do so gives an additional value to the obligations, and consequently an additional advantage to the municipality in the placement of its bonds. This consideration does not apply to the federal government, nor at the present time to the state governments, because they are both sovereign for debt purposes, and the only security which it is possible for their bonds to offer is the good will of their legislative bodies. The general evils attending an excessive use of floating obligations have been already pointed out, and it is only necessary to add, in this connection, that the alternatives which sometimes demand their employment by the national financier can never arise for local administrators. The only defense of a floating debt is the fact that an administration is surprised with sudden demands which cannot await the sale of ordinary obligations; but such a surprise cannot present itself to the local financier, who himself determines the occasion and extent of fiscal demands. As has been frequently remarked, local financiers have nothing to do with emergencies. Still, one cannot conclude from this that city and county warrants, certificates of indebtedness, and such temporary paper, should never be employed. Such instruments of credit may or may not constitute a floating debt, according as they are or are not assigned to some assured revenue. If a definite amount of clear income be appropriated to their payment, common warrants are properly classed as tax loans and not as floating debts, and their convenience in treasury administration commends their use. That which is here condemned is that looseness, so frequently to be observed in the management of city accounts, which leads to the settlement of claims by the issue of warrants and certificates. The funding of such paper must come sooner or later, and the city that thus postpones the liquidation of its accounts is sure to become embarrassed. It follows, likewise, from the reasons already given, that the policy of local indebtedness need not be shaped with a view to ultimate conversion. Conversion of a public debt means such a modification of the contract as to secure, before its final payment, more favorable terms than those originally entered into. In the case of national financiering this is of great importance, because the conditions under which money is borrowed are com monly such that the government is obliged to accede to severe terms. A state of war, for example, is unfortunate for the borrowing of money, and without any change whatever in the industrial relations, the return of peace will give a government control over capital at cheaper rates than it was obliged to pay during the continuance of hostilities. But this cannot apply to local financiering, for a local government is at liberty to select the most opportune times. for the sale of its bonds, and consequently it need never suffer the expense of high rates of interest to overcome the risk of investment. So far as the rate of interest is dependent upon risk, a municipal council may censure itself if that rate be not as low when a debt is created as after several years shall have elapsed. Again, in the administration of national affairs, it may be necessary to contract a debt of such magnitude that it cannot be expunged before the natural development of commercial relations shall have reduced the rate for which money may be secured; and from this it follows that the thought of ultimate conversion should be always kept prominently in view. But this reasoning cannot apply to local borrowing, for local debts should never cover periods so extended that industrial changes can materially modify the value of money while specific obligations continue to run. The purposes for which municipalities borrow do not require that their obligations should long remain in the hands of creditors. It may be that those conditions justifying an appeal to credit will constantly recur in the course of local administration, so that the local government will not be freed from debt for a long series of years; but it will be a debt constantly in course of expungement, and in this manner whatever advantage arises from a gradual fall in the rate of interest can be secured to municipalities. In local financiering, new borrowing secures money for new purposes, while existing taxes expunge old debts; in national financiering, conversion implies the employment of fresh credit in order to pay off existing debt for the purpose of obtaining better terms-but in either case the governing bodies reap an advantage from constantly falling interest. The accuracy of what has been said may, perhaps, be more clearly discerned in the reflected light of another distinction. Those considerations that determine the time at which the payment of debts should begin, as also the rate at which it should proceed, are quite different for national and local financiering. The point at which the two policies diverge is, that in the one case money is borrowed for general and in the other for particular purposes. When a debt is contracted for a general purpose, as is the case in time of war, it is conceived to rest upon the combined industries of the country, and questions pertaining to payment are determined by the state of trade. This subject has been already discussed in a foregoing chapter. Most local debts, on the other hand, are contracted for some definite purpose, and their proceeds are employed in such a manner as to establish in the community some particular form of public service; it is natural, therefore, that the expungement of a local debt should conform to the manner in which its funds were invested. As an illustration, suppose capital to be borrowed for the purpose of paving streets or providing sewerage, the service thus rendered is common to all members of the community, but of such a nature that the debt must rest upon taxes. But what is of yet more importance, the local council cannot proceed as though the city would never be called upon to repeat its expenditure, for pavements and sewerage are subject to wear, and must sooner or later be replaced by new systems. From this it must appear that the payment of a local debt is not to be determined by the general industrial conditions of the country, but that sound policy demands the expungement of existing obligations before the public authorities find it necessary to borrow fresh capital for new improvements. It seems, then, that the rapidity with which such payments should be made depends upon the probable life of the pavement or the sewerage, and this is a question that must be determined by the city engineer. Similar reasoning applies, only in a more marked degree, if the proceeds of a debt are employed to establish remunerative public works, for in such a case the income from the public industry established is supposed to support the debt. With regard to gasworks and waterworks, for example, general business rules may be appropriately applied for the reimbursement of capital sunk. Such debts should be paid as rapidly as the interests of consumers will bear, so that the property may become an unincumbered property to the community. There are other conditions, however, in which these rules of payment may be somewhat modified. In the case of purchasing real estate for public parks, or of lending assistance to railroads or other private enterprises, the policy that should direct a local treasury is more nearly akin to that followed by the national financier. The reason is that these measures are conceived to be exceptional rather than constantly recurring. The real estate of a park, which at first may cost a large sum of money, is an investment the value of which is not depreciated by time and use; the benefits supposed to arise from large commercial facilities are also of a permanent nature. It follows that the payment of such debts may properly extend over a longer period, and for two reasons. The fact that the investment is permanent obviates the necessity of clearing accounts before a similar expenditure of fresh money is required. But of more importance is the demand that the rate of taxation shall not be changed with unnecessary rapidity. If, for example, it were undertaken to pay for a park purchased in four or five years, there would be an unnecessary burden entailed upon the community, first, by the rapid rise in tax rates, and second, by the rapid fall in tax rates after the payment had been accomplished. It is true that this is not of so much importance in local taxation, where impositions are for the most part direct, as in the case of federal taxes, where reliance is had upon indirect contributions; but it yet applies, and from it one may conclude that a two or three per cent sinking fund provides for the extinction of such debts with sufficient rapidity. CHAPTER XXV FINANCIAL LEGISLATION IN THE UNITED STATES 85. Congressional Legislation. The methods by which Congress enacts revenue and appropriation laws are thus characterized by a recent critic : 1 The headless condition of American public finance has long been the remark of astonished foreign observers, and the concern even of some of those who live under it and suffer from it. Always defective in theory, in practice the American system of control over the national income and outgo has become, with time, more and more confused and uncertain, and has led to results more and more grotesque or alarming. With one set of men guessing at what the national revenue will be under the taxes imposed by them; with several other sets hazarding conflicting estimates of the national expenditure, according to appropriations made by them; with the courts continually stepping in to declare taxes null and void, or to direct their incidence in ways different from the intention of those who framed them; with appropriations "held up" in the discretion of the secretary of the treasury or vetoed by the comptroller, it is no wonder that the shrewdest forecasts of the treasury are often made ludicrous by the event, or that the whole system should sometimes seem a melancholy jumble. True, the argument of pike and gun has long been available to those who maintain that it is the best possible system in the best of possible governments. Whatever you might say, just look at the results, look at the income leaping up to surpass the increasing expenses, look at the regularly recurring surplus. How can a system be bad which leads to such prosperity? The true question was all the while, of course, whether it was the 1 R. Ogden, The Rationale of Congressional Extravagance, in Yale Review, VI, 37-49 (1897). Reprinted with consent of the author and the Yale Review. |