Public Finance

The foregoing consideration would apply to any system of finance in its ordinary or usual state, but the difficulty of adjustment is much increased by the operation of what has been described as extraordinary outlay.
*1 Occasions, as we saw, will from time to time arise, when it becomes necessary to spend large sums for particular objects. War and the execution of public works are the great causes of this sudden increase of expenditure, and the former is very hard to foresee and provide against. In any case it may fairly be said that exceptional charges of the kind should not be altogether met out of current income. As the advantages realised are of indefinite duration, it seems fair that the charge should, in popular language, be spread over a number of years. Without at present criticising this doctrine, we may remark that the political conditions place limits—elastic ones, it is true—on the revenue-collecting powers of the administration, and that in practice there are only two expedients for meeting abnormal outlay, viz. either the modern method of incurring debt, or the older one of storing up treasure or other disposable wealth for the time of need. The absence of equilibrium in public finance must show itself in the creation of a surplus store of wealth, or in the formation of liabilities. In the present chapter we shall therefore examine the policy of forming public treasures or other reserves, in order to provide for the necessities of the State in times of emergency.

§ 2. The system of public treasures can lay claim to a high antiquity. Thus the Athenians in the period immediately preceding the Peloponnesian war accumulated a sum of 9,700 talents, and at its outbreak had actually 6,000 talents in store. Even earlier, the Persian sovereigns had collected the tribute of their provinces in the shape of contributions of the precious metals, large stocks of which fell into the hands of Alexander.
*2 The same policy of hoarding was followed by the Romans. The stores of conquered sovereigns were accumulated, and the special tax on the emancipation of slaves was used in the same way. Indeed, the possession of the treasury became a leading object of the rival parties in the civil wars that overthrew the Republic.
*3

Like facts are noticeable in the mediæval period. One of the first objects of the successor to the Crown on the death of a king was to gain possession of the treasure. Both in England and France there were several instances of this eagerness.
*4 The treasure and the kingdom were regarded as a joint possession, each being in accordance with the conceptions of the time, looked on as equally a form of property. This practice lasted in England till the time of Henry VIII., who speedily dissipated the savings of his prudent father. Henri IV., who in this was guided by Sully, was the last French monarch who maintained a treasure.
*5

By the time of Adam Smith the practice had decayed; he notes that the canton of Bern was the only Republic, as Prussia was the only monarchy, that continued to keep a reserve.
*6 The latter country has been remarkable in this respect. Thus Frederick William I. (1713-1740), as Carlyle tells us, ‘Yearly made his own revenues, and his people’s along with them, and as the source of them, larger: and in all states of his revenue he had contrived to make his expenditure less than it; and yearly saved masses of coin and “deposited them in barrels in the cellars of his
Schloss.” ‘
*7 His successor, Frederick the Great (1740-1786), continued this system, and it affords a striking instance of the persistence of national policy when we find that the present German Empire follows what is virtually the same method.

§ 3. The reasons that induced so many States to accumulate treasure are to be found in the conditions of society existing at the time. A very rude community will have no need of a store of money; weapons and provisions would be more useful in its case. The system of money dealings must have come into being before hoarding can be regarded as the duty of a wise sovereign. Once that point has been reached, the great convenience of having a stock of a universally desired article on hand is too plain to be overlooked. The efficient maintenance of an army in the field depends in a great degree on the supply of what is so often called the ‘sinews of war.’ Cases are not unknown where expeditions failed altogether from want of this indispensable auxiliary. The superstitious reverence for the precious metals and the force of habit may partly account for the great treasures of ancient States; but they owe their continuance far more to their felt necessity. Where credit was undeveloped, and taxes were occasional and uncertain expedients, a State that had no treasure was in a dangerous situation, unprepared either for attack or defence. The position of the sovereign in earlier times as a large property-holder was contributory to the same result. Lands, forests, mines, and various lucrative claims were in the possession of the ruler. The treasure came to be looked on as one part of this extensive class, serving a particular purpose and completing the public economy.

As the system of state hoarding was produced by the economic conditions of the periods in which it was employed, so the change to the modern economic organisation necessarily led to its abandonment. The increased productiveness of taxes, and the facility with which credit could be used, relieved governments from the duty of keeping a stock of bullion for emergencies. The State ceased to be its own banker, and came to rely on the instrument supplied by the growth of credit. Not only were the ultimate advantages greater, but there was an immediate benefit in the saving of the amount required to replenish the store, when it had from any cause run down. Borrowing in times of need was more pleasant than a long course of previous saving. The change was, as we have seen, as gradual as the alteration in the ruling conditions that produced it. The keeping of stores of bullion died out slowly, and has even left, as in the case of Germany, survivals to the present day. This last instance deserves some further notice. The traditional policy of storing up a reserve for the pressure of war was applied to the German Empire by means of the resources obtained through the French indemnity. A sum of £6,000,000 was held in bullion and a much larger amount was invested in high-class securities, chiefly German railways and the debts of foreign countries. The ‘fund for invalids’ in 1901 amounted to over £19,000,000. There is, therefore, a reserve of over £25,000,000 held by the Empire in what is practically the form of a hoard, and apparently ready for use in time of war.

German economists have defended this proceeding on the ground that it is imperatively required for military necessities. The use of the treasure in the past is dwelt on, and it is further urged that at the outbreak of war the money market is so strained that a large loan is costly, if not unobtainable. The treasure or war chest is but the complement of the fortresses, equipment, and system of speedy mobilisation that constitute the safeguards of German unity.
*8 On the other hand, the general argument against state reserves is a forcible one. The retention of bullion by the State involves the loss of the interest that could be gained by its productive employment, while it is quite uncalled for in any country with an efficient system of banking. What is really required is a sufficient disposable metallic reserve to be drawn on in the time of trial. The state-treasure policy thus invades the domain of banking, and is at best inadequate. Three weeks of war would exhaust the store of £66,000,000 now held at Spandau.
*9 It is so hard to measure the precise amount needed, and error in either direction leads to such loss, that the policy is too uncertain in its effects to be advisable. The influence of state hoarding on trade and prices should also be considered. The withdrawal of a large mass of money tends to lower prices, and is so far a hindrance to the development of trade and the ever-present possibility of its sudden use has a disturbing effect.
*10 On the whole, then, it is beyond question that in any country with modern credit facilities the formation of a treasure is a mistaken proceeding. The case is still stronger against the use of a reserve in the form of securities. They, it is true, have the advantage of yielding interest, but where a public debt exists, it is better to use this available property for its redemption. To borrow with one hand, while lending with the other, is simply introducing an additional complication into the public accounts, without any corresponding advantage. The repayment of a portion of the German debt would be as much an investment as the policy actually pursued. But the method of investing in securities is not merely useless; it has direct disadvantages. If home securities are chosen, the State is drawn into the business of speculation and stockjobbing, with injurious results to trade. The interest on such investments may apparently exceed what would be saved by paying off debt; but this higher yield means diminished security or stability, a consideration that leads to another objection to such investments. The aim in view is the possession of a disposable fund for emergencies, but it is just at times of emergency that stocks are most likely to fall in value. A large sale of securities by a government at the outbreak of war would force down their price, and make the process of realisation a costly one. Moreover, the funds so obtained would be equally available for taking up a loan. To come on the market as a needy seller is the worst possible way of disposing of any kind of state property.

Where foreign securities are held the position is somewhat different. They will not be so much affected by the commencement of war, as they possess an international market. Political difficulties are, however, greater. Should the contemplated war be with the Power whose debt is used as an investment, the question of stoppage of interest would arise. In any case the relation between the investing and lending States is not a satisfactory one: it brings a sovereign power into the domestic affairs of another State, and in case of readjustments affecting the debt may cause grave difficulties. These considerations fully support the opinion that, speaking generally, the system of state treasures or reserves of securities is indefensible at the present stage of financial development.

Some exceptional cases have been suggested, but even they can hardly be admitted as modifying the principle just stated. A State,
e.g., may have no public debt to redeem, and then the formation of a reserve may appear desirable, but there are other alternatives, viz. either (1) the remission of the less eligible forms of taxation, or (2) the increase of the agricultural or industrial domain of the State, a course which may be adopted on social, as well as economic, grounds. Again, the interest on the debt may be so low, that its redemption may not seem commercially profitable as compared with investment. The objections to state dealings with capital, already noticed,
*11 are too serious to be set aside on this ground. The remission of taxation, though it seems to be a sacrifice on the part of the State, may in many cases be the best course. The real source of state revenue is, need we say once more, the national income, and judicious remission of taxation has a beneficial influence on the growth of this reservoir, on which the State in the last resort depends for its tax receipts. The often-used phrase about allowing taxation ‘to fructify in the pockets of the taxpayers’ is here exactly applicable. The financial power of the State rests on the economic development of the people, and will be proportional to it. Any special resources in the form of money that may be required are best procured through the agency of bankers. The case in this respect is far clearer, than in the somewhat parallel one of manufacture of weapons and supplies, since the question of quality, or that of effectiveness of competition, does not arise.

§ 4. Whatever be the conclusion as to special and exceptional cases of state reserves, it is at all events plain that the older policy of hoarding as a general rule of finance is obsolete. It is, in fact, on its ruins that the modern phenomenon of public debts has arisen. From keeping a reserve to meet all emergencies States have passed to the opposite course of not paying even their working expenses. The problem of public indebtedness is becoming more and more important, and is giving rise to serious questions. The remaining chapters of the present book will therefore be devoted to an examination of the different aspects of this vital part of modern finance.