404 



NATIONAL DEBT 



dimply to a return of the original mini actually 

 advanced. Tlic practical conclusion to be drawn 

 from this argument is that in general it is had 



rlicy for a nation to Ixirrow at a discount, because 

 is deprived of the opportunity of convention to a 

 lower rat*' (if interest. Sup|M)e, for example, that 

 a nation can only borrow at par at six \ter 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 Hum 

 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 con- 

 version, whilst in the latter cose 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 not iff.*), ami 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 !>efore 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 l>etter always to meet current expenses, 

 however extraordinary, out of present taxation, 

 rather than to resort to loans. Tin* contention is 

 that to meet the actual expenditure the govern 

 mi-iit 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 pro 

 d in-live piirpo.-.-,. 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 Keturn 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 ex|H*iuliture was less than the amount re- 

 ceived in taxes by 46 millions. Now the charge 

 on the original defit liefore the war was al*out 9} 

 millions tier annum, or for the twenty-three years 

 about 220 millions. Against this must he set the 

 46 millions of surplus shown above, leaving on the 

 net deficit for the twenty-three years about 174 

 millions. lint to meet this sum the national debt 

 was by a process of borrowing and repayment 

 octualfy 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 liorrowing may lie made not from 

 the productive resources of a country, but from 

 foreign capital or the general accumulations of the 

 world, or that the hian may absorb wealth which 

 otherwise would not have lieen saved at all, or may 

 intercept weal 111 which might otherwise have gone 

 abroad. Mill argues (1'nlitinil /,Vomv. bk. v. 

 chap. vii. Meet, i.) that a sullieient test whether the 

 loan is really made MOTH productive rapital is given 

 by the effect on the rate nf interest. If the rate 

 rises the presumption is that the productive capital 

 has been really drawn U|*on. Tliis test, however, 

 can only lie 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, ,\.- ; and on the anticipation of the 

 outbreak of war a rise is certain to take place 



independently of the action upon the productive 



;'lal of the count i y. 

 le question next arises : 



capital of the country. 



The i|iiition next arises : Supposing a national 

 debt in existence, should any effort lie made to 



extinguish the principal? The chief arguments 

 aguinxt any n|*ecial 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. I'.ut in reply it may 

 be urged that all taxation necessarily implies Ions 

 both directly and indirectly, the indirect and 'un- 

 seen ' loss being much greater. Thus in the United 

 Kingdom, whilst the direct expense of the customs 

 duties has lieen placed at only 34 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 foreigneis, and 

 in this case the payment of interest must take the 

 form of a real exportation of wealth without any 

 eORMponding importation. (2) It is BIKWd 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 lieen largely due to 

 exceptional and great changes in connection with 

 machinery, railways, telegraphs, financial reform, 

 foreign trade, education, &c., ami that although 

 the same causes will remain in oitvration, the rate 

 of increase may not 1? so great. It is worth noting 

 that the calculations of Mr (.iffen (see Growth of 

 Cii/iilal) on the accumulations of capital in the 

 I'nitfd Kingdom for the ten years 1865-75 are 

 less than those for 1875-85. In certain countries 

 also, notably France, 

 .ii v, and in nearlv all t 

 (3) It is said that the i 

 and that therefore by conversion the real burden 

 may become less and b->s. The recent experience 

 of the United Kingdom and of the Uniteo States 

 tends to sup|>ort 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 

 ware, ccc. (4) It is maintained that the existence 

 of a national debt, which consists practically of 

 perpetual annuities guaranteed by tne state, is a 

 national convenience ; and further, that if the debt 

 were extinguished, capital would tend to be sent 

 abroad. Hie answer is that under modern con 

 flitions 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 ilium it simply for the lienefit 

 of future and probably more wealthy generations; 

 but it may be rejoined that we must consider the 

 continuity of national life, and ri*meml*er that the 

 present race is supposed to enjoy the benefits of 

 former sacrifices. 



>n a Iwilance of arguments most economists have 

 approved of the rule that it i- advisable to pay oil 

 debt, so long as the taxes by which the surplus is 

 iaised 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 practi- 

 cally leave the nation poorer than if it had not 

 jiaiil off it.s debt by such means. On the other 

 hand, if remissions of taxation have, as in the 

 United Kingdom, already Ix-cn carried so far as 

 to leave the burden of taxation comparatively light, 

 it is better to use any surplus rather for the pay- 

 ment of debt than for a further reduction of taxa- 

 tion. In supiMirt of this view, it may lie added 

 that the less the previous debt so much the greater 

 would the power of a state be in making a loan in 



