.g. education, be indirectly remunerative.

The nature of public debts differs in some respects from that of private obligations. It is held, for example, that the government of a sovereign state has the discretionary power of enforcing the claims of its subjects for payment of the national (as contrasted with domestic) obligations of another state. The interests of bondholders may in consequence give rise to diplomatic intervention and thus lead to political disturbances, as has been shown recently by the action of England and France in Egypt and Tunis respectively. The growth of national indebtedness has, however, hitherto been generally accompanied by an increased sense of responsibility founded on the importance of public credit, and fundamental revolutions in government have not generally given rise to repudiation, although the new government might strongly disapprove of the objects for which the debt was incurred, or the methods by which the money was raised—compare, for example, the history of France during the present century and the recent revolution in Brazil. On several occasions, however, specious arguments for partial repudiation have been urged and met with some popular countenance.

It has been maintained that if a debt has been incurred in a depreciated currency—that is to say, if the government has only received the capital sum borrowed in this form—it is only equitably bound to pay back the principal with an allowance for its depreciation. This position was taken up by some writers as regards the English debt incurred during the period of the bank restriction, when Bank of England notes were inconvertible and depreciated, and more recently the same reasoning was advanced in the United States after the civil war. The obvious answer, however, is that a government would receive so much less capital if the lenders were not assured against uncertain depreciation. The amount actually received for a nominal capital sum will clearly vary, according to the standard in which the payment is to be ultimately met (see Mill's Political Economy, bk. iii. chap. xiii.). In the same way it has sometimes been maintained that if a government has borrowed at a discount, and its stock has afterwards risen to par, the fundholders have no equitable right to this rise in value caused by the growth of credit and national prosperity. But again the reply is that the chance of their rise in the future was taken into account by those who made the original advances, and that they would have required so much more interest if they were to be entitled simply to a return of the original sum actually advanced. The practical conclusion to be drawn from this argument is that in general it is bad policy for a nation to borrow at a discount, because it is deprived of the opportunity of conversion to a lower rate of interest. Suppose, for example, that a nation can only borrow at par at six per cent., it is better to do this than to borrow nominally at three per cent., and create (roughly) double the amount of capital obligation for the same sum actually received. In the former case every fall in the rate of interest at which the nation can borrow may be taken advantage of by a process of conversion, whilst in the latter case the whole gain accrues to the fundholders. It is of course assumed that the debt may be paid off at any time (or with a short notice), and that payment is not definitely fixed for certain dates. The opposite case of the United States shows the importance of this provision.

It is, however, true as before that the certainty of high interest for a fixed period will operate upon the amount actually given for every nominal hundred, but the point is that the state is better fitted to take advantage of the probable ultimate fall in the rate of interest. A somewhat similar argument has been advanced by Dr Chalmers and others to show that, considering the nature of a state, it is better always to meet current expenses, however extraordinary, out of present taxation, rather than to resort to loans. The contention is that to meet the actual expenditure the government must in some form or other actually take the required amount from the sum total of the national wealth. If it makes a loan it is said that it really takes the capital amount and diverts it from productive purposes, just as effectively as if it obtained the money directly by taxation, but in addition is burdened in perpetuity with the interest. The circumstances under which the national debt of England was so largely increased in the Napoleonic wars no doubt seemed to justify this position. According to a Parliamentary Return of 1869 it was shown that from 1793-1816 the total income raised from taxes amounted to 1149 millions, and the total expenditure, except for the interest on the debt, amounted to 1103 millions. That is to say, for the twenty-three years (apart from the interest on the debt) the whole civil, military, and naval expenditure was less than the amount received in taxes by 46 millions. Now the charge on the original debt before the war was about 9½ millions per annum, or for the twenty-three years about 220 millions. Against this must be set the 46 millions of surplus shown above, leaving on the net deficit for the twenty-three years about 174 millions. But to meet this sum the national debt was by a process of borrowing and repayment actually increased by some £622 millions (see Noble's National Finance, p. 3, note). In answer to the general argument, however, it may be pointed out that the borrowing may be made not from the productive resources of a country, but from foreign capital or the general accumulations of the world, or that the loan may absorb wealth which otherwise would not have been saved at all, or may intercept wealth which might otherwise have gone abroad. Mill argues (Political Economy, bk. v. chap. vii. sect. i.) that a sufficient test whether the loan is really made from productive capital is given by the effect on the rate of interest. If the rate rises the presumption is that the productive capital has been really drawn upon. This test, however, can only be used with caution, if at all, for the rate of interest depends upon many factors—e.g. the state of credit, the general economic conditions of other nations, &c.; and on the anticipation of the outbreak of war a rise is certain to take place independently of the action upon the productive capital of the country.

The question next arises: Supposing a national debt in existence, should any effort be made to extinguish the principal? The chief arguments against any special exertion towards repayment are the following: (1) It is said that the payment of the interest constitutes a mere transfer of wealth from one class of the community to another, and therefore is no real burden. But in reply it may be urged that all taxation necessarily implies loss both directly and indirectly, the indirect and 'unseen' loss being much greater. Thus in the United Kingdom, whilst the direct expense of the customs duties has been placed at only 3½ per cent., the indirect loss has been calculated by Cliffe Leslie and others at from 20 to 30 per cent. In some cases also the national creditors are foreigners, and in this case the payment of interest must take the form of a real exportation of wealth without any corresponding importation. (2) It is argued that with the natural progress of society industrial countries become more and more wealthy, that the burden of the debt becomes proportionately less, and that its extinction can be more easily effected at a more remote period. It ought to be observed, however, that the rapid accumulations of the past fifty years have been largely due to exceptional and great changes in connection with machinery, railways, telegraphs, financial reform, foreign trade, education, &c., and that although the same causes will remain in operation, the rate of increase may not be so great. It is worth noting that the calculations of Mr Giffen (see Growth of Capital) on the accumulations of capital in the United Kingdom for the ten years 1865-75 are less than those for 1875-85. In certain countries also, notably France, population is almost stationary, and in nearly all the marriage rate is declining. (3) It is said that the rate of interest tends to fall, and that therefore by conversion the real burden may become less and less. The recent experience of the United Kingdom and of the United States tends to support this view; but, on the other hand, there are various elements of uncertainty—e.g. the opening up of new countries, the possibility of great wars, &c. (4) It is maintained that the existence of a national debt, which consists practically of perpetual annuities guaranteed by the state, is a national convenience; and further, that if the debt were extinguished, capital would tend to be sent abroad. The answer is that under modern conditions there are many safe investments, and that only surplus capital migrates from a country. (5) It is said that it is unjust to the present generation to impose a burden upon it simply for the benefit of future and probably more wealthy generations; but it may be rejoined that we must consider the continuity of national life, and remember that the present race is supposed to enjoy the benefits of former sacrifices.

On a balance of arguments most economists have approved of the rule that it is advisable to pay off debt, so long as the taxes by which the surplus is raised do not directly or indirectly impose still greater burdens. A bad system of customs and excise duties, for example, by checking the natural development of production and trade, may practically leave the nation poorer than if it had not paid off its debt by such means. On the other hand, if remissions of taxation have, as in the United Kingdom, already been carried so far as to leave the burden of taxation comparatively light, it is better to use any surplus rather for the payment of debt than for a further reduction of taxation. In support of this view, it may be added that the less the previous debt so much the greater would the power of a state be in making a loan in case of exceptional need. A nation already overburdened with debt might be obliged, in the case of a great war, immediately to resort to a forced currency, which would be liable to a serious or fluctuating depreciation. An issue of inconvertible notes is generally the worst method of incurring a national obligation, being in reality a species of forced loan. Some years ago a favourite argument against the immediate repayment of public debts was the assertion that there was in progress a natural depreciation of gold, owing to great discoveries and to the use of credit substitutes. This argument must, however, now be reversed, for there can be little doubt that since 1875 the tendency has been towards an appreciation of gold. Such an appreciation of the standard in which most debts have been contracted—in other words, a general fall in prices—makes the real burden of these debts so much heavier. With low prices, including low money incomes, the same amount of nominal taxation involves greater sacrifices on the part of the taxpayers. Accordingly, if the standard is likely to appreciate still further (see BR-METALLISM) and no remedy is adopted, it will be advisable to reduce money debts of all kinds as rapidly as possible. It should also be noticed that ‘an old tax is no tax,’ and that in a period of prosperity it is not advisable to lessen or abolish taxes which must afterwards be re-imposed. It is preferable to create a surplus for the extinction of debt. The case of the United States with a surplus larger than can be made use of, and raised to a great extent by burdensome indirect taxation, may be regarded rather as an exception which proves the rule.

In conclusion, attention may be called to the principal methods adopted for the extinction of public debts. These are mainly two, with variations in detail. First, there is the simple plan of raising directly more in revenue than is required for expenditure, and devoting the surplus directly to the purchase of the bonds or stock representing the debt. A continuous surplus of this kind is a real sinking fund. In former times many fallacies have been current regarding the powers of a sinking fund. Financiers have been deluded through spurious figures on the powers of indefinite accumulation of a small sum at compound interest, and have imagined that if a certain sum were set aside and allowed to grow in this manner, it would insensibly extinguish any debt. If, however, in the meantime, the state, as in the case of England during the Napoleonic wars, continues to borrow at higher rates, a sinking fund of this kind is directly worse than useless, although indirectly it may find defenders on the ground that a suspension would injure the national credit. The second method of repayment which has met with much favour in the United Kingdom is the substitution of terminable annuities, at a higher rate, for the perpetual annuities which constitute the interest on the debt. The great advantage of this plan is that there is so far no apparent surplus which the government or the people can devote to a reduction of taxes or to new modes of expenditure, whilst a sinking fund is always open to attack. If the stock has originally been issued at a discount, and a rise may be expected, the adoption of terminable annuities gives the nation the benefit of this rise, whilst the gradual diminution of the debt of itself increases the tendency to rise.

A third method of getting rid of public debts has sometimes been proposed, founded upon the fact that a state can borrow on lower terms, or that its credit is better than is the case of private individuals or companies. Thus it is argued that the state might purchase the railways, the ordinary stock of which in the United Kingdom earns about four per cent., with money borrowed at less than three per cent. Adam Smith, however, long ago pointed out that a nation can rarely make a profit of any industrial undertaking, and to judge by recent experience, governments are likely to pay far more than the real market value of any stock they may purchase.

The debt in 1890 was divided into unredeemed funded debt, £585,959,852; estimated capital of terminable annuities, £71,731,869; and unfunded debt (i.e. debt which the state is not bound to repay), £32,252,305 (including outstanding bonds for purchase-money of Suez Canal shares). In 1750–57 took place the first great consolidation of various stocks (see CONSOLS); in 1888 the ‘3 per cents.’ were consolidated into ‘new stock’ to bear 2½ per cent. till 1903, and thereafter 2½ (see also EXCHEQUER BILLS). In 1897 the total debt—£644,909,847—was £55,000,000 less than the gross annual value of property and profits assessed for income-tax.

At the last-named date, however, the net debt—deducting the cash in the treasury—was 757,915,079 dollars; and of the whole, 764,069,095 dollars bears no interest. The bonds issued to the Pacific railways, which pay over 5 per cent., are included to the amount 64,623,512 dollars.

The debt of Brazil is said to be £120,000,000; of Japan, £60,452,000; of Chili, £17,524,600; of Mexico, £16,700,000; of China, £12,505,000.

See the sections dealing with finance and debt in the articles on the several countries; H. C. Adams, Public Debts (1888); J. Noble, National Finance (1875); P. Leroy-Beaulieu, Traité de la Science des Finances (2d ed. 1879); R. Dudley Baxter, National Debts (1871); Adolph Wagner, Die Ordnung der Finanzwirtschaft (in Schönberg's Handbuch der Pol. Oekon., 3d ed. 1885); Sir Stafford Northcote, Twenty Years of Financial Policy (1862); Leone Levi, History of British Commerce (2d ed. 1880); A. J. Wilson, The National Budget (1882); Adam Smith, Wealth of Nations (M'Culloch's ed. 1872), bk. v. chap. iii., and appendix on the Funding System; E. W. Hamilton, An Account of the Operations under the National Debt Conversion Act, 1888, and the National Debt Redemption Act, 1889 (1889); Fenn's Compendium of the Funds (ed. by Nash).