to our general store of capital. Under special conditions, however, this method of employing new disposable capital may be thoroughly inexpedient. This would be the case if, on account of decreased demand for goods or because of an urgent demand of the state for goods, individual investors find there is no demand for their capital and that goods invested under such conditions would lose their value as capital. If, in such a case, this disposable capital is transferred to the state in the form of a public loan, it is because the investor had the conviction that it would produce a greater value in this employment than it would if invested in private industry. The view of the state securing the loan was the same; and the opinion of the two parties to the transaction must be assumed to be correct. For no one can pretend to judge the value of a good more correctly than the person who exchanges it for another. The outward sign according to which the opinion of the two parties is determined, and in which it expresses itself, is the rate of interest.

The disposable capital taken by the state in this way cannot, it is true, be employed in private business enterprises. In fact no increase of such enterprises can take place, and perhaps even the present volume of industry cannot be maintained. . . . But the reason for this is not that capital has been taken away, but rather the more general circumstance, that now, as a result of special conditions, there is less need of goods adapted to the immediate satisfaction of wants, and that other goods and other employments of capital have for the time a higher value. Therefore the employment of disposable capital in private enterprises in the production of goods of the sort previously wanted, would be useless, and such capital would be lost.

If, for instance, a dangerous war breaks out, it will be out of the question to satisfy new demands for luxuries, and often it will be impossible even to satisfy the former demand. It is necessary, instead, to secure the means of protecting and preserving the goods already on hand. A large or even larger production of costly silks, for instance, would be inadvisable; and if this occurred, the producers would probably lose money. Production of silks, therefore, is suspended or decreased; and the disposable capital of silk manufacturers, which under ordinary conditions would be reinvested in this industry, is loaned to

the government. By the government it is employed in the purchase or production of cloth needed to clothe the army, or something of a similar nature. In the same way less capital is invested in making pleasure carriages, and more ammunition or army wagons are built. So, too, the breeding of driving horses is checked, and more army horses are bred.

All these investments of disposable capital serve the purpose of procuring the good which is at the moment of the greatest value, - protection against foreign enemies or the successful termination of a war that has begun. The goods invested in this manner preserve their properties as capital, for they are converted into goods which represent their value because much needed and therefore in demand.

With this falls the theory that public loans destroy capital, the theory which we meet in the works of most writers. It is, apart from the faulty conception of capital which we mentioned above, to be considered a necessary consequence of the theory that all public consumption is unproductive. We have already discussed the falsity of this theory.

This theory is wrong not only in regard to goods which had formerly served another purpose, but are now taken for public purposes because these seem to be more important (as in the example just given,) and offer the most needed sort of employment. But it is also especially wrong in regard to goods that pass directly from the disposable capital of the society into the hands of the state rather than into private industries. Such goods had not yet been used as capital, and in reality first became such when used by the state. It is questionable, indeed, whether they would have retained their value if they had passed into the hands of private enterprises.

The doctrine that taxes and capital come out of different parts of the wealth of the society and consequently exercise different, even opposite, effects upon the welfare and development of economic society, — because the former do not impair capital while the latter do impair it, is wholly untenable. It is based upon an arbitrary separation of things naturally similar and inseparable. Both taxes and loans flow in the same manner from the disposable capital of society, and only the purposes for

which they are employed give rise to a fundamental distinction between them.

(Dietzel then proceeds to enlarge upon the advantages of public loans. They enable governments, he says, to raise large sums of money very quickly; make it unnecessary to increase taxation to an injurious extent; encourage saving; enable a country to draw on the resources of foreign investors; enable a government to place part of an extraordinary burden upon future generations; increase production; and add to the wealth of a country. ED.)

CHAPTER XXII

SHOULD A NATIONAL DEBT BE PAID?

78. The Views of Mill. The desirability of redeeming a national debt was urged by Mr. Mill as follows:1

It

When a country, wisely or unwisely, has burthened itself with a debt, is it expedient to take steps for redeeming that debt? In principle it is impossible not to maintain the affirmative. is true that the payment of the interest, when the creditors are members of the same community, is no national loss, but a mere transfer. The transfer, however, being compulsory, is a serious evil, and the raising a great extra revenue by any system of taxation necessitates so much expense, vexation, disturbance of the channels of industry, and other mischiefs over and above the mere payment of the money wanted by the government, that to get rid of the necessity of such taxation is at all times worth a considerable effort. The same amount of sacrifice which would have been worth incurring to avoid contracting the debt, it is worth while to incur, at any subsequent time, for the purpose of extinguishing it.

Two modes have been contemplated of paying off a national debt: either at once by a general contribution,2 or gradually by a surplus revenue. The first would be incomparably the best, if it were practicable; and it would be practicable if it could justly be done by assessment on property alone. If property bore the whole interest of the debt, property might, with great advantage to itself, pay it off; since this would be merely surrendering to a creditor the principal sum, the whole annual proceeds of which were already his by law; and would be

1 Principles, Bk. V, ch. 7, §§ 2-3.

2 Ricardo and others had advocated such a policy. Cf. Ricardo, Principles of Political Economy and Taxation, ch. 17. — ED.

equivalent to what a landowner does when he sells part of his estate, to free the remainder from a mortgage. But property, it needs hardly be said, does not pay, and cannot justly be required to pay, the whole interest of the debt. Some indeed affirm that it can, on the plea that the existing generation is only bound to pay the debts of its predecessors from the assets it has received from them, and not from the produce of its own industry. But has no one received anything from previous generations except those who have succeeded to property? Is the whole difference between the earth as it is, with its clearings and improvements, its roads and canals, its towns and manufactories, and the earth as it was when the first human being set foot on it, of no benefit to any but those who are called the owners of the soil? Is the capital accumulated by the labor and abstinence of all former generations of no advantage to any but those who have succeeded to the legal ownership of part of it? And have we not inherited a mass of acquired knowledge, both scientific and empirical, due to the sagacity and industry of those who preceded us, the benefits of which are the common wealth of all? Those who are born to the ownership of property have, in addition to these common benefits, a separate inheritance, and to this difference it is right that advertence should be had in regulating taxation. It belongs to the general financial system of the country to take due account of this principle, and I have indicated, as in my opinion a proper mode of taking account of it, a considerable tax on legacies and inheritances. Let it be determined directly and openly what is due from property to the state, and from the state to property, and let the institutions of the state be regulated accordingly. Whatever is the fitting contribution from property to the general expenses of the state, in the same, and in no greater proportion, should it contribute toward either the interest or the repayment of the national debt.

This, however, if admitted, is fatal to any scheme for the extinction of the debt by a general assessment on the community. Persons of property could pay their share of the amount by a sacrifice of property, and have the same net income as before; but if those who have no accumulations, but only incomes, were required to make up by a single payment the equiva