In his report for 1875 Secretary Bristow acknowledged that the sinking-fund payment was secondary only to the interest on the public debt, and took precedence of all other appropriations. As some had asserted that the excess payments of former years excused the lapse of the sinking-fund payment when need arose, the secretary took occasion to declare that the statute imposed a duty to be performed annually, and that purchases must be made within each fiscal year. The secretary explained the cessation of bond purchases by the fact that bonds could not be bought at par, while he was forbidden by law to pay more. This deadlock, however, had been broken by the law of March 3, 1875, which authorized the secretary to obtain bonds for the sinking fund by calling in and redeeming the fivetwenties.

As the deficiency in the revenues continued, the next secretary, Morrill, thought fit to present a view of the operations of the debt in toto. From his calculations he concluded that the public creditor had no ground for complaint.

The terms of the law of Feb. 25, 1862, required that by the operations of the sinking-fund account, the public debt should be reduced in the sum of $433,848,215.37 between July 1, 1862, and the close of the last fiscal year. A reduction has been effected during that period of $656,992,226.44, or $223,144,011.07 more than was absolutely required.

It can therefore be said, as a matter of fact, that all of the pledges and obligations of the government to make provision for the sinking fund and the cancellation of the public debt have been fully met and carried out.

The sinking fund first rose into prominence during the preparations for specie resumption. The act of 1875 permitted the sale of bonds, to procure the stock of gold necessary for resumption. A compliance with the letter of the statutes would lead to the practice of redeeming and borrowing at the same time. Sound finance required that, in such a case, the government should cease buying bonds for the sinking fund, and let the cash destined for that purpose accumulate in the treasury, awaiting the day of resumption. It was accordingly urged, and with reason, that the claims of the sinking fund should be suspended.

This was not done, but something similar was done. The

debt to which a yearly one per cent payment was pledged included notes as well as bonds. It might, therefore, be held lawful to redeem greenbacks, or even "shinplasters," for the sinking fund, in place of bonds, and thereby lessen the mass of paper to be confronted on Jan. 1, 1879. Accordingly under the law of April 17, 1876, $7,000,000 of fractional currency were credited to the sinking fund at five per cent interest. Similarly $8,000,000 of greenbacks were added under a clause in the resumption act.

In

Since the accession of Senator Sherman to the treasury portfolio a construction of the law of 1862 has prevailed which, however consonant with common sense and sound finance, is irreconcilable with the theory that the sinking fund then established is part of the contract with the public creditors. his report for 1879 the secretary said: "These acts (of 1862 and 1870) are regarded as imposing upon the secretary the duty of providing for the sinking fund out of the surplus revenues of the government." The new construction was very apparent in a Senate debate, in 1884, over a proposition to reduce the sinking fund. Senator Plumb regarded the sinking fund as merely a matter of bookkeeping. . . "The sinking fund has simply been something represented by certain entries on the books of the treasury, but nothing in the vaults of the treasury."

Senator Sherman stated that, in 1873 and thereafter, the government did not pay one fourth or one fifth of the sinking fund. In 1877 and the following years, surpluses appeared and much more was paid than the sinking fund required. The question, then, is, Has the United States, which has pledged its faith to pay a certain sum annually, a right to apply the excess payment of one year to make up the deficiency of another year? The senator regarded it as a compliance with the law when the government does substantially what it agreed to do. No man could question the faith of the United States because it was for three or four years unable from its current revenues to pay the sinking fund, provided it has, on the whole, more than made good its promise. But while the senator regarded the sinkingfund payment as justly amenable to the financial demands of the country, he deemed it inconsistent with honor and public faith to alter or invade the sinking fund by law. Temporary

exigency might suspend amortization without dishonor, but conscious policy never.

Our conclusion, then, is that the debt has been reduced, but not with the steadiness and automatic regularity contemplated by the terms of the law of 1862. Though the total reduction has exceeded the requirements of the law, yet so sensitive have the yearly appropriations been to the condition of the treasury, that it is doubtful if they could have conformed more closely to the varying financial situation, had there been no law at all.

What the secretaries have done and they could do no more was simply to amortize with the annual surplus, be it large or small. It is hard to see, therefore, wherein our sinking-fund law, thus administered, differs in effect from a law directing the secretary to use surplus funds to pay the debt. If Congress had ordered the law to be administered so that the sinking-fund appropriation should enjoy a priority over other appropriations, not permanent, or regular, the law would have meant something. In that case a shrinkage in the revenues would have meant a deficiency in the funds for public works, and not in the funds for the public debt. We should not then be placed in the anomalous position of granting to gratuitous appropriations like those of the river and harbor bill, the preference at the counters of the treasury over a matter of contract like the sinking-fund appropriation.

It seems, then, from our last experience, that, however solemnly a sovereign state may confer upon the principal of the public debt the first lien upon the revenues, considerations of practical policy will lead that state to relegate the principal of the debt to the frontier of public obligation, there to be abandoned, should the national income for a time retreat within narrower bounds.

CHAPTER XXIV

NATIONAL AND LOCAL DEBTS COMPARED

83. Differences in the Nature of National and Local Debts. In addition to important legal differences, national and local debts differ in respect of the purposes for which they are contracted. This is discussed by Professor Henry C. Adams1 as follows:

The rule according to which public functions are allotted to the various centers of power in the United States is quite simple for one who understands the political philosophy of democratic governments. The safety of democratic institutions lies in the realization of local self-government, and the principle that controls in matters of organization is that the administration of all powers should lie as closely as possible to those interested in their exercise. This theory of allotment would grant to the federal government all duties touching purely national and sovereign questions; it would press upon the local centers of administration such functions as are of peculiar local interest; while the states, standing between the two, would gather up into themselves all the remaining powers that the people have chosen to place out of their own immediate control.

From this it seems natural to expect that local financiering should differ from that of the federal government chiefly in the variety of purposes for which money is borrowed, and a glance at the history of local administration shows this expectation to have been met. The commonwealths have frequently borrowed money for purposes regarded as lying outside the appropriate duties of Congress, and, when we come to consider the course of municipal financiering since 1860, it will be seen that the activity of the minor civil divisions has also greatly extended.

1 Public Debts, 299-306. Reprinted with the consent of the author and the publishers, Messrs. D. Appleton and Company.

The first occasion upon which the states employed their credit as a source of revenue brings to view the financial operations of the Revolutionary War. There was, at this time, much confusion, both of thought and of action, and the line of distinction between the local duties of the states and the comprehensive duties of the central government had not yet been drawn. The states had not yet surrendered any part of their sovereignty, and in consequence the administration of their treasury departments was largely shaped by national ideas. It is for this reason. that the first period of local indebtedness records nothing of interest to the present comparison. The states did not again come forward as borrowers of money until about 1830. The development of the railroad system, which has since revolutionized all industrial methods, had at this time just begun, and it was not then believed that private enterprise was adequate to the extensive demands of the public for highways of inland commerce. The wildest expectations were entertained respecting the efficacy of public improvements, and, under the pressure of speculative excitement thus engendered, the states were forced to undertake business enterprises upon the basis of borrowed money.

This period of excitement will receive detailed attention in the following chapter;2 for the present is it adequate to notice that public banking and public improvements left upon the states a burden of debt from which many of them only escaped through financial disgrace. The amount of this debt in 1842, as also its character and residence, is shown by the figures in the following table:

1 It may, however, be well to add the following details. In order to aid in the prosecution of the War for Independence, the states contracted various debts, largely, although not wholly, in the form of issues of paper money. After the war many of the states did little or nothing toward extinguishing such obligations, and were deeply in debt when the new government was formed under the Constitution. In 1790, when the federal debt was funded, Congress, upon the advice of Hamilton, decided to assume the outstanding state debts incurred for the prosecution of the war. The funding act authorized the assumption of $21,500,000 of state debts; but, after a through sifting of the indebtedness, only $18,271,000 was finally assumed. From this time onward until the period of which Professor Adams is to treat, the states made little use of their credit.

Ed.

2 Besides Professor Adams's chapter, it may be well to refer the student to a contemporary account of the financial situation of the states in 1837, by Alexander Trotter, entitled, Observations on the Financial Position of the States of the North American Union (London, 1839). — ED.