increased. Thus the capitalized sum of the French debt was in 1840 $850,000,000, in 1870 it was $2,759,000,000; but the pressure of the annual payments demanded by these debts, computed upon the national income for the respective periods, is found to be .022 and .023. That is to say, the national income of France increased at a rate nearly as rapid as that of her debt, notwithstanding the extravagances of the empire. But it should, perhaps, be added, that this favorable exhibit has been destroyed by the financial disasters occasioned by the Franco-Prussian war. It is upon such facts as these that the common argument in support of the policy of perpetual indebtedness is based, and, so far as the facts are concerned, there is no room for controversy. But the conclusion of the argument may not be so readily accepted, for, if it can be shown that the payment of the principal of a debt has no tendency to retard the industrial development of a nation, the entire course of reasoning falls to the ground. As opposed to the idea from which this reasoning must proceed, I venture to place the following proposition, which, if maintained, will furnish an incontrovertible argument in favor of the policy which the United States has adopted:

The payment of the principal of a debt tends neither to impoverish a nation nor to retard its material development; but, on the other hand, the maintenance of the principal and the constant payment of accruing interest tend to cripple the productive capacity of any people.

The two parts of this proposition should receive separate attention, and we are led first to inquire if the industries of a country are injuriously affected by the process of payment. It is admitted by all that somewhere in the course of deficit financiering either at the time the debt was established, or during the period that it was carried, or at the date of its payment-a loss is sustained chargeable to the adoption of the loan policy. Should one reason from the analogy of private debts, he will conclude that this burden is borne at the time when the debt is paid; for when an individual debtor clears himself from obligations, he loses control over a certain amount of capital, and consequently lessens his importance as a member of industrial society. But such reasoning cannot be applied to the state. The state is not an individual, it has no life separate from the united lives of

all citizens, and it recognizes no interest but the collective interest of society. The state is the corporate representative of all citizens, creditors as well as debtors, and is not at all interested in the proprietary residence of capital, provided only it be judiciously employed. Since, then, the payment of its own obligations effects no more than a transfer of control over capital from one set of men to another, it cannot be said that the industrial development of the country is thereby obstructed.

The position here assumed may be easily understood if one hold firmly in mind the nature of capital. Capital is subsistence fund, and he who controls it has it in his power to direct labor. It is capital which the state wants when it borrows money, and in borrowing capital it draws to its own use that which, had it not been thus appropriated, might have been applied to some productive industry under private management. The obligations which the state creates against itself are written in the language of money, because this is the most convenient language known for the expression of indebtedness; but the state has no use for money except to effect the transfer to itself of control over existing capital.

Suppose a state to borrow a billion dollars; it cannot be said that industrial society is thereby necessarily rendered any the poorer. Capital is not destroyed by the borrowing. Before the loan was filled, the nation was possessor of a certain amount of capital, distributed in a thousand funds and under the direction of a thousand wills; after the loan the nation as a whole holds the same amount of capital as before, the only difference being that control over it has passed to the state. Whether or not this operation is industrially detrimental depends upon the use to which the state puts the proceeds of its loan. If it be consumed in the prosecution of a war, the nation is impoverished to the extent of the unproductive consumption, since capital, in the form of bacon, flour, clothes, implements, mules, and the like, has been destroyed. We may, then, conclude that the injury sustained on account of a loan for war purposes is sustained at the time the loan was contracted, and is due to the fact that the state has caused a certain amount of capital to disappear without hope of recovery.

Let us now turn to the process of payment. The obligations

which the state has created against itself call for the payment of a certain amount of money. The money, which it obtains by means of taxation, is held for a moment, then transferred to the public creditors, and in this manner the state becomes absolved from its indebtedness. It would of course be incorrect to say that this transfer of money from one set of citizens to another does not in the least disturb capital, for possession of money is the evidence of ownership in capital; but it may be rightly claimed that it does not destroy capital. Before the payment, one set of individuals controlled the subsistence fund of the country to the extent of the payment; after the extinction of the debt, ownership rests with another set of individuals. The government is freed from the necessity of providing an annual sum in the form of interest, and, measured by the amount of capital in the country, the nation is in no wise impoverished. There is the same amount of food for the subsistence of laborers, and the same amount of raw stuffs upon which to set them at work. If the new masters of capital are as enterprising as the old, the nation loses nothing by the payment of its debt. This is the explanation, and in the explanation lies the defense, of the proposition that the payment of a public debt does not necessarily impoverish a nation. The injury to industrial society is worked by the destruction of capital at the time the loan was contracted; the labor required to create again the capital thus destroyed constitutes the burden imposed upon the nation; the payment of the principal of the debt is at most but a readjustment of ownership in existing capital. It is a fallacy to argue that the expungement of public obligations destroys capital.

But how is a people impoverished by the maintenance of the principal of a debt? In so far as bondholders live from the proceeds of their bonds, they form a class not immediately interested in current industries. At some time in the past they may have furnished the government with large sums of capital, thus averting the inconvenience of excessive taxation or of a sudden change in rates; and, in return for this service, they received from the government the promise of an annuity until an equivalent of the original capital should be returned. persons are guaranteed a living without labor.

Such

There is but one way in which the government may escape the necessity of supporting in idleness this class, and that is by paying its members their respective claims. The bondholders would in this manner be deprived of their secured annuity, but they would in its stead hold a sum of free capital; and if they wish to continue in the enjoyment of an income from their property, they must apply their funds to some productive purpose. In this manner the country gains by bringing to bear upon industrial affairs the interested attention of those who formerly were secured a living from the proceeds of public taxes. For another reason also is the payment of a debt advantageous. No people can long retain that hopefulness so essential to the vigorous prosecution of industries if the past lays heavy claims upon the present. As a rule, they only should partake of current product who are in some way connected with present production. Carelessness and jealousy are not characteristics of efficient labor, but they are sentiments naturally engendered by the payment of taxes for the support of a favored class. It is the permanency of this payment, rather than its amount, which exerts a depressing influence upon labor, and its extinction is a first step toward the establishment of confidence and contentment. It is for such reasons as these that we conclude that the policy of debt payment vigorously prosecuted will assist rather than retard industrial development.

CHAPTER XXIII

SINKING FUNDS

80. The Theories of Dr. Price.1- During the eighteenth century various attempts had been made, as described by Adam Smith, to reduce the British debt by creating a sinking fund. These efforts proved ineffectual for various reasons, and finally Dr. Richard Price came forward with what was generally believed to be a demonstration of the efficacy of a permanent sinking fund inviolably pledged and applied to the extinction of a public debt. His theories found favor with the younger Pitt, and were embodied in a new sinking-fund law of 1786, known as Pitt's sinking fund. This act set aside £1,000,000 per year to be placed in the hands of sinking-fund commissioners, who were to apply it to the purchase of the national debt, and then to draw from the treasury interest on stock thus purchased and apply that to further purchases. It was intended that this should continue until the interest on the stock purchased (redeemed) and held by the commissioners should equal £4,000,000; when, with the £1,000,000 annual appropriation, the sinking fund would amount to £5,000,000 a year.2

The theory upon which this was done is most clearly set forth by Dr. Price in his Appeal to the Public on the Subject of the National Debt. The gist of his argument is contained in the following extracts:

1 Dr. Richard Price (1723-91) was a dissenting clergyman and a well-known writer upon a variety of subjects. His principal works dealing with the theory of sinking funds were: Observations on Reversionary Payments (1769) and An Appeal to the Public on the Subject of the National Debt (second edition, 1772). We quote from the latter publication.

2 See Palgrave, Dictionary of Political Economy, III, 405 et seq.