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61ST CONGRESS \
2d Session
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e I?XT A rr
biJ>iN A l
w
^
i DOCUMENT
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N o . 579
NATIONAL M O N E T A R Y COMMISSION
The Credit of Nations
BY
FRANCIS W . H I R S T
Editor of The Economist
AND
The Trade Balance of
the United States
BY
GEORGE
PAISH
Editor of The Statist
Washington : Government Printing Office : 1910
NATIONAL MONETARY COMMISSION.
NELSON W. ALDRICH, Rhode Island, Chairman.
EDWARD B . VREELAND, New York, Vice-Chairman.
J u u u s C. BURROWS, Michigan.
J O H N W . W E E K S , Massachusetts
E U G E N E H A L E , Maine.
PHILANDER C. K N O X , Pennsylvania.
THEODORE E . BURTON, Ohio.
H E N R Y M. TELLER, Colorado.
HERNANDO D . MONEY, Mississippi.
J O S E P H W . BAILEY, Texas.
A. P I A T T ANDREW,
R O B E R T W . BONYNGE, Colorado.
SYLVESTER C. SMITH, California.
LEMUEL P . PADGETT, Tennessee,
GEORGE F\ BURGESS, Texas.
A R S ^ N E P . P U J O , Louisiana.
ARTHUR B . SHELTON, Secretary
Special Assistant to Commission.
11
TABLE OF CONTENTS
THE CREDIT OF NATIONS
By FRANCIS W. H I R S T , Editor of The
Economist.
INTRODUCTION
T H E DEBT AND CREDIT O F G R E A T B R I T A I N :
I.
II.
III.
IV.
THE
Origin and growth of the national debt
Schemes of conversion
T h e history of the sinking fund
The local debt of England and Wales
51
57
59
63
67
72
DEBT AND CREDIT OF F R A N C E :
I. History of debt
(A) Prerevolution
(B) The revolution to the end of the first empire,
1789-1814
(C) The Bourbon and Orleanist governments and the
second republic, 1814-1852
(D) The second empire, 1852-1870
(E) The war of 1870
(F) Recent history of the French debt, 1878-1908
II. Methods of issue—Redemption, conversion
I I I . Local indebtedness in France
THE
13
26
32
39
DEBT AND CREDIT O F GERMANY:
I. The German imperial debt
(A) The funded debt of the German Empire
(B) Principles governing imperial loan expenditures. .
vC) T h e unfunded debt of the German Empire
II. Debts of the German States
I I I . T h e local loans of Germany
THE
Page.
3
77
77
81
82
85
86
87
91
94
DEBT AND CREDIT OF T H E U N I T E D S T A T E S :
I. History of t h e national debt
(A) 1775-1789: The continental congress
(B) 1790-1812
(C) The war of 1812
(D) 1816-1846.
(E) 1846-1848: The Mexican war
(F) 1848-1860
(G) 1861-1866: The civil war—
(a) Federal
finance
(b) Confederate
finance
in
101
101
103
107
109
in
in
112
118
National
Monetary
Commission
T H E DEBT AND CREDIT OF T H E U N I T E D STATES—Continued.
I. History of t h e national debt—Continued.
(H) 1865-1890: T h e funding of t h e debt
(I) 1890-1898
(J) 1898: The finances of t h e Spanish war
(K) 1899-1909
I I . Sinking fund and debt reduction
I I I . Debts of t h e States, cities, and other local bodies
(A) Restrictions on municipal borrowing
(B) Amount and growth of t h e debt
(C) Issue and sale of bonds—Prices and rates of interest
(D) Municipal sinking funds
page.
120
124
126
127
131
134
144
144
146
149
THE TRADE BALANCE OF THE UNITED STATES
By GEORGE P A I S H , Editor of The Statist
Page.
I.—On trade balances
II.—Capital investments and trade balances
III.—Effect of capital investments upon trade
IV.—The new countries and imports of capital
V.—Foreign trade and the precious metals
VI.—The precious metals and capital investments
VII.—Services and trade balances
VIII.—Lending and borrowing countries
IX.—Europe's capital investments in the United States
X.—The value to the United States of loans of capital by
other lands
XI.—Tourist and other expenditures
XII.—Expenditures of immigrants and emigrants
XIII.—Remittances to friends
XIV.—Freights
XV.—Insurance
XVI.—Summary of remittances for interest, tourist expenditures, gifts to friends, and freight charges
XVII.—Effect upon United States trade balance of imports and
exports of capital
X V I I I . — I m p o r t s and exports
X I X . — T h e import and export of gold
X X . — T h e trade balance and gold imports
IV
153
155
159
161
163
165
166
169
172
176
178
180
182
186
190
191
192
197
207
210
The Credit of Nations
With special reference to the debts of
Great Britain, Germany, France,
and the United States
BY
FRANCIS W. HIRST
Editor of The Economist
THE CREDIT OF NATIONS.
A COMPARATIVE STUDY OF RECENT DEVELOPMENTS
IN EUROPE AND THE UNITED STATES.
INTRODUCTION
Many and diverse are the causes affecting the international
money market. Local conditions still account for strong variations and cross currents; but the tendency is always toward
sameness or parallelism, for the money markets of the world
under the influence of the telegraph and the telephone are
taking on a more and more international character. By common admission when trade is good, when speculation and
enterprise are active and prices rising, a higher rate of interest
is obtainable for loans, whereas when trade is declining and
prices falling lenders of money have to be content (other things
being equal) with lower rates of interest. But among those
who actually deal in money—bankers, brokers, etc.—and
especially among speculators on the stock exchange many
peculiar notions and superstitions are entertained on this subject, more particularly as regards the influence of gold movements and gold production upon the money market. Even
in the ranks of those who make a scientific study of the problem
room has been found for many differences of opinion. One
fact generally admitted both by practical and theoretical financiers is that the money market and the loan market have important bearings upon one another. The most propitious time
for issuing a new loan is when the money market is easy, and
financial anglers with a big flotation in hand will watch and
wait anxiously for the psychological moment to strike. On the
3
National
Monetary
Commission
other hand the rates for "short money'' and for "long money*'
may frequently diverge. Their fluctuations are mutually
influential without being strictly parallel, for demand and supply may differ widely according as they are concerned with
days or years. Supplies of money for weekly or monthly loans
and for the discounting of bills which mature in two or three
months may be abundant at times when there is very little
capital available for investment in new issues of government
loans, railroads, or industrial stocks.
These general questions it is not the writer's purpose to
investigate. His object is the much humbler and narrower one
of examining the different degrees of credit which attach to a
number of different nations or governments, and of measuring
some striking alterations in the relationship between national
securities which have occurred in recent times and are brought
to light by statistical comparisons carried over a series of years.
For this purpose there is at hand a mass of material recently
accumulated by the treasury officials of the German Government in 1908 for the purpose of forwarding a project of
financial reform. The statistics cover a period of thirty years
from 1877 to 1907.
It may be remarked first of all that the debt of any
important government can usually be bought on all the leading
stock exchanges at pretty much the same price. But some
governments—Russia and Brazil, for example—do not like the
market for their securities to be too international or the prices
to be too fluid. They fear that the whole level of their credit
may be unduly lowered by a sudden panic or prejudice occurring in a single market. Hence, while allowing the coupons
to be cashed anywhere they will divide an issue between perhaps Paris, London, Berlin, and New York, making the bonds
issued for French or German consumption nontransferable to
England or New York, and vice versa. In other words, for-
4
The
Credit
of
Nations
eign loans are often international as to the coupons but local
as to the scrip. Thus it happened that at one time, when the
revolutionary movement in Russia was regarded in London
with great apprehension but with comparative composure in
Paris, the market price of Russian bonds fell in London some
10 per cent below the market price for the parallel issue in Paris.
This no doubt was an extraordinary occurrence; but it may be
important, and is always useful, in comparing the credit of
different countries to state in each case the stock exchange or
bourse from which the quotations are taken. The following
list shows the nature of the stocks compared and the stock
exchange from which the quotations are taken for the twenty
years, 1887-1907:
1. British consols—3 per cent to April 6, 1889; 2^ per cent
to April 6, 1903; and 2}4 per cent since that time; London Stock
Exchange.
2. French rentes—3 per cents; Paris Bourse.
3. German 3^2 per cents; Berlin Bourse.
4. United States bonds—1887 to 1894, 4 per cent bonds falling
due in 1907; and 1895 to 1907, 4 per cent bonds falling due in
1925; New York Stock Exchange.
5. Dutch 2>% per cent loan 1887 to 1896 and 3 per cent since;
Amsterdam Stock Exchange.
6. Swedish 4 per cents 1887 to 1895; 2>H per cents from 1895;
Hamburg Bourse.
7. Austrian 4.2 per cent note rentes; Vienna Bourse.
8. Russian fives 1887 to 1889; fours from 1889; Paris Bourse.
9. Italian 5 per cent rentes subject to an income tax of 13.2
per cent up to 1894 and of 20 per cent from July 1, 1894, to
December, 1906; 2>H P e r c e n t rentes from January 1, 1907, to
December, 1911, and 3 ^ per cent (tax free) after 1911; Paris
Bourse.
10. Spanish exterior 4 per cents; Paris Bourse.
5
National
Monetary
Commission
Average price of the public loans of Great Britain, Francey Germany,
States, and Holland from 1887 to iooy.
Year.
United
United
Britain
Holland
Germany
States
(234 percent, (3 France
(3XAper cent,
per cent). (3 M per cent). (4 per
cent).
bill 1902).
bill 1896).
1887.
80. 1
1893
955
99-o
98.0
96.4
957
96.6
98.3
1894-
127. 2
98.8
100. 5
97-3
98.3
99-9
97- 2
100.3
101. o
100. o
102. 3
114. o
1895-
106. 2
102. o
104. 4
121. s
1896.
no.8
104. 5
116. 2
1897.
1898.
1899
1900.
1901.
1902.
1903.
1904.
19051906.
1907.
112. 4
1033
103.5
124. 5
no. 9
102.8
102. 6
125.3
107. 1
IOI . 2
129. 7
99-6
94. 2
94-3
100. 6
101. 2
99- 7
95-8
99-5
138.3
100. 6
102. o
136. 7
C90. 7
98.1
97-5
102.3
135-3
101. 9
132.0
99- 7
98.9
97-5
943
90. 7
93- 7
96.3
95-7
95 2
99- 2
101. 3
132. 4
94- 1
97-6
94-8
99- 5
946
130. 3
93-0
126. 6
89.8
1889.
1890.
1891.
1892.
88.2
89.8
88.3
84. 1
81.6
84.9
90. 7
99- 7
126. 7
127.8
122. 7
118.6
ii5- 6
in. 9
1888.
94- 2
102. 4
103 • 7
100. 4
134- 5
102. 3
101. 6
101. 4
101. 4
101. 6
102. 4
101.3
<>> 1 0 0 . 6
6
o January to February, 3 % per cent.
6 March to December, 3 per cent.
cAt 2 ^ per cent.
Comparative
credit of the same countries shown by reducing them all to a 3
per cent basis.a
Year.
Great
Britain.
France.
Germany.
1887
103.8
1897
122. 2
102
9
1903
108.5
97
7
1904
105-5
97
1
107.4
98
8
105.6
97
2
85.5
88.7
87.6
87.3
86.8
85.3
100. 6
94
4
81.1
1906
79. 7
United
States.
Holland.
no. 9
8 4 . "7
105. 2
98 9
117.8
95
7
H5-3
95
?
116. 2
94
T
114.8
93
O
i n . 9
89
8
a Thus a 4 per cent loan a t 100 would be 75 in this table, or a t 120 it would be 90.
Similarly, a 2 y* per cent loan a t 80 would be converted into 96.
6
T h
Credit
of
Nations
Comparative credit of the same five countries shown by exhibiting the real rates
of interest paid.a
Year.
1887
1897
1903.
1904-1905
1906
1907 _. __
Great
Britain.
France.
Germany.
2.8
3- 7
2.4
2. 7
2.8
2.9
30
3.0
3.0
30
3. 1
2.7
2.8
2. 9
3
3
3
3
3
3
3
United
States.
2. 4
2.8
5
3
4
4
4
5
7
Holland.
35
2. 2
3.0
3- 1
3. 1
2. 1
3. 1
2. 1
3- 2
2. 0
2. 2
a
T h u s if a s per cent stands at 120 the real rate of interest paid is 4-17; or if it
stands at 80, the real rate of interest is 6.25.
Three corresponding tables for Sweden, Austria, Russia, Italy,
and Spain will help us to form a very correct idea of the ups and
downs of public credit in Europe during the last twenty years.
Here again the first table gives the average prices of the public
loans.
TABLE I.
Year.
1887-
Austria
Sweden
Russia
(4 per cent). (4.2 percent) (5 percent).
102. 9
80.6
103- 5
80.0
1893-
103. s
102. 1
101.8
102. 9
103.3
84-3
88.5
91.9
95- 7
97-4
1894-
102. 4
98.7
1890 _
1891.
1892.
1897-
d100.9
e
101.1
102. 1
102.3
1898.
100. 9
1899-
98. s
96.3
18951896.
1900.
I90i_
Italy
(5 percent).
Spain
(4 per cent).
97-5
66.0
96. 2
95- 1
94-3
91.9
91. 1
70.9
98. 5
99-9
«92.8
97- 1
97-4
95-o
99-5
87.8
6
100. 8
101. 2
79-4
C79. 7
101. 5
101. 2
101.8
101. 6
100. 4
103.4
103.7
102. 4
101. o
98.5
98.6
100.3
99.o
a At 4 per cent.
& 5 per cents with 13.2 per cent income tax.
c 5 per cents with 20 per cent income tax.
d January to September, 4 per cent.
« October to December, 3 K per cent.
7
74-5
74- 7
72. 1
62. 9
63'5
66.6
88.4
70. o
86.8
93- 1
93. 1
94- 1
94.o
97-5
62. 2
61.5
44- 7
60. o
71. o
72. o
National
Monetary
Commis s to n
TABLE I—Continued.
Year.
Austria
Sweden
Italy
Russia
Spain
(4 per cent). (4.2 percent). (s per cent). (5 p e r c e n t ) . (4 per cent).
1902
1903
1904
1905
1906
1907
100. 8
100. 4
994
98.7
99- 2
95-7
0
101. 4
100.3
99-6
100.3
99-4
979
101. 0
102. 0
99-2
93-5
87.3
75-4
75-2
103. 0
103. 1
105. 2
103.9
0102.4
82. 2
89.9
85.9
91.8
952
93-1
3 % per cents free of income tax
The second table gives the comparative credit of the same
countries by translating the same loans into terms of 3 per
cents:
TABLE II.
Year.
1887
1897
1903
1904
1905
1906-- _ _ __
Sweden.
Austria.
Russia.
77. 1
87.7
86.0
85.2
84.6
85.0
57-5
72. 7
71. 7
71. 1
71. 6
82.0
69.9
59- 1
77- 7
74-4
70.1
65-4
S6-S
S6.4
71.0
Italy.
66.7
69. 1
76.5
76.6
78. 2
77. 1
81. 1
Spain.
49- 1
45-8
67. 1
68.5
71. 0
69. 4
The third table gives the real rates of interest paid by the
same five countries:
TABLE III.
Russia.
a.
Austria,
Italy.
Spain.
4-5 1
6. 1
6.5
4 0
4 3
3 9
1906
3 9
3 8
3 8
4.6
4. 1
4. 2
4 2
4 5
5 3
1907
4- 2
5 3
3 7
4.3
1887
5-2
1897
4. 1
1903
4- 1
4. 2
1904
1905
S-o
3 8
4-4
4-3
4. 2
To expound these tables fully and to explain the variations
would be almost equivalent to writing a history of Europe
and America. The bearing of foreign and colonial policy upon
8
The
Credit
of
Nations
finance is particularly strong. While Italy and Spain were
pursuing a spirited colonial policy in Abyssinia, Cuba, and the
Philippines their finances decayed and their credit languished.
When, having suffered defeat, they withdrew, the recovery was
extraordinarily rapid, until in 1909 Italy can borrow on better
terms than Germany, while even Spanish credit is little inferior.
The influence of the war with Japan on Russian credit is also
plainly visible, while the heavy addition to British debt resulting from the Boer war has greatly reduced the lead of British
credit, which is now very little better than that of France.
The United States figures are misleading because there is an
artificial demand for the bonds for currency purposes.
It must be remembered also that large additions might be
made to the debt without injuring the credit, as when, for
example, railways are nationalized and bonds with the interest
payable out of the public revenues are substituted for the railways' bonds and stock previously in existence. Thus in the last
two years the taking over of the railways by the Government
does not appear to have hindered the upward movement of
Japanese credit. The same may be said of recent State purchases of railways in Austria, Mexico, and Italy. In such cases
the portion added to the debt is capital in the strict sense.
"New money'' is not necessarily required from the market, and
the interest on the new debt may be more than covered by the
annual profits of the railways. Similar considerations apply
with greater or less force to many national and municipal loans.
Again, when a country is advancing fast and fortunes are being
accumulated rapidly the public credit is almost certain to
improve so long as the public debt remains stationary or grows
less rapidly than private wealth. Twenty years ago most of
the Italian debt was held abroad. In the last decade most of
it has been bought back, and the great bulk is now held in
Italy. Every country, of course, favors its own national debt,
which is treated as a gilt-edged security.
9
National
Monetary
Commission
As I have followed the growth of the British, German, French,
and American debts more closely in the following pages, it will
not be necessary to set out any figures here. But the appended
table taken mainly from official abstracts may serve to illustrate the movements of a number of other public debts in the
period 1877-1907.
Public debts.
Year.
Sweden.
Austria.
1877
1887- — f Kr. 245,967,703
i
£13,664,872
1897— f Kr. 287,483,444
1
£15,971,302
1903--- J Kr. 345,214,113
1
£19,178,562
f Kr. 383,944,089
1904--1
£21,330,227
f Kr. 380,818,611
1905--1
£21,156,589
J Kr. 420,852,244
1906
I
£23,380,680
j Kr. 464.359,845
1907--1
£25,797,769
a G.
Kr.
Kr.
Kr.
Kr.
Kr.
Kr.
Russia.
JR. 1,874,655,090
1
£296,820.000
5,212,863,000 R. 3,158,594,865
£434,405,000
£500,111,000
8,471,734,000 R- 6,334,987,000
£352,989,000
£668,693,000
9,185,759,000 R. 6,643,927,000
£382,740,000
£701,303,000
9,275.745,ooo R. 6,651,836,000
£386,489,000
£702,138,000
9,4i3,593,ooo R. 7,841,165,000
£392,233,000
£827,678,000
9,609,600,000 R. 8,625,560,000
£400,400,000
£910,476,000
9,783,318,000 R. 8,710,066,204
£407,638,000
Italy.
Lr. 9,736,819,000
£389,303.000
Lr. 11,502,795,000
£460,112,000
Lr. 12,754,610,000
£510,184,000
Lr. 13,101,114,000
£524,044,000
Lr. 12,927,419,000
£517,097,000
Lr. 12,931,180,000
£517,247,000
Lr. 13,681,641,000
£547,266,000
Lr. 13,940,401,000
£557,616,000
a Includes Hungarian debt.
The official figures for Spain and Holland are wanting, and I
have not been able to procure those for the Swedish and AustroHungarian debt in 1877. Allowance must, of course, be made
for the conditions and limitations mentioned above. In fact,
debts must be analyzed carefully before inferences are drawn
as to the influence* of debt fluctuations upon the fluctuations
of credit. We can only say that when the supply of a national
debt increases faster than the market for it the price of the
debt is bound to go down; and, conversely, when the demand
from investors increases and the supply diminishes or remains
stationary the price is equally certain to rise, monetary conditions remaining the same.
10
The Debt and Credit of Great Britain.
ii
THE DEBT AND CREDIT OF GREAT BRITAIN.
I.—ORIGIN AND GROWTH OF THE NATIONAL DEBT.
The history of the national debt of Great Britain, which is
perhaps more instructive for the practical science of national
borrowing than that of any other country, really begins with
the revolution of 1689. Before that time the monarch frequently raised small sums by pledging jewels, mortgaging temporary revenues, or by extracting loans (not always repaid)
from the Jews. The long struggle between King and Parliament was mainly concerned with finance, and until this was
finally settled a regular and national system of taxation was
impossible. But with the expulsion of the Stuarts and the
settlement of 1689, the financial control of the House of Commons was definitely established. It was important, moreover,
to maintain contentment at home; and, though the war waged
by King William against James and the King of France was a
war in which Parliament was ready to pledge the national
resources, it was found impossible to provide for its cost by
taxes within the year without arousing dangerous dissatisfaction; and accordingly a" public debt gradually grew up. At
the time of the revolution there was only one considerable incumbrance upon the national revenue, or rather upon the
national credit. This was called the banker's debt. It had
originated in 1672 and for some years from that time interest
had been duly paid at the rate of 6 per cent. But before the
end of the reign of Charles II the payment of interest was
dropped, and it was not until a little before the death of King
William that a composition was arrived at by which Parliament agreed to pay 3 per cent on the principal or to discharge
the whole by a payment of £664,263, i. e., half the principal.
82300 0 —10
2
13
National
Monetary
Commission
Thus in 1690 when Parliament wanted to borrowT to meet the
expenses of the war, its credit and integrity were regarded
with suspicion. Nor was the stability of the new government
fully recognized in this or the following reign, as will sufficiently
appear from the rates at which it had to borrow. The first
loan of £250,000 was raised in 1690 at the high rate of 8 per
cent for the year and 7 per cent for the three years following,
the interest being charged on certain excise duties. In the next
year two loans were raised, aggregating £1,000,000 at 8 per cent,
one secured upon duties levied on East India goods, the other
on wine duties. These loans were for five years. In the same
year another loan of £1,000,000 sterling was raised at 7 per cent
for four years and charged on additional excise duties. In 1693
two loans for £500,000 apiece at 8 per cent were charged on the
wine duties and other specified customs. In 1694 stamp duties
were introduced for the first time, and an 8 per cent loan for
£330*000 was secured upon the revenue thus created. In the
same year the Bank of England was incorporated and a loan of
£1,200,000 at 8 per cent was advanced by it to the Government.
In 1695 and 1696 several millions more were borrowed on various duties, including new taxes on bachelors, widows, marriages,
births, and burials.
At the peace of Ryswick in 1697 many of the revenues upon
which the various loans had been secured seemed likely to
prove deficient, and the exchequer tallies in the hands of the
public began to be sold at a heavy discount. The Bank of
England was authorized to enlarge its capital, and provision
was made by "the first general mortgage" to discharge the
debts before 1706 by continuing certain war duties till that
time, interest at 8 per cent being paid meanwhile. Several
further loans, however, necessitating additional duties on malt,
coal, etc., were contracted before the accession of Anne in 1701.
But in addition to the loans above described large amounts of
14
The
Credit
of
Nations
capital began to be raised by another device—the sale of annuities for lives or terms of years, which became extinct on death
or lapse of the prescribed time. An attempt to obtain a million
in this way in 1692 only yielded about one-tenth of that sum,
the proposal being too complicated. An alternative, however,
an annuity of 14 per cent on a single life, was more successful.
The payment of these annuities was made defrayable out of an
additional duty on ale, etc., which was afterwards made perpetual. Various other annuities were sold, and at the end of
King William's reign a principal of £3,884,000 was outstanding
for long and short annuities which involved a charge of £310,000
on the revenues. In 1696 the plan of raising money temporarily by means of exchequer bills was introduced, and the
important distinction between funded and unfunded debt was
gradually created and recognized. Thus "Dutch finance'' came
to be applied reproachfully by old-fashioned people to the various devices for throwing the burden of expenditure upon posterity that were introduced along with William of Orange and
"the Glorious Revolution."
In the early part of Queen Anne's reign (1702-1714) the
system of raising money by mortgaging particular branches
of the revenue was continued. Nine loans aggregating about
£6,000,000 sterling were floated in this way, mostly at 6 per
cent, while sums amounting to £1,600,000 were advanced by
the East India Company and the Bank of England in return
for the renewal of their charters in 1708 and 1709. Large
amounts were also raised by annuities, and toward the end
of the reign, when, owing to the cost of the war, money was becoming very difficult to raise, recourse was had to a vicious
method which added to the capital of the public debt a much
larger sum than the exchequer received. By means of six
lotteries, including one granted after the peace of Utrecht,
£9,000,000 of money were obtained. Each ticket was entitled
*5
National
Monetary
Commission
to a capital equivalent to the sum advanced bearing interest at 6 per cent with repayment in thirty-two years. But
in addition the prize drawers were entitled to large additional
sums amounting in all to £2,723,000 repayable in the same
year and bearing the same interest. So that the Government
borrowed £9,000,000 but created £11,723,000 of debt. The
history of the relations of the Government and the South Sea
Company, ending in the South Sea Bubble, would require a
separate chapter. Suffice it that large sums were also borrowed
through this channel.
The reign of George I marked an important recovery of
national credit, thanks to the operation of peace and economy.
Although the nominal capital of the debt was but slightly
diminished, the charge for interest, and consequently the real
burden on taxpayers, was very greatly decreased. Several
important improvements in the management of the debt were
introduced. In the first place the plan of mortgaging branches
of the revenue was replaced in 1715 by a loan raised in perpetual annuities redeemable by Parliament on repayment of
principal, but with funds assigned only for payment of interest. This system was thenceforth generally adopted, though
the old plan of specific mortgage was also occasionally resorted
to. Under the old system separate accounts of each loan with
the assigned taxes had been kept. This had led to confusion,
as there emerged a multiplicity of funds, some showing deficiencies and others surpluses. Accordingly, soon after the peace
of Utrecht, most branches of the revenue were united in three
funds—the aggregate fund, the general fund, and the South
Sea fund—each fund being charged with the payment of certain annuities. The united surplus of these three funds formed
the basis of the first sinking fund (1716), usually called after
Sir Robert Walpole, though its real author was Lord Stanhope. In 1717, after negotiation with the Bank of England
16
The
Credit
of
Nations
^
and the South Sea Company, a general reduction of interest
on the public debt was agreed upon to 5 per cent—the debt
in King William's reign having been contracted mainly at 8
per cent and that of Queen Anne's reign mainly at 6 per cent.
Almost all the public creditors agreed to the reduction, and
very few had to be paid off. Ten years later, in 1727, the
Government arranged to reduce from 5 to 4 per cent the interest on its debt to the Bank and the South Sea Company, and
in 1732 a similar arrangement was made with the East India
Company. The irredeemable annuities were also converted
into redeemable debt, and a reduction of interest to 4 per
cent upon this new capital was agreed upon in 1727. At the
end of George the First's reign the total debt funded and unfunded was estimated at about £52,000,000 sterling and the
charge for interest at £1,217,551.
}
During the first part of the reign of George II (1727-1760),
under the wise administration of Walpole, peace and financial
progress continued. Although the fallacious principle of contracting new debts while applying a sinking fund to the reduction of old debts was still occasionally observed, the debt was
substantially diminished. In 1739, however, a long war began,
at first with Spain and afterwards with France and Spain together, which eventually added some £30,000,000 to the national debt. With the growing wealth of the nation, however,
and the growing confidence in public credit, the Government
easily raised the large amounts required at from 3 to 4 per cent,
though the rate went a little higher in 1745 owing to the alarm
caused by the invasion of the Young Pretender. During the
peace which followed an important conversion of the debt was
effected. It was enacted in 1749 that all the public creditors
at 4 per cent who should signify their readiness to accept 3
per cent after December 25, 1757, should have their existing
rate of interest continued till December 25, 1750, and should
17
National
Monetary
Commission
then receive 3 ^ per cent till December, 1757, after which the
interest should be 3 per cent. The total amount of the debts
involved in this important scheme, which was to serve as a
model for future financiers, was £57,000,000 sterling. Most
of the creditors accepted the offer; but as some declined it
was repeated in 1753, though on less favorable conditions, as
the offer of 3% per cent interest was only till December 25,
1755. Most of the remaining creditors then accepted, and those
who persisted in declining were paid off. The debts thus dealt
with were united in a fund afterwards called "the 3 per cent
reduced annuities," while the debts originally contracted at
3 per cent were united in another fund called "the 3 per cent
consolidated annuities.'' Thus practically the whole debt was
converted in the middle of the eighteenth century into the
"sweet simplicity of 3 per cent," and the two parts of it were
known into our own time as "reduced threes" and "consols."
British credit in fact stood about as high then as it does now—
a rather startling fact.
Although during the peace this great reduction in the debt
charge was effected, the nominal amount of the funded debt was
but little reduced. The unfunded debt, however, which had
become larger, was nearly all paid off in 1756 before the Seven
Years' war broke out. Nearly £60,000,000 were added to the
debt by the Seven Years' war, which was far more costly than
its predecessors, and 3 percents fell far below par. Various
devices were resorted to, such as (in 1756) a 3 ^ per cent loan
redeemable in fifteen years; lottery loans; 4 percents (1760),
reducible to 3 per cent after twenty-one years, allowing £103
for every £100 borrowed; and a 4 per cent loan for £12,000,000
(1762), to be reduced to 3 per cent after nineteen years, with an
annuity of £1 for ninety-eight years. A large floating debt in
navy bills, exchequer bills, etc., incurred during this war was
paid off during the peace which ensued. The following con-
18
T h
C r e d i t
of
N a t i o n s
spectus shows the progress of the national debt from 1689 to
the war of the American Revolution :
Principal.
Debt at the revolution, 1689
Debt contracted during the succeeding wars of King
William
Debt at peace of Ryswick, 1697
Debt paid off during peace
Debt in 1702, at commencement of Queen Anne's war.
Debt contracted during the war
Debt at peace of Utrecht, 1713
Debt paid during the peace
Debt in 1739, at beginning of war
Debt added during the war
Debt at peace of Aix la Chapelle, in 1748
Debt paid off during peace
Debt in. 1756, at beginning of Seven Years' war
Debt added by Seven Years' war
Debt in 1763, at peace of Paris
Debt paid off during peace
Debt in 1775, at commencement of American war
£664,000
Interest and
annuities.
£39,000
20, 851,000
1, 681, 0 0 0
21, 5 1 5 , 0 0 0
1,721,000
5. 1 2 1 , 0 0 0
16, 3 9 4 , 0 0 0
35. 7 5 0 , 0 0 0
52, 1 4 5 , 0 0 0
4, 1 9 0 , 0 0 0
47. 9 5 4 , 0 0 0
3i, 3 3 9 , 0 0 0
79, 2 9 3 , 0 0 0
410,000
1,310,000
2,040,000
3,351,000
1,338, 0 0 0
2,012,000
i,078,000
3,091,000
4, 9 6 1 , 0 0 0
480,000
74, 3 3 2 , 0 0 0
2,610,000
64, 5 3 3 , 0 0 0
138, 8 6 5 , 0 0 0
4,852,000
2, 241, 0 0 0
10, 2 8 1 , 0 0 0
380,000
583,000
4,47i,000
By this time it was clear that the national debt was advancing at a dangerously rapid rate; and the whole of it had been
spent upon war. But from a financial point of view the war
with the American colonies proved more disastrous than any
of its predecessors. The first loan of 1776 was £2,000,000 in
3 percents at £107 10s. funded for every £100 borrowed. In
1777 £5,000,000 were raised in 4 percents at par with an annuity
of 1 os. for ten years. In the two following years the Government reverted to 3 per cent issues with large annuities to tempt
the public. In 1780 £12,000,000 were borrowed in 4 percents
at par with an annuity of £1 16s. 3d. for eighty years. In 1781
3 percents were funded at £150 with £25 added in the 4 percents,
so that by this transaction £21,000,000 was added to the
capital of the debt, though only £12,000,000 reached the exchequer. In short, the credit of the country went from bad to
19
National
Monetary
Commission
worse. The course of the funds has been described in telling
language by Sir George Trevelyan:
"The funds always fell after British defeats and never very
visibly recovered themselves in consequence of a British victory. In August, 1774, before the revolution began, the 3 per
cent consols stood at 89. A month before the news of Long
Island arrived in London they were at 84; a fortnight after
that news they were at 82. * * * By October, 1777, consols
had fallen to 78. The tidings of the capture of Burgoyne
brought them down to 70. They fell and fell until the capitulation of Lord Cornwallis reduced them to 54; and they could
hardly have gone lower if they were to retain any value at all."
The last sentence is perhaps an exaggeration; and in fact
twenty years later, at an early stage in the war of the French
revolution, our 3 per cent consols actually fell to 47.
We may now continue our history, following the figures of
Robert Hamilton, the learned and accurate author of the
"Inquiry concerning the National Debt." a
Principal.
Debt
Debt
Debt
Debt
Debt
Debt
Debt
in 1775, at commencement of American war
added by American war
in 1783, at peace of Versailles
paid off during the peace
in 1793, at commencement of French war
in 1802, at peace of Amiens
in 1814, after Napoleon's retirement to Elba
£128,583,000
121,267,000
249,851,000
5,732,000
244,118,000
520,207,000
742,615,000
Interest and
annuities.
£4.471.000
4,980,000
9,451,000
149,000
9,302,000
18,643,000
26,647,000
These figures, however, only relate to the funded debt. There
was also an enormous amount of floating or unfunded debt.
Thus according to Porter in the Progress of the Nation 6 the
a
Third edition, 1818. This treatise has never been superseded; its
conclusions have only been confirmed and illustrated by experience. I t
will be observed t h a t while the American war did not quite double the
debt it more than doubled the debt charge.
& Edition of 1847, p. 482.
20
The
Credit
of
Nations
whole capital of the debt funded and unfunded amounted to
£637,000,000 in 1802 and had risen to £885,000,000 a in 1816,
involving a charge for interest in that year of £32,938,000—
more than half of the whole public revenue from taxes. The
national credit was, of course, much impaired. During the
French wars the price of 3 per cent consols fluctuated between a
maximum of 73 a n d a minimum of 47.
The miserable condition of the country after the war is well
known, and the financial recovery was very slow. Until 1822
little was done. In fact Joseph Hume declared in that year that
the debt had been increasing rather than diminishing since 1816.
But in 1822 Vansittart introduced a scheme which led to the
conversion of the 5 percents with a large saving of interest, and
also provided for the establishment of a real sinking fund.
Some substantial retrenchments were effected in expenditure,
and in the following year Robinson, Vansittart's successor at
the exchequer, found himself with a surplus of £5,000,000,
which he applied to the reduction of the national debt. A number of taxes were repealed or reduced, and a net surplus of
£3,000,000 was recommended as a sinking fund for the reduction of debt in the future. Thus at last the elaborate
machinery of a sinking fund, first suggested by Price to Pitt,
which had proved worse than futile, was definitely abandoned.
From this time until 1833 there were annual reductions of the
national debt, which fell in ten years from £885,000,000 to
£841,000,000. The result was immediately visible. In 1824,
when over £6,000,000 of debt was canceled, 3 per cent consols
rose to 96, the highest point touched since 1792. After 1833
the reduction of debt was suspended, but in 1837-38 there were
small reductions and consols rose in the latter year to 95. Then
came the Whig deficits, and consols drooped until Peel took
a
Professor Bastable estimates the unfunded debt after Waterloo at
£60,000,000, and the funded at £826,000,000.
21
National
Monetary
Commission
the helm. In 1841 this great financier found that the whole
debt, i. e. "the aggregate gross liabilities of the State," a
stood at £838,000,000 and that consols were below 90.
By 1845, in spite of sweeping reductions of taxation, he had got
3 per cent consols to par, and there they stood in 1852-53, the
debt having been reduced by March 31, 1854, to £803,000,000.
By the Crimean war £33,000,000 were added to the debt,
which had risen to £836,000,000 in 1857, and a marked depreciation occurred in consols and in many other gilt-edged securities.6
In the next twenty years nearly £70,000,000 of debt were extinguished—it was £768,000,000 in 1877— an d consols varied
from 84 to 97. In the following twenty years the reduction
amounted to no less than £123,000,000. After 1880 3 percents
were ordinarily above par. In 1884 a small quantity of 2% and
2$4 percents were created by Mr. Childers, and in 1888 Mr.
Goschen converted £549,000,000 worth of consols into 2% percents. From £736,000,000 in 1887 the debt was reduced to
£635,000,000 in 1899. This was our best performance in debt
reduction during the nineteenth century, and it is not surprising
that during a glut of cheap money it should have led to a
record rise in consols. In three consecutive years, 1896, 1897,
and 1898, the 2 ^ percents (with a prospect of reduction to 2% in
1902), touched 113. The 2>£ percents, of which there was a
small quantity, touched n o .
a The Return "National D e b t " issued year by year gives " t h e aggregate
gross liabilities of the S t a t e " a t the end of each financial year from 1836,
denning them as the sum of (1) the nominal funded debt, (2) the estimated
capital liability in respect of terminable annuities, (3) the unfunded debt,
and (4) other capital liabilities.
& " T h e funds have recently gone down to 10 per cent. I do not say t h a t
the fall is all on account of this danger of war, b u t a great proportion of it
undoubtedly is. A fall of 10 per cent in the funds is nearly £80,000,000
sterling of value, and railway stock having gone down 20 per cent makes a
difference of £60,000,000 in the value of the railway property of this count r y . " — J O H N BRIGHT, at Edinburgh, October 13, 1853.
22
The
Credit
of
Nations
In the budget of 1899 (April 13), in order to provide for the
growing costs of armaments—there had been an increase in four
years of £2,500,000 on the army estimates and of £7,000,000 on
the navy estimates—Sir Michael Hicks Beach, who was then
chancellor of the exchequer, raised certain taxes and took
£2,000,000 of! the sinking fund. But the £2,000,000 lopped
off the sinking fund did not represent the whole or net shrinkage in the reduction of the national debt in that year of abounding prosperity and of abounding revenue. Since 1889 (the date
of the Imperial Defence Act) a new source of danger to credit
had been introduced. While with one hand the chancellor of
the exchequer was extinguishing consols, with the other he was
creating terminable annuities for naval works. In the year
1897-98 the expenditure out of borrowed money on works was
over £3,000,000. For the year 1898-99 it was £7,000,000.
Before the budget of 1899 the Secretary for War had announced
that the army would follow suit. A military works bill for barracks, etc., was to be introduced on the pattern of the naval
works act. No wonder that while the public supply of stock
was increased and the public demand diminished the private
investor had begun to take alarm, and to anticipate a decline in
British credit.
The effect of this policy was now felt. From n o in March,
April, May, 1899, the price of consols fell to 108 in June, 106 in
July, and 105 in August. By the beginning of September the
danger of war with the Transvaal had become apparent; but
consols only fell to 104 in September; and 103 was the average
for October, though war broke out in the second week of that
month. These figures are very significant. More immediate
injury was done to British credit by the financial policy which
preceded the war than by the actual outbreak of the war. Even
after the dimensions of the war came to be more accurately
understood, consols for a long time maintained themselves at
23
National
Monetary
Commission
about par. The monthly average from January to June, 1900,
was above par, the price for June being 1 0 1 ^ . Let us look at
it in a slightly different way. In the nine months preceding
the Boer war, January to September, 1899, the main considerations operating on the minds of investors were the increasing
expenditure, the reduction of the sinking fund, and the apprehension of trouble in South Africa. The first operated from
January to April, and caused a fall of 1 point; the second operated from May to August, and caused a fall of 5 points; the third
operated in September and caused a fall of 1 point. Then we
take the nine months following, during which the war was in
progress. In October, 1899, the average price of consols was
1 0 3 ^ . In June, 1900, the average price of consols was 1 0 1 ^ .
Such was the strength of British credit, and such the belief of
investors in our financial stability that nine months of unprecedentedly costly war only lowered consols by 2 points.
From this moment (June, 1900) there was a pretty steady depreciation of British credit down to November, 1901, when consols reached the lowest average monthly point touched during
the war, namely, 91 %. It may be seen now why this depreciation took place and how it could have been prevented. The
occupation of Bloemfontein (March 13) was followed by the
annexation of the Orange Free State (May 28); and the occupation of Pretoria (June 5) was followed by the annexation
of the Transvaal Republic (September 1). If the military successes had been followed by a treaty of peace with guarantees
and indemnity, the longest and most costly period of the war
would have been avoided.
From £635,000,000 in 1899, the lowest point since the Napoleonic wars, the national debt rose in consequence of the Boer
war to £703,000,000 in 1901 and to £798,000,000 in 1903. This
was the highest point since 1867, s o that the national savings
24
The
Credit
of
Nations
of thirty-six years of peace were swept away by national borrowings during three years of war.
The following table shows the movements of the national
debt and of the price of consols from 1894 to 1905.
[From return relating to national debt and from statistical abstract.]
Year ending March 3 1 -
Reduction
of debt.
Increase
of debt.
Average price of
consols for year
lending December. 0
Price.
189418951896.
18971898.
1899.
i9oo_
I90i_
101
106
no
112
no
7,000,000
58,000,000
61,000,000
3 1 , 0 0 0 , 000
I902_
190319041905-
98
5,000,000
7,000,000
7,000,000
7,000,000
8,000,000
3,000,000
[3, 000, 0 0 0 ]
2,000,000
106
99
94
94
90
1893
1894
1895
1896
1897
1898
1899
1900
1901
1902
1903
1904
0
To assist the eye in tracing the casual connection I have placed the year ending
December, 1893, opposite to the year ending March, 1894, and so on. The difference
between 2% percents (with the prospect of reduction to 2 ^ percents in 1902) and the
2% percents already existing in 1898 was only 2 or 3 points. The quotations here given
are for 2% percents till 1901, and for 2% per cents after 1901. I have bracketed the
reduction of 3,000,000 for 1904. because it was due to a returned Transvaal loan and not
to a real surplus of national revenue over national expenditure.
On March 31, 1906, though the Sinking Fund had been restored immediately after the war, the national debt still stood
at £796,000,000. Then, however, Mr. Asquith becoming chancellor of the exchequer, a heroic effort was made to retrieve
the situation, and the national liabilities were reduced by
March 31, 1909, to £754,000,000, a reduction in four years of
no less than £42,000,000. It may cause some surprise that no
recovery should have taken place in the price of consols, which
in fact have been lower in 1909 than in 1905. The state of the
international money market, the heavy issues of colonial gov-
25
National
Monetary
Commission
ernment securities and municipal stocks, which of course compete with consols, and the annual emission of some five millions
of Irish land stock are all contributory causes. Had not the
market been supported by this large Sinking Fund there is no
doubt that 2% per cent consols would have fallen well below 80.
Many are of opinion that the inclusion, at Mr. Chamberlain's
suggestion, of colonial government securities among trustee
stocks has also had a very depressing effect upon our premier
security.
II.—SCHEMES OF CONVERSION.
The history of the English debt includes several successful
schemes of conversion by which the debt charge for interest has
been from time to time reduced, much to the relief of taxpayers.
The need and occasion for schemes of conversion have been in the
periods of peace following upon great and expensive wars. During war debts have multiplied and rates of interest h^ve risen.
When a war is over the relation between income and expenditure gradually becomes normal; and fortunately for this nation,
considering its warlike propensities and history, our statesmen
have usually maintained the principle that in time of peace
surpluses ought to be provided for the diminution of debt. A
modern war leaves behind it an awkward legacy of floating
debt, consisting as a rule of treasury bills and exchequer bonds,
which it is the first business of the chancellor of the exchequer
to diminish when a period of peace recommences. When this
task is accomplished and the floating debt has been reduced to
comfortable proportions, the sinking fund can be utilized for the
purchase of funded debt. Then, if market conditions are favorable, consols and other national securities will begin to recover
from the depression into which they were sunk by war and borrowing. This is the opportunity for a conversion. In the preceding history we have already recorded the first important and
highly successful scheme of conversion, which was carried
26
The
Credit
of
Nations
through by Pelham, then chancellor of the exchequer, in 1749.
Under his scheme over £57,000,000 of 4 per cent stock were
dealt with. The offers to holders were accepted with regard to
£54,000,000, and the outstanding balance of £3,290,000 was
paid off at par. The next important conversion was undertaken by Vansittart in 1818, three years after the conclusion of
the Napoleonic wars. But this was a conversion from a lower
to a higher denomination, as the Government wanted to raise
£3,000,000 sterling of money without increasing the nominal
amount of the debt. The object was effected by converting
£27,272,000 of 3 percents standing then at 79, into 2>/4 per cent
stock at par, irredeemable for eleven years, the holders paying £ 11
in cash to the Government for every £ 100 in stock converted. In
1822 Vansittart carried through a scheme of conversion on the
ordinary lines. There existed at the time over £ 150,000,000 of
5 per cent stock consisting partly of "navy fives/' representing
the old victualling and transport bills, which had been funded in
1784, and partly of exchequer bills, subsequently funded. At
the time of the operation the 5 percents were quoted at 1 0 0 ^ .
Under the statute by which the conversion was effected (3 Geo.
IV, c. 9), holders who did not signify dissent within a fortnight
were to have every £100 of this stock converted to £105 of new
stock, on which interest at the rate of 4 per cent was guaranteed
for seven years. Holders of only £2,794,000 of stock dissented,
and were paid off at par. The old fives, to the amount of
£149,627,000, were converted into the new 4 percents to the
amount of £157,109,000. Two years later, in 1824, when Robinson was chancellor of the exchequer, the whole of the old 4 percents then amounting to £76,248,000 and standing at 101% ex.
dividend was converted by the act of 5 George IV, chapter 11, into
3 ^ per cent stock irredeemable for five years. The new 4 percents, created as we have seen by Vansittart in 1822, became
redeemable in 1829; and in 1830, when the new fours stood at
27
National
Monetary
Commission
\oiy2 ex. dividend,and 3 X percents at 9 8 ^ ex. dividend, Goulburn as chancellor of the exchequer, offered holders an alternative. They might either take in exchange for their stock £100
of new 3% percents, guaranteed for ten years, or £70 of new
5 percents guaranteed for forty-two years. The proposal was
made on March 26, 1830, and the assent of holders was assumed
unless they dissented by the 24th of April. Holders of only
£2,880,000 dissented, and were paid off at par. The rest, with
holdings of £150,790,000, accepted the proposal and nearly all
of them chose 3 ^ percents. Another small quantity of fours
was converted in 1834 by Lord Althorp.
In 1844, whenGoulburn was again chancellor of the exchequer,
under Sir Robert Peel, a very large and highly successful scheme
of conversion was carried through. The 2>}i percents to the
amount of £248,000,000 sterling stood, in March, 1844, a t 1 0 1 ^
ex. dividend. In exchange for these, new stock bearing interest at
7>Y\ P e r c e n t f ° r ten years and at 3 per cent for twenty years was
offered, and with the exception of £103,352 the whole of the 3 ^
percents, amounting to no less than £248,757,000, were successfully converted. In 1853 the ingenious mind of Gladstone, who
had lately become chancellor of the exchequer for the first time,
set itself upon another effort to diminish interest on the national debt. Unfortunately his scheme was too clever or too
complicated, and the times were unpropitious; for troubles began to arise in Eastern Europe and the price of securities drooped
in intelligent anticipation of the Crimean war. Another conversion was tried in 1884 under Mr. Gladstone's 2nd administration by Mr. Childers, who offered all holders of 3 percents either
£102 of 2^i per cent stock, or £108 of 2]/^ per cent stock, both to
be irredeemable until 1905. "Notwithstanding that the terms
of the offer were favorable," wrote the late Sir Edward Hamilton, "and that notices of it were sent to every stockholder, it
took the fancy of comparatively few. The total amount of
28
The
Credit
of
Nations
stocks converted under this scheme was only £23,362,000, of
which £11,950,000 represented holdings of government departments/' The Childers's scheme, however, served several useful
purposes, as Sir Edward Hamilton pointed out, for it supplied
Mr. Goschen four years later with a valuable gauge of the national credit, and familiarized the public with stocks of lower
denomination and of less "sweet simplicity" than 3 percents.
It also brought home to many holders the fact that, though they
had not been disturbed for thirty years, they were not secure
against the intervention of the chancellor of the exchequer.
This brings us to the last, the most important, the most difficult, and the most successful of all the schemes of redemption—
that, namely, which was effected by the late Lord Goschen,
when, as Mr. Goschen, he was chancellor of the exchequer in
1888. At that time the existing 3 per cent stocks were distinguished as consols, reduced threes, and new threes. The new
threes were redeemable at any time after January 5, 1873;
but under the national-debt act of 1870, which was a consolidation act, consols and reduced threes, though "redeemable at
any time after the passing of this act," were only redeemable
subject to certain regulations, including a year's notice. The
result was that the fortress of consols and reduced threes was a
more difficult one to assault than that of the new threes. After
consultation with his advisers at the Treasury and at the Bank
of England, as well as with the government broker and various
other authorities in the city, Mr. Goschen came to the conclusion that, while he was in a position to make a compulsory conversion of the new threes, he could not apply the same method
to the other two classes. The stocks in existence at this time
stood as follows:
Consols
Reduced threes
.New threes
82300 0 —10——3
£322, 681, 000
68, 912, 000
166, 399, 000
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To show the magnitude of the task, it may be mentioned that
at the time of the conversion the books of the Bank of England
in which the stocks were inscribed showed 96,265 accounts under
the head of consols, 19,975 accounts under the head of reduced
threes, and 52,995 accounts under the head of new threes; making a total number of 169,235 holdings varying in amount from
a penny to £5,760,000. Mr. Goschen propounded his scheme
of conversion on March 9, 1888, and after some debate the resolutions were reported and agreed to on the 12th, when the bill
was introduced into the House of Commons and read a first
time. It was read a second time on March 16, passed through
its committee stages on the 20th and 21st, and received the
royal assent on March 27 in an act entitled "The National Debt
Conversion Act, 1888" (51 Vict., c. 2). The main feature of
the scheme was the creation of new stock which was to be
offered to all holders of 3 percents. This new stock was to pay
quarterly dividends at the rate of 3 per cent per annum for the
year ending April 5, 1889, at the rate of 2 ^ per cent for the
next fourteen years, ending April 5, 1903, and at 2}4 per cent
for the next twenty years ending April 5, 1923, and thenceforward until the stock should be redeemed. To the holders of
new threes the chancellor of the exchequer only gave three
weeks, i. e., until March 29, in which they could exercise the
choice of taking new stock or of being paid off. Silence meant
consent to conversion. If they preferred redemption, they were
required to signify their dissent either to the Bank of England
or to the Bank of Ireland within the three weeks prescribed,
but holders who happened to be on the Continent were given
to May 1, and those who were out of Europe until September 1.
This financial coup de main was completely successful; for the
new threes remained at a premium after the notice of compulsory
conversion had been served, so that holders who did not want
new stock could sell to the market on terms more favorable than
30
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of
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those offered by the chancellor of the exchequer. The holders
of new threes who signified dissent before the 29th of March
represented less than £500,000 of stock. For the holders of
consols and reduced threes Mr. Goschen inverted the procedure.
They received the same offer of conversion, but silence was taken
to mean dissent. If they wished to exchange their stock for
an equal nominal amount of new stock, they must signify assent
on or before April 12, or at later dates if they were on the Continent or out of Europe. To encourage them to surrender
their privilege of a year's notice, holders of consols or reduced
threes who assented were offered a bonus of 5 per cent on the
stock surrendered. This bait proved attractive, and in the
following autumn it appeared in a parliamentary return a that
out of a total amount of about £592,000,000 of 3 percents dealt
with under the conversion act, about £550,000,000 had, in six
months, been converted into 2 ^ per cent stock, the old stock,
which remained unconverted at the end of the operations,
being less than £42,500,000. Had it been necessary to raise
much money for the purpose of paying off dissenting holders of
new threes, ample powers were given to the treasury—it might
create or sell new stock; it might issue exchequer bills or
treasury bills; or again it might borrow temporarily under the
conversion act. Mr. Goschen and his advisers deserved the
greatest credit for the extraordinary skill with which this campaign was conducted, and there is no doubt that its success
was partly due to the favorable reception which Mr. Goschen's
masterly speech on the 9th of March secured for it in the city
of London. It is hoped that this brief history may be of use
to those who are concerned with public finance. It will at any
rate enable the reader to understand how it is that British
consols are now a 2% per cent security.
a
House of Commons Papers, c. 5584, sess. 1888.
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I I I . — T H E HISTORY OF THE SINKING FUND.
During the eighteenth century, as Adam Smith observes,
and as we have already shown, the reduction of the public
debt in time of peace never bore any proportion to its accumulation in time of war. Yet the danger of a large public debt
and the fear of impending bankruptcy were constantly impressed
on the public mind by writers and statesmen. Sinking funds
were devised by which the debt should gradually be extinguished. But unfortunately the management of the debt,
both in its theory and in its practice, left much to be desired.
A true sinking fund postulates an excess of revenue over expenditure, a margin over and above what is required for the
public services and for defraying interest on the public debt.
But during the most profound peace, to quote again the
author of "The Wealth of Nations," various events occur
which require extraordinary expenditure, and the Government
finds it more convenient to provide the money by dipping into
the sinking fund than by imposing a new tax:
"Every new tax is immediately felt more or less by the
people. It occasions always some murmur and meets with
some opposition. The more taxes may have to be multiplied,
the higher they may have been raised upon every different
subject of taxation, the more loudly the people complain of
every new tax, the more difficult it becomes either to find out
new subjects of taxation or to raise much higher the taxes
already imposed upon the old. A momentary suspension of
the payment of debt is not immediately felt by the people and
occasions neither murmur nor complaint. To borrow of the
sinking fund is always an obvious and easy expedient for getting
out of the present difficulty. The more the public debts may
have been accumulated, the more necessary it may have become
to study to reduce them, the more dangerous, the more ominous it may be to misapply any part of the sinking fund the less
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likely is the public debt to be reduced to any considerable
degree, and the more likely, the more certainly is the sinking
fund to be misapplied toward defraying all the extraordinary
expenses which occur in time of peace. When a nation is
already overburdened with taxes, nothing but the necessities
of a new war, nothing but either the animosity of national
vengeance or the anxiety for national security can induce the
people to submit with tolerable patience to a new tax. Hence
the usual misapplication of the sinking fund."
The first regular and systematic plan for the discharge of the
national debt was devised by Lord Stanhope and adopted by
Sir Robert Walpole's government in 1716. The public debts
were then being discharged by the South Sea, aggregate and
general funds, which funds were fed by the produce of certain
taxes; and as the revenues thus mortgaged were greater than
the interest on the debts, surpluses existed. Accordingly these
surpluses, and any further surpluses which might accrue, were
united and appropriated by law for the discharge of the national
debt and for that purpose alone. The fund thus created by
Walpole was called the sinking fund. At the same time interest on the debt was reduced from 6 to 5 per cent, and the
savings thus made went to swell the sinking fund, which again
benefited to the extent of £400,000 per annum in 1727, when
the interest on the national debt was further reduced from 5
to 4 per cent. Further reductions in 1749 and 1750 added
another £600,000 to the sinking fund. In the peaceful years
1710 to 1732 the sinking fund was preserved intact even when
fresh debt was being contracted. But in 1733, rather than
raise the land tax (which then stood at the low and popular
rate of one shilling in the pound), a sum of £500,000 was subtracted from the sinking fund; in 1734 £1,200,000 was taken,
and in 1735 the sinking fund itself was anticipated and mortgaged.
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After 1718, when the sinking fund was established, it was
made a collateral security for any new loan in this way. If the
particular tax or duty upon which a new loan was charged
proved deficient, the deficiency was made up by the sinking
fund, whereas when the tax yielded more than was required
for the service of the loan, the surplus, instead of swelling
the sinking fund, was used for the expenditure of the year.
But this was altered by a statute of 1752, by which the sinking fund received the new taxes and discharged the interests
on the new loans. The produce of this sinking fund rose
pretty steadily from £323,000 at its commencement in 1717 to
£3,166,100 (its highest point) in 1776.
But if the proper purpose of Walpole's sinking fund be to
sink—i. e., to extinguish or diminish debt—this fund certainly
failed of its purpose after 1733, for out of its annual produce
after that date, until the termination of the fund in 1786, only
8)4 millions sterling went to paying off debt. "On the whole,
therefore,'' to quote the summing up of Robert Hamilton,
"this fund did little in time of peace and nothing in time of
war to the discharge of the national debt. The purpose of its
inviolable application was abandoned, and the hopes entertained of its powerful efficacy entirely disappointed."
In 1786, when Pitt united the existing branches of revenue in the consolidated fund, he took from this fund the
sum of £1,000,000 annually and intrusted it to commissioners for the redemption of the national debt who were
to employ it in purchasing such stock as they deemed expedient at market prices. To this million was to be added
interest on debt redeemed and expiring annuities until the
fund amounted to £4,000,000. In 1792 another and separate sinking fund was established, consisting of 1 per cent
on the nominal capital of every loan® to which the dividends
a As a matter of fact this provision was frequently departed from during
the war.
34
The
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of
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on the capital redeemed by the fund were to be added. A
similar provision was applied to annuities. In 1802 the two
sinking funds were united and modifications made. In 1807
Lord Henry Petty introduced a new plan, which lasted for
one year, and in 1813 Vansittart again modified Pitt's sinking
funds with a view to reestablish as far as possible the original
design. The sinking funds of 1780 and 1792, which were afterwards maintained with remarkable persistency during the
wars with France, were originally established by Pitt, under
the influence and inspiration of Doctor Price. Price's theories
first appeared in a Treatise on Reversionary Annuities in 1771,
and ¥/ere finally exploded by Robert Hamilton in his "Inquiry
concerning the national debt." Price's plan for redeeming the
national debt was to apply a fixed sum, separated from the
rest of the revenue, to the purchase of stock in the market,
the interest on the debt so redeemed being always added to the
original sum, so continually to enlarge the operation of the
fund. Price put his faith in the operation of compound interest. Money, he said, bearing compound interest increases at
first slowly, but the rate continually accelerating becomes in
course of time so rapid as to mock all the powers of the imagination. It followed, he thought, that a sinking fund should
be based on compound interest, that it should be maintained
in war time, and that the money required for it should be
raised by new loans if necessary. Indeed, he actually contended
that war would increase efficacy of his sinking fund, and that
a suspension of the sinking fund during war would be "the
madness of giving it a mortal blow" at the very time when
it was making progress most rapidly. That a man of high
character and liberal talents, an expert calculator to boot,
could have imposed upon himself to such an extent is hard
to believe. But it is still more incredible that such a piece of
charlatanry imposed upon Pitt and governed British finance
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for a generation. Of the influence of Price's plan Hamilton
writes: " I t has not shared the common fate of the projects of
private individuals and vanished in neglect and oblivion.
It is the basis of Mr. Pitt's sinking fund, adopted fifteen years
after its first publication, and now followed out for upward
of thirty years, and although with some deviations, yet on the
whole with a steadiness seldom experienced in public measures
for so great a length of time and under a succession of different
administrations." Doctor Price argued further that in time
of war his sinking fund would support the price of consols.
But, as Hamilton points out in his crushing analysis, the price
of stocks as of other commodities depends on supply and
demand. In years when the Government borrows as much as,
or more than, it spends on canceling debt, it is clear that whatever sums are brought into the market by the commissioners
for the purchase of stock equal or greater sums must be withdrawn from the market by the additional loans required to
replace the amounts given to the commissioners. If, then,
and so far as purchases on behalf of the sinking fund are only
made possible by borrowing, it is impossible that the national
credit can receive support by a sinking fund maintained under
such conditions. Price proposed that £10,000,000 should be
borrowed in time of war, when £9,000,000 only are required
to balance income and outgo, in order that a surplus million
may be given to the commissioners of the sinking fund, and
urged that this device would keep up the public credit and
enable the Government to borrow at, say, 4 ^ instead of 5 per
cent and so save £50,000 of interest. What he overlooked
was that in order to pay the lenders back £1,000,000 the
Government was borrowing from them previously the same
sum. The only people who benefit by the double transaction are the financiers who profit by the loan issues. The
taxpayer loses just what they gain, and public credit can not
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of
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be better and must suffer from the unnecessary expense. In
practice the Pitt sinking funds were even worse than in theory.
It was calculated by a parliamentary inquiry in 1828 that
the loans raised during the French war yielded on an average
£5 os. 6d. in interest, while the previous loans to which the
sinking fund was applied averaged only £4 10s. In fact the
Price and Pitt plan of " selling new stock cheap and buying
old stock dear" in order to keep up a sinking fund during war,
is computed to have cost the nation more than £1,500,000 a
year for a long period.
I have explained this fallacy and its exposure not so much
on account of the important part it played during the wars
with France, as because it is constantly cropping up. It is the
practice of governments all over the world to attach sinking
funds to loans, though their debts are year by year increasing.
They forget or ignore the simple truth that an excess of revenue
over expenditure is the only real sinking fund by which public
debt can be discharged, that the increase of revenue or diminution of expenditure are the only means by which such a sinking
fund can be enlarged, and that all schemes for reducing the
aggregate liabilities of a nation which are not founded upon
this principle are fictitious, illusory, and mischievous. In 1819
the force of Hamilton's criticisms was recognized, and a real
surplus of four millions was set aside for repayment of debt.
But financial embarrassments intervened, though another
attempt was made in 1823. Finally, in 1828, a finance committee of the House of Commons (presided over by Sir H. Parnell), after inquiry "found" what Hamilton had proved, that
the only real and useful sinking fund is a surplus, and suggested
that a surplus of three millions a year should be provided. In
his budget speech of July 11, 1828, Goulburn made some recommendations on these lines, and in the following year an act
(10 Geo. IV, c. 27) was passed providing that one-fourth of the
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whole surplus (if any) in each year should be issued to the
national debt commissioners and applied by them to the extinction of debt. The commissioners were also authorized to use
the surplus for paying off exchequer or deficiency bills as well
as funded debt. In 1866 Mr. Gladstone assigned a small annual
sum to the extinction of debt and reconstituted the old sinking
fund by providing that the whole realized surplus of the year,
if any, should be applied to the reduction of debt, a very wise
provision, under which, in years of expanding trade and abnormal prosperity, unexpected windfalls and overflows of revenue
are employed of necessity to reduce the national encumbrances.
Thus debt is diminished just when the nation can best afford
to do something for posterity. But Mr. Gladstone's legislation
of 1866 still left British finance open to the objection that in
years of peace there was no substantial permanent provision
for reducing debt and that if an incautious Chancellor of the
Exchequer overestimated his revenue there would be an actual
addition to the debt. This defect was happily remedied by
Sir Stafford Northcote, who established what is called the new
sinking fund in 1875, by the act of 38 and 39 (Vict., c. 45).
This act provided that the annual charge for the debt should
exceed by a substantial and increasing sum the actual interest
required, and that this excess of charge over interest should be
employed by the commissioners of the national debt in reducing national liabilities. This new sinking fund has always been
temporarily suspended by statute during war in obedience to
the principles above established, and it has been from time to
time modified and reduced. The principle, however, that a
permanent sinking fund of a substantial amount should be provided for in every peace budget, in addition to realized surpluses,
has been on the whole well maintained, and in fact the largest
reductions ever brought about in the national debt were effected
by Mr. Asquith as Chancellor of the Exchequer in the years
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of
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1906, 1907, and 1908, through the operations of the old and
new sinking funds, the latter having been raised to some ten
millions sterling annually, though reduced to seven by Mr.
Lloyd George in the budget of 1909.
Mr. Lloyd George also proposed to divert the old sinking
fund, i. e., the annual surplus, if any, of each year, to the purposes of developing the agriculture, forests, and other natural
resources of the country. But this proposal was fortunately
dropped, and the old sinking fund remains as it stood in its
final form under section 5 of the Sir Stafford Northcote's Act
(38 and 39, Vict., c. 45). By this section the treasury is directed to ascertain within fifteen days after the expiration of
each financial year any surplus of income over expenditure and
to issue the same out of the consolidated fund in the course of
the year. Within six months of the date of such issue the
national debt commissioners are required to apply the sinking
fund in purchasing, redeeming, or paying off any one or more
of the following descriptions of debt, namely, annuities, perpetual or terminable charged on the consolidated fund, exchequer bonds, exchequer bills, and advances made by the
Banks of England or Ireland under section 12 of the exchequer audit act 1866. By an act of 1877 (40 Vict., c. 2)
these powers of cancellation were extended to treasury bills.
IV.—THE LOCAL DEBT OF ENGLAND AND WALES.
No account of the national liabilities of the United Kingdom
would be complete which left out the local debt. The systems
of local government in England, Scotland, and Ireland, though
similar in principle, are sufficiently distinct in detail to make it
possible to describe them as a whole; but the importance of
England and Wales, the predominant partner, is such that it
should be worth while to give some details as regards the local
debt of England and Wales, which will not be necessary in the
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Commission
case of Scotland and Ireland. First of all, however, it will be
convenient to show, as far as official figures are available, the
recent growth of local indebtedness for the United Kingdom,
taking the three component parts separately:
Local debt, England, Scotland
Ireland, iSgo, igoo,
1890-91.
Kngland and Wales
Scotland
_ _
Ireland__ _ _
__ __
_
£201,215,458
(a)
__ _ _ _
(a)
(a)
United Kingdom. _
and
1900-1901.
1905-6.
1905-6.
£316,704,222
46,274,880
13.534.973
£482,983,929
58,818,534
18,586,251
376,514,075
560,378,714
0 Not available.
It is, of course, very difficult to arrive at an exact computation of local indebtedness, and different publications give
figures that vary considerably according to the views of the
compilers as to what should and what should not be comprised
in the term "local debt."
In England and Wales the principal local authorities from a
financial point of view are the municipal borough councils, the
county councils, the urban and rural district councils, and the
poor-law guardians. These last, however, are likely to be
extinguished in the near future, in which case their work
will be transferred to the county and municipal authorities.
Another group of ad hoc bodies, the school boards, suffered this
fate in 1902. The revenues required by the poor-law guardians
are derived partly from the poor rate, partly from grants-in-aid,
these grants-in-aid being contributions from the national
exchequer, i. e., the general taxpayer, in aid of the local exchequer,
i. e., the rate payer. The county council and borough councils
also levy a rate, and the rural and urban district councils levy
what is called a general district rate. Local authorities, especially municipal boroughs, have other sources of revenue, such
as market tolls, the takings of municipal tramways, the charges
40
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of
Nations
for municipal gas and water, etc. They are also allowed, subject to statutory restrictions and other conditions imposed by
act of Parliament, to contract debt for certain capital purposes,
the theory being that it is a proper thing to mortgage the rates
so as to defray the cost of large permanent undertakings by an
annual outlay for interest and sinking fund spread over a series
of years. Generally speaking, a local authority which wishes
to borrow must either obtain the consent of the local government board or else get the power required into what is called a
private or local act of Parliament. But under Part V of the
Public-Health act of 1890 any urban local authority may create
debt and issue stock under the local government board's regulations. The stock so created must be issued at a price not lower
than 95, must be redeemable at par after a fixed period, and must
otherwise conform with the regulations of the central board.
Municipal and local loans can only be issued for statutory
purposes, and they must be repaid in instalments, spread over a
period of years, varying according to the purpose, from 20 to 50
or even 60 years. The public-health code, under which a vast
local debt has been contracted, provides further that the sum
borrowed "shall not at any time exceed, with the balances of
all the outstanding loans contracted by the local authority
under the sanitary acts and this act, in the whole, the assessable
value for two years of the premises assessable within the district
in respect of which such money may be borrowed." In brief,
a local authority may not borrow for public health more than
double the value of the assessed annual rental of the lands,
houses, factories, and other ratable property within its area.
The last fifty years have been a period of unprecedented
activity and expansion in local government throughout England
and Wales. All towns and almost all large villages have been
sewered and drained at great expense. In most cases reservoirs
have been created and ample supplies of water secured. Gas,
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Commission
electricity, tramways, parks, and many other of the necessities
and conveniences of modern life have been initiated or extended. The result is that while population and wealth have
grown very rapidly the expenditure of our local authorities
has increased still more rapidly. Very detailed figures have
recently been published by the local government board a by
which this expansion may be measured. In 1867-68 the total
receipts of local authorities in England and Wales from all
sources except loans were as follows:
Rates
Exchequer grants
Other sources
£16, 503, 000
951, 000
6, 883, 000
Total
24, 337,000
Twenty years later the total had nearly doubled; and in the
financial year 1905-6, the last for which complete figures were
available, the corresponding figures were:
Rates
Exchequer grants
Other sources
£58,256,000
19, 850, 000
35, 612, 000
Total
113, 718, 000
It will be seen that the pressure of the local ratepayers for
relief had resulted in the percentage of total revenue contributed
by Exchequer grants rising from 3.9 in 1867-68 to 17.5 in the
last year of the series. The ratable value is the annual value
of the land, houses, etc., in the parish or other area from which
the rates are collected, and represents in each case the rent at
which such land or houses can be let. In order therefore to see
how the growth of local expenditure compares with the growth
of wealth it is necessary to compare the average rates paid to
the local authorities in England and Wales by the ratepayers—
every such rate being levied at so many shillings and pence to
the pound of ratable value.
° Public Health and Social Conditions, cd. 4671, 1909.
42
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Credit
of
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We then get the following figures:
1867-68.
S. d.
3 3/
Rates per £1 of ratable value _
1905-6.
S. d.
5
W
This, however, gives an inadequate idea of local taxation,
and therefore we add the grants per £1 of ratable value, which
are paid to the local authorities out of the national exchequer.
In 1867-68 the grants for education were nonexistent, or so
small as to be negligible. But in 1905-6 they amounted to
£10,500,000, or is. 2 ^ d . per £1 of ratable value.
For poor law and other purposes these grants were 2%&. in
1867-68 and 9d. per £1 of ratable value in 1905-6. Thus the
total receipts of local authorities in England and Wales per £1
of ratable value rose from 3s. 5%&. in 1867-68 to 7s. %%&. in
1905-6. ''The receipts from other sources" a rose, as we have
seen, from less than £7,000,000 in 1867-68 to more than
£35,500,000 in 1905-6. A large and growing proportion of
these sums, as we are reminded by a recent memorandum of the
local government board, represents revenue derived from profitable or at least revenue undertakings. Thus the revenue from
the waterworks rose from £2,500,000 to £4,500,000 between
1890 and 1905, the revenue from gas works from £3,750,000 to
£7,000,000, and the revenue from electricity supply from practically nothing to nearly £3,000,000. Tramways and light railways, which only yielded the local authorities £129,000 in the
financial year 1889-90, produced no less than £5,942,000 m
1905-6.
It will readily be inferred from these figures that of late years
the local authorities have possessed themselves of a large amount
of valuable and revenue-producing property, which must be
borne in mind when we come to consider the apparently alarma Sources other than rates, grants, and loans,
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Commission
ing increase of local indebtedness. The earliest and latest years,
for which complete information as to the total amount of local
debt has been provided, are the financial years 1874-75 a n d
1905-6. These figures for the whole of England and Wales,
including the capital borrowed by the metropolitan water board,
now become a public authority, are as follows:
Amount of local
debt.
Year.
£92,820,000
482,984,000
1874-751905-6..
Average
amount per
pound of
ratable
value.
Average
amount per
head of
population.
s. d.
£
s. d.
16
3
18
1
3
14
The largest increase of debt in this period is due to county,
municipal, and urban sanitary authorities, which have contributed no less than £269,000,000 to the total increase of
£390,000,000. The building of schools accounted for £35,000,000
of debt, and the metropolitan water board borrowed £47,000,000
during the period.
In order to know more precisely how much of the debt may
fairly be regarded as directly productive capital expenditure on
purposes for which trading corporations might have been created,
the local government board has classified the debt as follows,
taking a period of twenty-one years:
Amount and amount per pound of ratable value of the outstanding local debt of
England and Wales.
1884-85.«
Amount.
Trading undertakings
Public health
Education._ __
Poor relief
Lunatic asylums
Miscellaneous purposes
Total
1905-6.
Ratio.
Amount.
£
s.
3,326,000
12,308,000
0
0
0
0
0
0
10 10
7 11
2 1
0 10
0 6
1 8
173,208,000
1
£ 7 8 , 805, 000
57,566,000
15,252,000
5,951,000
3
10
Ratio.
£
d
s. d.
£255,244,000
1
5
2
136,440,000
0
13
5
10,878,000
0
O
i
25,342,000
0
402,984,000
2
41,720,000
13.360,000
1 4
l
2 6
7
7
©This year is the first for which a complete classification of our local debt, according
to its purposes, can be made.
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of
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Thus in twenty-one years local debt grew about twice as
fast as the local value, so that the apparent burden upon the
ratepayer doubled. But only a very small fraction of the debt
and of the increase is to be attributed to pauperism and lunacy,
the two purposes which most nearly approach the character of
dead-weight debt. For almost the whole of this debt the ratepayers get in return for the interest and sinking fund a important
services, including some of the prime necessaries and comforts of
civilized life. Thus out of the total capital debt under the head
of "trading undertakings," which was outstanding in the financial year 1905-6, no less than £118,000,000 was for waterworks, £23,000,000 for gas works, £27,000,000 for electricity
supply, £28,000,000 for tramways and light railways, and
£49,000,000 for harbors, docks, canals, etc. Probably the bulk
of this capital debt, to quote an official publication, "belongs to
undertakings producing a revenue which covers the cost of
working and permits of a substantial contribution toward the
redemption of the capital debt without recourse to the aid of
local rates." The following figures, taken from a return as to
the reproductive undertakings of municipal corporations, 6 may
serve to illustrate the financial character of these municipal
trading undertakings.
Average annual income derived from water, gas, and electricity supply, tramways, harbors, and markets, by town
councils, in the four years 1899-1902
£12,571,045
Average annual expenditure on the same undertakings:
Interest on and repayment of capital and depreciation. _
4, 202, 741
Other charges
7, 789,682
0 There has been some controversy of late as to the utility of local sinking funds, seeing t h a t growing towns are apt to increase their debt. The
arguments for and against will be found in Commons Papers 193 and 372
of 1909 entitled " Reports from the select committee of sinking funds in
exercise of borrowing powers." See also a useful review in the Economic
Journal for 1909, pp. 468-473, by Mr. S. H. Turner.
& House of Commons, Paper 398, 1902.
823000-—IP—4
45
National
Monetary
Commission
So that the difference between income and expenditure exhibits an average annual net profit in these four years to town
councils from their trading undertakings of £578,622.
Taking public health, the next largest item, which accounted,
as we have seen, for £136,000,000 of local debt in 1905-6, we find
on analysis that £51,000,000 was incurred in the improvement of
main roads, highways, and public streets; £38,000,000 in sanitation and sewage disposal; while £9,000,000 was spent on housing
the poor, nearly £7,000,000 on hospitals, £3,000,000 on cemeteries, and nearly the same amount on baths and washhouses.
Although with the exception of baths, housing, and cemeteries
these expenditures are not directly productive of revenue, so
that all the interest and sinking fund have to be drawn from
rates and taxes, it is obvious that they all contribute indirectly
to improve the health, wealth, and efficiency of the nation.
The leading municipal securities are highly favored, and at
the present time British towns can borrow more cheaply than
the Empire of Germany. Municipal stocks rise and fall with
consols and other gilt-edge securities, as may be seen from the
following table of prices at the beginning of January in each
year from 1899 to 1909.
The larger the town the larger the debt and consequently the
freer the market. The security of a comparatively small town
like Bath is practically as good as that of London or Manchester, but its credit is perceptibly lower, just because Bath stocks
are a little less marketable.
46
The
Credit
of
Nations
Prices of consols, local loan stock, and various municipal
i in each year from 1899 to 1909.
Year.
Consols,
1 8 9 9 - - - (2H%)noH
a 99
1900 —
1901 —
97H
1902 —
937A
92 £6
1903 - - 1904--- ( 2 ^ % ) 8 8
1905 - - 1906 —
1907 - - 1908 —
1909 - - -
88H
89^
86
83 X
84
stocks on
January
Manchester.
London
Bath,
Local loans, county
Leeds 4
l
3 p e r c e n t . council, 2 A
per cent 3 per
cent.
per cent. 4 per cent. 3 per cent.
a
no
a 100
99
100 54
100H
97^
97^
99^
97
95
98K
95^
89
°I43
135^
88M
86
87
*33X
80
81^
131 X
130M
126K
125J4
80 H
127K
75
75
77^
119^
xi6H
117X
a Ex. dividend.
47
106K
104^
102J4
118H
100K
113H
110J4
9 9 54
°94K
9354
9554
92 J4
89K
9iK
114H
112*4
0 109
a 108
102
99^2
98K
96
94
91
87
107
91
106
88
104
84
106
85
The Debt and Credit of Germany.
49
THE DEBT AND CREDIT OF GERMANY.
I . — T H E GERMAN IMPERIAL
DEBT.
The German Empire was described by Count von Buelow, the late Imperial Chancellor, as a "parvenu" among the
Great Powers. This, the greatest military power in the world,
is not a third as old as the United States, for it was born from a
union of states less than forty years ago, when modern Japan
was also being evolved.
The financial history of the German Empire since its development has been remarkable, whether we consider the progress of
its expenditure, of its revenues, or of its debt. The following
table a gives a conspectus of the whole subject:
[Amounts are expressed in millions of marks.]
Total
expenditure.
Total
revenue.
Annual average for the years.
Ordinary.
1872-1875
1876-1880
1881-1885.
1886-1890.
1891-1895.
1896-1900.
1901-1905.
1906
1907
1908
1,146. 1
774. i
776. 2
1,1138
1,411.3
1,775-6
2,083.3
2, 157-3
2,421.4
2,519-3
Extraordinary.
Ordinary.
Extraordinary.
670. 3
258.9
141- 7
102. 9
169.8
235. 1
388.5
265.5
759 8
767 6
1, 134 4
1,413 9
1,807 7
2, 060 3
2, i n 8
2,351 4
2,519 3
163. 3
50. 1
218.4
154.4
55-5
226. 9
264. 7
340. 7
265.5
It will be seen that, although there were from the first
extraordinary sources of revenue, yet the distinction between
a All the figures used in this monograph are taken from official sources,
chiefly from the valuable Denkschriftenband zur Begriindung des Entwurfs
eines Gesetzes betrefjend Aenderungen im Finanzwesen, compiled by officials
in the German imperial treasury, published in 1908.
51
National
Monetary
Commission
ordinary and extraordinary expenditures (a distinction drawn
in order to supply reasons or excuses for borrowing in times of
peace) was not introduced into the accounts of expenditure
until the year 1886; and it was not until 1908 that the propriety of making the extraordinary expenditure tally with the
extraordinary revenue was recognized in the imperial accounts.
The above table showing the total expenditure and income
must be supplemented by a second table showing the net
expenditure and income, after deducting the profits earned by
some of the government departments, such as the post-office,
the imperial railways, and the printing department. The net
expenditure and revenue of the German Empire then work out
as follows:
[Amounts are expressed in millions of marks.]
Net
expenditure.
Annual average for the y e a r s -
1872-1875
1876-1880
1881-1885
1886-1890
1891-1895
1896-1900
1901-1905
1906
1907
1908
i
!
'
3 77- o
462.
456. 9
604. 9
813. s
908. 9
1,041.0
1,261.2
1,410.0
1,503.2
Net
income.
267. o
283. 1
4IS-Q
576. I
726.8
915-9
1,013.7
1,230.6
1,320. 8
1,417-3
Applying the net expenditure and revenue to the population
we find that the net expenditure of the Empire per head of the.
population rose from 9.1 marks on the average of the years
1872-1875 to 17.7 marks in 1901-1905 and 23.9 marks in 1908,
the corresponding revenue figures being 6.4, 17.3, and 22.5, so
that the average taxation paid into the imperial exchequer
yearly by each person in the German Empire has almost quadrupled in the course of thirty-six years, having risen from 6 to
22 marks; and neither figure takes account of the extra burdens
52
The
Credit
of
Nations
caused by the fact that most of the customs duties are protective,
so that in many cases only a small part of what the consumer
pays in higher prices finds its way into the treasury.
Turning now to the details of expenditure we find that the
cost of the army rose from an average of 324 million marks in
1872-1875 to 462 in 1891-1895, 622 in 1901-1905, and 854 in
1908. The corresponding figures for the navy were 36 million
marks in 1872-1875, 84 in 1891-1895, and 223 in 1901-1905,
and 339 in 1908. The cost of the foreign department (Auswdrtiges Amt) rose from an average of 6.7 million marks for
1872-1875 to 17.8 for the year 1908. The cost of the colonial
department (established in 1896) rose from 8.8 million marks in
1896-97 to 58.4 million marks in 1907, reverting to 49.2 million
marks in 1908. The cost of what may be called the home office
or ministry of the interior {Innere Verwaltunga) rose from an
average of 2.5 million marks in 1872-1875 to 52.2 for 1891-1895,
74.5 for 1901-1905, and 83.4 for 1908. Neglecting other departments we now come to the cost of financial administration
(Reichsfinanz Verwaltung). The estimates of the imperial
treasury comprise (1) the pay of the officials, (2) the cost of
administering the various taxes and imposts, (3) the administration of the general funds, and (4) the assignments to the
states of the Bund.
0 Die Verwaltung im Bereiche de s Reichsamtes des Innern.
53
National
Monetary
Commission
The following table gives a survey of the expenditure of the
treasury under the first three headings from the commencement
to the present time:
Cost of treas-) Cost of adury adminis- ministering
tration.
taxes, etc.
Average for the years.
Marks.
232,000
251,000
449,000
482,000
538,000
618,000
714,000
835,000
880,000
830,000
1872-18751876-1880.
1881-1885.
1886-1890.
1891-18951896-1900.
1901-1905.
1906
1907
1908
Marks.
392, 000
405,000
398,000
407,000
440,000
469,000
520,000
6
537.ooo
4,357.000
3,419,000
General
funds.«
Marks.
829,000
1. 757.ooo
2,822,000
4, 153.000
4, 038, 000
4,883,000
10,925,000
24,259,000
26,098,000
27,515,000
<* The general funds of the imperial treasury included in 1908 (1) charitable funds
at the disposal of the Kaiser, (2) various invalid and pension funds mostly connected
with the war of 1870.
6The system of accounts was changed this year.
Among other branches of home administration the expenses
of the Reichstag and of justice both rose in the period 1872-1908
from less than half a million to more than 2 millions of marks;
while the allgemeine pensionsfonds, for army, navy, and civil
service rose from 20 to n o million marks. The expenditure on
imperial posts and telegraphs rose from 99 to 545 million marks,
on imperial railways from 31 to 95 million marks, and on the
imperial printing establishment (founded in 1878) from 2 to 7
million marks.
Another branch of expenditure is entitled capital accounts
(Kapitalfonds), including (a) the imperial pension fund, (6) the
expended funds; 0 which again fall into (1) the imperial fortification funds, (2) Reichstag building fund, costing 26 million marks
1A ujgezehrtejonds.
54
Credit
T h
of
Nations
and paid for out of the French indemnity; (c) the famous war
reserve (Reichskriegschatz) kept in the castle at Spandau, and
consisting of 120 million marks set aside from the French indemnity; (d) money set aside for a Working Capital Fund. a
The accounts of the empire are complicated by the financial
relations of the federated empire to the states of which it is
composed. From 1872 to 1878 the states paid matricular contributions to the empire varying between 51 and 82 million
marks a year. The tariff revision and financial changes of 1879
enlarged the financial resources of the empire, and from 1883 to
1898 (with the exception of the two years 1893 and 1894) the
empire made annual contributions to the states. This contribution was usually small, but occasionally became substantial, as in 1889, when it rose to 139 million marks. From 1899
onward the imperial finances again became unequal to the
strain of increasing expenditure, and matricular contributions
were again required from the states. The following table gives
a comprehensive view of the imperial finances in the last nine
years and of the annual deficits in ordinary revenue:
[Amounts are expressed in millions of marks.]
Year.
Expenditure.
1902
1904
1905
1908
1,083.4
1,147-5
1.173-9
1,208.3
1, 1 9 4 . 0
1,285.9
1, 2 6 1 . 2
1, 4 1 0 . 0
1,503-2
Income.
excluding and
Surplus Uncovered Deficits
including the mapaid to Matrikulartricular
contributhe states. beitrage.
tions.
19. 2
15.2
24.4
24.3
23-7
24. 2
24. 2
24. 2
24. 2
97i- 7
979-3
1,026. 6
1.060.3
1, 0 8 7 . 0
1,176.1
1,230.6
1 320.8
1,417-3
~ 92.5
-I53-0
~I22. 9
—i n . 7
—168.2
—147-3
-123. 7
— 148. 0
— 107.0
— 109.8
— 30.6
— 89. 2
~
~
83.3
85.6
6.4
65.0
65.7
— 85.9
o A useful table showing the increasing cost of imperial administration under nine different branches from 1879-1908 is given on pages 94-95 of the Denkschriftenband.
The
charge for Schuldendienst or service of the debt appears in a later table.
55
National
Monetary
Commission
The art and theory of a public debt are comparatively new to
Germans ; a but it must be admitted that modern Germany has
proved itself an apt pupil of older kingdoms and empires alike in
the theory and the practice of borrowing for income. We shall
trace the growth of the imperial debt from its commencement in
1877 at some length; but it will be convenient first to take a
general view. As Germany is an imperial federation of States
with a developed system of local government the debt falls into
three great classes—the debt of the Empire, the debts of the
individual States, and the debts of the urban and rural communities. The following table shows the growth of debt in the
Empire, the States and the "Kommunen , ' of Germany from
1881 t o 1908 :b
[Amounts expressed in millions of marks.]
Debt of
Empire.
267.8
1,317.8
2,395.7
4,253-5
1891.
1901.
1908.
Debt of
States.
5.244.3
9. 230.0
10,796.7
14,362.4
Debt of communities with
more than
10,000 inhabitants.
771.8
1,400. 5
3.097.7
5,295-7
This shows a growth in twenty-seven years of 3,985,000,000
marks in imperial debt, of 9,118,000,000 marks in the aggregate
debt of the German States and of 4,523,000,000 marks in local
debts. The imperial debt has been multiplied more than fifteen
times; that of the States has not quite trebled; while the local
debt was nearly seven times larger at the end than at the beginning of the period. This summary is not complete as it does not
include the debts of the Prussian "Landkreise" and Provinces,
a Even after the exhausting wars of Frederick the Great there was no
Prussian debt.
& The figures are all taken from official sources. The leading authority for
the debts of German towns is Most's "Die Anleiheaujnahme der Grosseren
deutschen Stddte in Jahrzehnt 1897-1907.'*
56
Credit
Th
of
Nations
or of school and poor law authorities, or of communities with
less than 10,000 inhabitants. If all these were added to the
local indebtedness, it is officially estimated that the figure would
be not 5,295,000,000 but 7,420,000,000 marks. Most of the local
debt and a great part of the state debts are of course more or
less reproductive, producing revenue directly or indirectly in
relief of taxes; but the imperial debt is in the main what we
call in England "dead weight" debt.
(A) THE FUNDED DEBT OF THE GERMAN EMPIRE.
The total funded debt of the German Empire, including longterm treasury notes, has risen by leaps and bounds in the last
thirty years, although Germany has not been engaged in war
with any considerable power. But the expedition to China cost
altogether about 290 million marks and the wars in Southwest Africa entailed an expenditure of about 429 million marks,
while another sum of 109 million marks was required for the
construction of the Kaiser Wilhelm (Kiel) Canal. In 1877 the
imperial debt of Germany was only 72 million marks, rather
more than 1^ marks per head of the population. On the 1st of
October, 1908, the debt amounted to 4,253 million marks—
rather more than 67 marks per head of the population. The
following official table shows the total funded debt of Germany
on March 31 in various years from 1879 to 1908, viz:
March 31-
Total debt.
Millionmarks.
Amount per
head of the
population.
72.2
Marks.
1.66
1881
267.8
5-9o
1886
440. o
9-36
1891
1,317.8
26. 56
1896
1901
1906
1907
1908
1908 (October 1)
2,I25.3
2,395- 7
3,543-5
3.803.5
4,003.5
4,253.5
4 0 . 46
1877
57
4 2 . 29
58.14
61.48
63.78
67.34
National
Monetary
Commission
In order to provide material for the Government and to assist
it in framing proposals for the reform of the German finances
in 1908-9, the imperial treasury made a very careful analysis
of the objects upon which the sums raised by imperial loans
had been expended up to the end of the financial year 1907.
I. Sums expended out of loans on behalf of all the states of
the Bund:
Million marks.
For the imperial army
For the imperial navy
For the imperial railways
For the colonies
For the currency
For printing
For the inclusion of Hamburg and Bremen in the Zollverein
For the Kiel Canal
To meet deficits in the ordinary budget
For workmen's dwellings, etc
Expedition to China
South West African wars
Expedition to East Africa
_
r
1, 670. 1
768. 4
252. 4
7.4
46.4
5.3
52. o
109. 1
114. 3
9. 4
287. 1
379. 1
1. 8
3,702.8
II. Payments made by all the states of the Bund except
Bavaria (which has its own army) for the military forces of
the Empire, 121.6 million marks.
III. Expenditure by all the states of the Bund except
Bavaria and Wurttemberg (which have their own postal systems) for post and telegraphs, 263.8 million marks.
It will be seen therefore that the imperial debt consists of
three parts, the first and by far the greatest being that which
is raised for the purposes of the whole empire, which accordingly defrays the interest. The second part of the debt is
raised and defrayed by all the states except Bavaria. The
third part is raised and defrayed by all the states except
Bavaria and Wurttemberg.
It was of course inevitable that as the capital of the debt
grew there should be a proportionate growth in the annual
58
Credit
T h
of
Nations
payment for its maintenance. The following table shows the
charge for interest and management of the debt (which of
course has to be defrayed in the annual budget) in every fifth
year from 1880 to 1905 and in 1907-8.
Debt Charge.
[Amounts expressed in millions of marks.]
I
Charge for
interest
and management
of debt.
Charge for
interest
and management
of debt.
1880
6.2
1900
1885
17.4
1905
1890
48.3
1907
1895
71.7
1908
(B)
79.o
119.8
148.4
155.5
PRINCIPLES GOVERNING IMPERIAL LOAN EXPENDITURE.
At the beginning of this century the rapid growth of the debt
began to attract serious attention; and in the year 1901 rules
were formulated for the different spending departments to show
what classes of expenditure might properly be defrayed out of
loans. In the budget memorandum of that year the items of
expenditure defrayed out of loans were for the first time stated
separately. The following were the rules then laid down to
govern borrowing by the four great spending departments—
army, fleet, railways, and post-office.
1. The army.—The cost of fortifications and of perfecting
the network of military railways may be defrayed out of loans.
2. The navy.—Expenditure on the enlargement of the fleet,
subject to the provision that 6 per cent of the total value of
the fleet must be spent out of ordinary revenue on the construction of new ships.
3. Railways.—Capital expenditure for the opening of new
traffic, and also outlay upon unusually costly buildings and
59
National
Monetary
Commission
improvements, which would be an excessive burden on the
ordinary estimates.
4. Posts and telegraphs.—The cost of acquiring and equipping
telegraph lines by sea and of laying telegraph and telephone
wires underground. All expenditure on telegraphs and telephones for military purposes may also be defrayed from loans,
and since 1902 any extensions of the telephone system which
promise to be immediately profitable have also been placed to
capital account.
The principles formulated in 1901 for the regulation of loan
expenditures have since been supplemented, the following
additional rules being prescribed in a memorandum of 1907:
(a.) Home administration.a—Loans may be employed for the
purchase of land and other functions in connection with the
housing powers intrusted to the home office. Money may also
be borrowed to defray some of the larger structural alterations
in the Kaiser-Wilhelm Canal, which are costly enough to
exceed the limits of current maintenance and go beyond the
ordinary extensions required by the growth of traffic.6
(b.) Military administration.—Not only the cost of building
forts (Festungsbauten), but also expenditures for general purposes connected with fortifications (Festungszwecke), may be
defrayed out of borrowed money.
(c.) Naval administration.—The excess above the 6 per cent
described in the regulations of 1901 is to take the form of an
additional sum in the extraordinary budget. 0 War ships only
are to be included in this category, the cost of arming the
ships with guns and supplying them with mines and torpedoes
a
Im Bereiche des Reichsamts des Innem.
b Etwaige gr6 s sere bauliche Anderungen am Kaiser-Wilhelm Kanal, die
schon wegen des erheblichen Aufwandes iiber den Begriff der laufenden Unterhaltung und der durch die regelmassige Fortentwicklung des Verkehrs bedingten
Erweiterung
hinausgehen.
c
Wird das Mehrbedarf in Geslalt eines Zuschusses des ausserordentlichen
Etats auf Anleihe iibemommen.
60
The
Credit
of
Nations
must be defrayed out of taxes and included in the ordinary
estimates.
(d.) Posts and telegraphs.—In addition to the provisions of
1901, the losses occasioned by renting rooms below the market
price to underpaid officials and workmen may be thrown on
the capital expenditure of the post-office if not otherwise provided for by the general fund.a
(e.) Railways.—The rules of 1901 are repeated at greater
length, with slight modifications. As regards loans for things
rapidly used up which are only treated as capital because
of their unusual cost, it is prescribed that they shall have
special and appropriate sinking funds attached, the interest
and sinking fund being charged on the ordinary railway budget.
This device is borrowed from the British system of loans for
works. The German runs: "Und zwar bei solchen Anlagen,
Einrichtungen und Beschaffungen, die einer verhdltnissmdssig
schnellen Abnutzung unterworfen sindf unter Verzinsung und
entsprechend abgekurtzer Tilgung des aufgewendeten Anleihekapitals zu hasten des ordentlichen Eisenbahnetats." Authority
similar to that granted to the post-office in regard to borrowing
money for subletting rooms to underpaid officials and workmen
is likewise conferred on the railway department.
It may cause surprise that anyone should have gone so far in
describing the debt of the German Empire and the regulations
which govern or restrict its increase without any reference to
a general sinking fund. But the fact is that there neither is
now, nor ever has been, a sinking fund for the imperial debt of
a This curious provision runs as follows: "Die Ausgaben fur Vermietung
an minderbesoldete Beamte oder an Arbeiter bestimmte und sich angemessen
verzinsende Gebdude, sofern ihre Einrichtung hauptsdchlich aus Rucksichten
der sozialen Fiirsorge erfolgt unS eine Verweisung auf den in Etat des Reichsamtes des Innern ausgebrachten allgemeinen Fonds nicht angangig ist.'' Nothing could better illustrate the straits into which treasury officials were
driven by the widening gap between revenue and expenditure. The wording, however ingenious, cannot excuse what is practically the part payment of ordinary wages and salaries out of loans.
82300 0 —10
5
61
National
Monetary
Commission
modern Germany, though in the rules, 1907, a sinking fund was
prescribed for special types of railway loan expenditure. A
law, indeed, was passed on June 3, 1906, providing that from
1908 onwards a provision of three-fifths of one per cent of the
debt should be set aside for its extinction.
For eloquent brevity the latest comment of the German
ll
treasury upon this law can not easily be surpassed.
Eine
Tilgung ist auf Grund dieser Bestimmung noch nicht erfolgt."
"This provision for a sinking fund has not yet produced any
results." In truth the object of a sinking fund is to reduce debt.
The extinction of a small amount of debt with one hand while
you create a large amount with the other is not practical; in
fact, it is wasteful. Most modern states indeed indulge in this
sham of a sinking fund probably in the hope of encouraging
their creditors. The German Reichstag has wisely determined
not to enforce its own law until the Government has contrived
to balance revenue and expenditure. Until equilibrium is
attained a sinking fund is a farce. Hence when war is declared
one of the first financial steps taken by the British Government
is to suspend the sinking fund.
As regards the actual method of issuing new debt, the following official account may be of service:
If the Government adopts the system of open sales with the
Reichsbank as its agent, the transaction is spread according to
market conditions over a longer or shorter period. But if the
Imperial or Federal Government assigns the new scrip to
financial and other institutions, then the day on which the
purchase money due to the Imperial Government is to be paid
wholly or in part, is considered as the date for the conclusion of
the transaction. The same holds good when the issue is assigned
to an Imperial Government department or a State institution
which has funds to invest. But when, according to the method
now usually adopted the scrip is issued to a "consortium" or
syndicate presided over by the Reichsbank and the Seehandlung, then there are three dates marking three different stages
62
The
Credit
of
Nations
in the transaction. The first is the day on which the agreement is entered into between the Imperial Government and
the consortium of banks, when the conditions of the issue are
fixed; then comes the day on which the loan to be issued is
offered for public subscription; thirdly, there is the period
within which the consortium which has taken over the loan is
bound to complete its cash payments to the Imperial Exchequer.
The first Imperial Loan of June 17, 1877, was emitted by a consortium but from that time to the end of the 8o's this method
was only once resorted to, namely in 1887, when an Imperial
loan of 100,000,000 marks was intrusted to an association of
banks and financial houses. From 1889 onwards as the debt
rose more rapidly, this method became more common, and since
1900 it has been constantly adopted in the case of important
issues.
So much for the funded debt.
(C) THE UNFUNDED DEBT OF THE GERMAN EMPIRE-
The unfunded debt of Germany consists of long-term and
short-term treasury issues. With reference to the first it is
officially admitted that a great increase has taken place in the
ten years 1898-1908. The explanation given is that owing to
general industrial conditions and demands the strain on the
German capital and loan market was so great as to preclude the
possibility of consol issues on a scale sufficiently large to meet
the deficits.
The following table shows the issues of long-term treasury
bonds (langfristigen Schatzscheinen) between 1900 and 1908:
63
Year and series.
I900:
Series I___
Series I I _.
Series I l l Series I V .
1904:
Series I
Series I I _
Series III_
1905, series I_
1907, series I_.
1908:
Series I _ .
Series I I _.
Series I l l -
Amount.
Rate of
interest.
Million
•marks.
Per cent.
20
20
20
20
4
4
4
4
Date of
falling due.
Apr.
1, 1904
July
1, 1904
Apr.
1, 1905
July
1, 1905
Price of
issue.
Remarks.
99K
99K
99K!
99X!
20
sH
Apr.
1, 1908
20
3K July
3K Oct.
3K Apr.
1, 1908
1, 1908
1, 1909
99X To redeem Series I, 1900.
99X To redeem Series I I , 1900.
9»K|
98K| To redeem Series I I I , 1900.
IOO
20
200
4
July
1, 1912
98
20
4
4
4
Apr.
1, 1912
July
1, 1912
98
98
Oct.
1, 1911
20
IOO
To redeem Series I, 1904.
To redeem Series I I , 1904.
I n exchange for Series I I I , 1904.
3
The
Credit
of
Nations
Short-term treasury bills (Kurzfristige Schatzanweisungeri)
are used to meet temporary deficiencies at times when the
revenues coming in are inadequate to cover the expenditures.
They have been regularly employed for the purpose of strengthening the balances of working capital. For a few years after
the war the French indemnity sufficed for this purpose. In
1877, however, 24 million marks worth of these treasury bills
were put into circulation. In 1882 the amount rose to 70 million
marks, in 1887 to 100, in 1892 to 175, in 1902 to 275, in 1905 to
350, and finally, in 1908, short bills to the amount of no less
than 475 million marks were negotiated. The amount actually
in circulation varies of course enormously, and until the year
1904 it happened not infrequently that all the outstanding bills
would run off. But between 1904 and 1908 treasury bills were
always in circulation. In April, 1905, the total of bills in circulation mounted to 350 million marks, then sank rapidly to
10 millions, but rose again at the end of November to above 200
millions. In 1906 there were similar fluctuations from a minimum of 27 to a maximum of 323 millions. In 1907 the amount
rose early in April to 340 millions and never fell below 49
millions. In 1908 the legal maximum was raised to 475 million
marks and a record of 359 million marks was touched in the
spring. In that year the lowest figure was 129 millions, and
on November 9 the circulation again mounted to 354 millions.
This brief history shows, as has been officially pointed out,
that since 1903 a "latent debt" has grown up of varying amount
indeed, but still of permanent character. As a government
expert puts it: "Since 1903 the Empire has had treasury bonds
in continuous circulation; so that a service for strengthening
the working balances has to some extent degenerated into a
concealed debt consisting of short-term bonds."
Since 1897 the average circulation of the treasury bills has
varied from 14 days in 1899 to 94 days in 1904.
65
National
Monetary
Commission
The procedure adopted for taking up treasury bills is thus
described:
When the necessity for an issue of floating debt arises the
Imperial Chancellor directs the Department of the Debt to
make an estimate of its immediate prospective requirements
and to prepare a corresponding issue of Treasury Bills, which
are then deposited with the Reichsbank. As soon as the credit
to be maintained by the Treasury at the Reichsbank falls below
10,000,000 marks, the Reichsbank thereupon without any
special notice draws from the Treasury Bills deposited whatever
number may be required to restore the Government's balance,
buying them (usually) at its current official rate of discount. It
either keeps these bills in its bill-cases until they fall due or
rediscounts them. In exceptional cases Treasury Bills are
allotted to other public departments or private firms.a
In conclusion it may be pointed out that just as the increase
of the floating debt during the Boer war proved a disquieting
factor in the London money market, so the great increase of
treasury bills has been of late a source of anxiety in German
banking circles, and there is a strong desire to restrain the
output.
a
" Steht die Notwendigkeit, schwebende Schulden aufzunehmen, zu erwarten,
so wird nach Massgabe des fur die ndchste Zeit vorauszusehenden Bedarfs auf
Anweisung des Reichskanzlers seitens der Reichschuldenverwaltung ein entsprechender Betrag an Schatzanweisungen ausgejertigt und der Reichsbank zur
Aufbewahrung ubergeben. Sobald und soweit alsdann das seitens der Reichshaupikasse bei der Reichsbank zu unterhaltende Guthaben unter den bei
Einrichtung des Reichsbank-Girokontos der Reichshauptkasse im Jahre 1808
jestgesetzten Mindestbetrag von 10 Millionen M. sinkt, entnimmt die Reichsbank
ohne besondere Anweisung dem Depot einen entsprechenden Teil der Schatzanweisungen und kauft sie in der Regel zu ihrem jeweiligen offiziellen Diskontsatz an. Sie behdlt diese Betrdge entweder bis zum Verjall im Portefeuille oder
begibt sie im Wege der Rediskontierung weiter. In Ausnahmefallen
werden
auch an andere offentliche Kassen oder Fondsverwaltungen oder an private
Firmen Schatzanweisungen veraussert."
66
Cr e d i t
T h
of
N a ti
o n s
I I . — D E B T S OF THE GERMAN STATES.
The debts of the 26 or 27 States a of the Bund have not
advanced as a whole at anything like the ratio of the imperial
or local debt. The lion's share of the increase is due to Prussia.
At the beginning of the period Prussia's debt was not half as
large again as Bavaria's; now it is more than five times as
large. The following table excludes all the smaller States
whose debt was less than 10,000,000 marks in 1908:
Debts of 13 German
States.
[In million marks.]
Prussia
Bavaria
Saxony
Wurttemberg
Baden
Hesse
Mecklenburg-Schwerin
Oldenburg
Brunswick
Liibeck
Bremen
Hamburg
Alsace-Lorraine
1908
1881
1891
1901
1,96s
5,834
6,602
7,963
1,341
i,33i
1,362
673
625
829
i,754
917
418
439
495
322
339
335
585
47o
31
35
284
407
37
94
108 |
127
36
36
55
84
69
58
50
23
11
37
55
53
80
80
160
235
160
271
406
545
19
25
30
35
The total funded debt of all the States was officially computed on November 1, 1908, to be 13,807,423,000 marks, and
there was also outstanding a floating debt of 555,000,000
marks, of which 545,000,000 fell to Prussia, 7,000,000 to Oldenburg, and 3,000,000 to Alsace-Lorraine. Of the Bavarian debt,
302,000,000 marks were general or dead-weight debt and
1,551,000,000 marks represented capital invested in the Bavarian state railways. To the total state debts, funded and
unfunded, computed on November 1, 1908, at 14,362,000,000
marks, Prussia contributed 8,771,000,000 marks, or 61 percent.
a Counting Saxe-Coburg-Gotha as two, and including Alsace-Lorraine.
67
National
Monetary
Commission
Prussian and imperial credit are almost exactly on a par, and
when, as frequently happens, the premier State and the Empire both require loans the issues are usually brought out
together by a "consortium" of German banks and in the same
denominations. At the end of April, 1909, when both the
Prussian State and the German Empire were suffering from large
deficits, Prussia requiring 480,000,000 marks and the Empire
320,000,000, there was some difficulty in arranging for the
joint issue, and a long conference took place between the representatives of the two Governments and the bankers, the
former pleading for a 3 ^ per cent issue, while the bankers stood
out for 4 per cent, arguing that the German public had got
accustomed to expecting 4 per cent for its money, and that
a -$y2 per cent issue would not be taken up, in spite of the
favorable condition of the money market. The government
officials, of course, in the interests of the taxpayer and of
German credit, were anxious that Germany should not have
to borrow on the same basis as Spain or on worse terms than
Italy. Eventually it was arranged that half the loans should
be in 4 per cent and the other half in 3% per cent denominations, both to be irredeemable until the year 1918. The 4
per cent loans were taken over by the bankers at 102 and
issued to the public at 102.70, while the 3 ^ per cents were
taken over at 94.80 and issued at 95.60, both loans being
three-fourths of 1 per cent lower than were the existing 3%
and 4 per cents on the day when the loan was announced.
The "consortium" of bankers, which issued the loans on this
occasion, was composed of the leading bankers and finance
houses of all the principal cities of Germany. In Berlin the
members of the "consortium" were the Deutsche Bank, Disconto-Gesellschaft, Dresdner Bank, Berliner Handels-Gesellschaft, A. Schaaffhausenscher Bankverein, Bank fur Handel
und Industrie, Nationalbank fur Deutschland, Commerz und
68
Th
r e d i t
of
Nations
Disconto-Bank, Mitteldeutsche Creditbank, Mendelssohn &
Co., S. Bleichroder, Delbruck Leo & Co., and F. W. Krause
& Co.; in Hamburg, the Norddeutsche Bank, Vereinsbank,
L. Behrens & Sons, and M. M. Warburg & Co.; in Frankfort,
M. Lazard Speyer-Ellissen and Jacob S. H. Stern; in Cologne,
the house of Sal. Oppenheim, jr., & Co.; in Munich, the Bavarian Hypotheken and Wechselbank and the Bayerische Vereinsbank; in Nuremburg, the Konigliche Bank; in Mannheim, the
Rheinische Creditbank; in Stuttgart, the Wurttembergische
Vereinsbank; in Leipzig, the Allgemeine Deutsche Creditanstalt;
and in Posen, the Ostbank fur Handel und Gewerbe.
The history of Prussian credit since 1886 may easily be traced
by following the average prices of Prussian 3 ^ per cent consols
from that year to 1908 on the Berlin Bourse. The average price
in 1886 was 102.1. They fell back to 99.8 next year, but rose to
103 in 1888 and 104.4 m 1889. In 1890 the price fell back to
100.5 a n d in 1891 to 98.4. For the next two years they stood at
par, and ran up to 102.4 m I&94, 104.4 m I^95» a n d 104.6 in
1896. This was the high-water mark, though the highest
actual quotation in the year (105.6) was just below the record of
105.8 which had been touched in 1889. The price now sank
steadily to 95.8 in 1900, but recovered to 99.4 in the following
year and to 102.2 in 1903. Then another shrinkage began
which lasted until 1909, when cheap money more than offset the
continuance of heavy borrowing. The following table will show
the close correspondence of the Prussian and imperial 3% per
cents from 1904 to 1908:
Year.
Prussian.
1904.
19051906.
19071908.
101.89
101.94
101.41
101.33
99-54
94. 66
92.21
99-59
94-89
92.25
69
Imperial.
National
Monetary
Commission
The slight sup^iority of Prussia's credit to that of the Empire
may be explained by the fact either that Prussia has more
tangible assets or that the Empire is a comparatively youthful
and artificial creation compared with the Kingdom of Prussia.
Certain it is that some German and foreign investors are inclined
to prefer the security of a German State to the collective guaranty of the Empire.
The credit of Saxony, judged by her 3 per cent rentes, at one
tirne stood higher than that of either the Empire or Prussia.
But in 1898-99 Prussia stood better with the market than
Saxony; for in 1898 Saxony issued a 3 per cent loan at 83, while
Prussia issued 3 per cent stock for a similar amount in the following year at 92. In the same year Bavaria raised a 3 ^ per
cent loan at 99 and Brunswick got no better than par for a
small 4 per cent issue. Ten years later the situation was very
different, owing to the heavy and persistent deficits of Prussia.
In 1906 a Prussian 3 per cent loan could still be issued at par,
but in 1907 and 1908 large blocks of Prussian 4 per cents had to
be marketed at 99 and 98. Meanwhile in 1907 small issues of
Bavarian and Hessian fours fetched 100 and 102, respectively,
while Brunswick and Hamburg also borrowed on a 4 per cent
basis at par. It is clear that in the last three or four years both
Prussia and the Empire have offended against the law of demand
and supply. They have been issuing stock faster than it can be
absorbed. In 1907 and 1908 Prussia added 600,000,000 marks
to her funded debt and issued 345,000,000 of long-term treasury
notes.
70
T h
Credit
of
Nations
The following table gives a conspectus of recent Prussian
borrowings:
Month and year.
Amount
of issue in
million
marks.
January, 1902,
185
February, 1904
February, 1905
April, 1906
70
30
300
January, 1908
181
April, 1908-
Type.
Price of
issue.
Mode of issue.
3 per cent consols.
do
do
3 % per cent
consols.
4 per cent consols with provision for reduction later
to 3 K and
3^.
4 per cent consols.
« I t was sold to the400
Konsortium at 1
Konsortium _
a 89. 8
Kleines Konsortium _ _
91. 0
Konsortium
Seehandlung
Konsortium
_
98. 5
b 99.5
_
& Sold to Konsortium at 98 4.
The larger States also issue long-term and short-term notes and
treasury bills for more or less temporary purposes. As a rule
the amount of these outstanding is highest in March, but in the
last two or three years the requirements have been unusually
large from November onward, chiefly in consequence of Prussia's
heavy deficits. The increasing pressure of these public bills
on the money market is sufficiently shown by the rapid rise of
rates at which the treasury bills were discounted:
1902.
1903-
Discount rates.
___ 2 . 3 — 2 . 7
• 3—3- 6
1904190519061907-
• 9—3- 8
. 8—4. o
• 6—4. 3
. 4—6. o
In the last year of course the difficulties were much accentuated by the American crisis. The amounts of treasury
bills (Schatzanweisungen) which may be issued by Prussia are
71
National
Monetary
Commission
restricted to 100,000,000 marks, those of Bavaria to 35,000,000
and of Wurttemberg to 20,000,000. The largest amount
actually issued by Prussia, Wurttemberg, Bavaria, and three
smaller States in the period 1902-1907 was 110,000,000 in
December, 1907, and the next largest was 81,000,000 in February, 1906. In April and August, 1902, only 2,000,000 were
outstanding.
II.—THE IvOCAIv LOANS OP GERMANY.
As we have already seen, the local indebtedness of Germany
has been advancing very rapidly and was over 7,400,000,000
marks in 1908, nearly double that of the Empire and more than
half that of the States. After 1880, and again still more notably
after 1890, the growth of this debt was much accelerated, mainly
in consequence of the increasing activity of the town councils,
many of which practice what is called municipal socialism.
In the period between 1881 and 1907 the debt of the towns
and "I/andgemeinden," with more than 10,000 inhabitants,
increased nearly sevenfold—from 771,000,000 to 5,295,000,000
marks. Of this total, in the former year about 49,000,000 marks
were short-term obligations and in 1907 about 487,000,000. In
the same period the charge for this mass of local debt rose from
53,000 to 285,000 marks. The credit of the towns was rather
better therefore in 1907 than in 1881; for while the debt was
multiplied by 6% the debt charge for interest, etc., was only
multiplied by 5 ^ , though this calculation of course assumes that
provisions for sinking fund remained a constant proportion.
If, however, we look at the borrowing of the last ten years
we find a general tendency, especially at the end of the period,
for the rates of borrowing to rise rather than to fall. In 1898,
for example, the 165 largest towns of Germany borrowed
150,000,000 marks at 3 ^ per cent and 24,000,000 marks at 4
per cent, while in 1906 they borrowed 42,000,000 at $% per cent
and 122,000,000 at 4 per cent. In 1907 and 1908 the municipal
72
The
Credit
of
Nations
rate of borrowing in Germany began to rise above 4 per cent.
Under these circumstances German municipal loans came to
attract foreign attention, especially in Switzerland, Holland,
and Scandinavia, as offering good security with a high
rate of interest. A considerable quantity of the loans emitted
are absorbed by the town and provincial savings banks and
similar institutions which have funds to invest; but out of the
2,143,000,000 marks of debt issued by the 165 largest towns
from 1897 to 1907, 1,653,000,000 were sold to Bank-Konsortiums.
Generally speaking, the credit of German towns is lower than
that of the States and Empire, but the difference is less than
might be expected from the analogy of other countries. Berlin's
credit is almost on a par with Prussia's, as there is a very free
market and a particularly strong support from the Berlin Savings
Bank (Sparkasse). The small but rapidly growing towns, where
there is much industry but little capital, have to pay most, as
they have no reserve strength and are more at the mercy of the
large financial houses. Even the towns which are also States—
Hamburg, Bremen, and Liibeck—cannot as a rule borrow
quite so cheaply as Berlin. '
73
The Debt and Credit of France
75
THE DEBT AND CREDIT OF FRANCE.
I. HISTORY OF DEBT.
(A) PR3REVOI.UTION.
Though the public debt of modern France dates from the
revolution, the art of borrowing had long been practiced by
the monarchy. The first French King to raise loans on security was Francis I. He borrowed from the city of Paris, and
in return alienated to it certain aids and customs, which became known as "rentes sur FHotel de Ville." This convenient device, once discovered, was vigorously employed. In
1561 the debt already amounted to 74,000,000 francs and had
become so onerous that the regent, Catherine de Medicis, on the
advice of the Parlement of Pontoise, thought of laying hands on
ecclesiastical property as a means of reducing royal obligations.
The clergy preferred to avert confiscation by a temporary
sacrifice, and after the "Conference of Poissy" they signed an
undertaking to provide for six years an annuity of 1,600,000
livres,a whereby the King might regain all the domains, aids,
and customs which had been alienated to the city of Paris.
The annuity, however, was used not to liquidate the old, but
to contract new debt. It became known as "rentes sur le
clerge," which were also sold to the Hotel de Ville. On the
strength of this subvention the clergy afterwards claimed and
obtained many exemptions from taxation. After the civil
wars Henry the Fourth found the finances in great disorder,
with a debt amounting to 337,000,000 livres. But in 1604 his
great Minister Sully effected such extensive reforms and reductions that at the close of the reign, while the revenues had
largely increased, the debt had been diminished by 100,000,000.
Neither Richelieu nor Mazarin were able to maintain the Sully
a Eighty-one livres Tournois = 80 francs.
82300 0 —10
6
77
National
Monetary
Commission
tradition, though the latter made some attempts at debt reduction. But by this time borrowing had become habitual
and loans were constantly issued in the early part of Louis
the Fourteenth's reign, whose finance ministers had a hard
task to supply their master's prodigal magnificence. One of
them, Fouquet, who raised loans of all kinds at all possible
rates of interest, made a first (and unsuccessful) attempt to
employ the tontine annuity, so popular both in France and
England in the next century, as a means of money raising. It
was suggested to him by its Italian inventor, or name father,
I^aurent Tonti; but with Colbert at the treasury a very different system came into force. Acting on his belief that rentes
were a most useless and expensive possession for a State, he
took active measures to reduce debt. He had no belief in the
benefits of credit; in his eyes loans were always made by idle
capitalists for unproductive purposes, and he looked upon the
interest charge as an improper burden on the taxes. Accordingly, in 1664-65, Colbert redeemed all the debt created in
the previous six years and compulsorily reduced the interest
on the remainder. This drastic measure had its disadvantages, for it so estranged the capitalists that when shortly
afterwards loans had to be raised for the wars it was found
very difficult to get the money. Warned by this experience
Colbert suggested, after the peace of Nymeguen, 1679, an optional conversion "au dernier 20 "(i. e., 5 per cent) of loans
contracted "au dernier 14-16" (i. e., 7 per cent to 6% per cent)
and so reduced the annual charge by more than 2,000,000
livres. At his death, in 1683, the debt charge—which in 1663
had exceeded 30,000,000 livres—stood at about 8,000,000;
this figure he considered to be not out of proportion to the
scale of public expenditure.
With the death of Colbert all sound management vanished
from French finance, and in 1715 (at the end of the reign of
78
The
Credit
of
Nations
Louis XIV) the capital amounted to nearly 2,000,000,000
livres, although two years previously Desmarestz had carried
out a compulsory conversion, reducing the interest on all the
debts "au dernier 25" (4 per cent) and the capital to correspond. This lowered the capital value by 135,000,000 livres
and the interest charge by 14,000,000. In the early part of
Louis the Fifteenth's reign the public finances fell into such
chaos that St. Simon, in the Regent's Council, advocated open
bankruptcy. In 1719 the notorious John Law, to crown his
bubble projects, proposed a general redemption of the debt—
the rentes to be exchanged for bonds on his India Company.
The crash came too soon and the Freres Paris, who undertook
the liquidation of the gigantic bankruptcy, dealt drastically
with the debt, reducing the rentes to 2 per cent and the life
annuities to 4 per cent. As a result the debt, in 1719, is said
to have stood at 1,700,000,000 livres capital value, with an
annual charge of 48,000,000 livres. Throughout this reign
the policy of loans and forced reductions continued, and the
mischief caused by the Seven Years' war was aggravated by
court extravagance.
In 1764 the revenue stood at 286,000,000 livres. The whole
public debt of France was estimated (in a memoir presented in
the same year by the parliament of Bordeaux to the King) at
2,400,000,000 livres, one-eighth of which was represented by
annuities for lives. The interest on the whole debt was put at
120,000,000, of which one-fourth was required for the payment
of the annuities. 0 In 1768, in spite of remonstrances from
Parliament, all pretense of debt redemption was suspended,
and from 1769 to 1774 the Abbe* Terray carried out a series of
bankruptcies and forced loans to which he gave the smooth
names of "reductions" and "consolidations" of debt. Nevertheless, when Louis XVI succeeded in 1774, the total debt
a See Adam Smith's Wealth of Nations, Book V, Chap. I I I .
79
National
Monetary
Commission
charge was very nearly 120,000,000 livres, while the floating
debt amounted to 235,000,000 livres.
The appointment of Turgot revived the credit of the State.
The rate of interest on loans to the Government dropped in
twelve months from 52/5 to 4 per cent, and when the great minister fell he was planning a large conversion. His programme—
"ni banqueroute avouee ou masquee par des reductions forcees,
niaugmentation d'impots, ni emprunts"—was a complete reversal of all French financial policy since Colbert, and might have
saved the monarchy. In his two years he paid off 74,000,000
livres of debt and 58,000,000 of anticipated revenue, leaving
only 10,000,000 of the latter to be dealt with by his successor.
But Necker (1777-1781) reverted to the bad old plan of borrowing; and between 1783 and 1787 Calonne, the last finance
minister of the ancient regime, added 650,000,000 to the debt.
He was at last (February, 1787) forced to summon the assembly
of notables, and in his opening speech admitted that the last
ten years had added 1,250,000,000 to the debt, and that the
deficit for the present year was 115,000,000. It is not surprising that he lost his office. In 1789 a committee of the
constituent assembly reported that the annual debt charge,
exclusive of the floating debt, was then 208,000,000 livres.
From the above history, drawn from the best sources available—though the figures have no pretense to exactitude, so
confused were the public accounts and so conflicting the estimates even of the best informed—we may infer that borrowing
was a main cause of the downfall of the French Monarchy, and,
further, that financial ruin was due at least as much to the
methods followed as to the amount raised. An open bankruptcy or confiscation is, of course, a public fraud upon private
lenders, and makes it impossible for the state to raise further
sums except at exorbitant rates of interest. Even more disastrous to the national trade, revenues, and credit was the
80
The
Credit
of
Nations
favored plan of "redeeming'' debt by issuing paper money to
the creditors, the result being a general debasement of the
currency or destruction of public faith in the means of exchange
and a general refusal to accept money in ordinary commercial
transactions. Consequently the state, receiving taxes in its
own depreciated and debased currency, was unable to pay its
way, the prices of things and services having increased automatically as the currency was enlarged and debased.
(B) THE REVOLUTION TO THE END OF THE FIRST EMPIRE,
1789-1814.
In spite of several declarations by the assembly that they
held the national debt as a sacred trust, the public credit of
France had sunk to a very low ebb. Necker, now again Finance
Minister, tried to raise two loans of 30,000,000 and 80,000,000
francs, respectively, but neither were covered. The report of
the committee had recommended an issue of assignats; this
vile measure was voted in spite of Necker's protests, and he
resigned in August, 1790. The issues of assignats continued,
and in 1793 a forced loan of 1,000,000,000 francs only produced
100,000,000. The "loan" (which did not bear interest) was
practically a confiscation of all income in excess of 9,000 francs
per annum and a heavy tax up to that limit. The Government,
it may be added, estimated the income without consulting its
possessor. Yet this same year saw the first appearance of the
public debt in its modern form. By the law of August 24,
1793, Cambon proposed the creation of a "Grand livre de la dette
publique" in which all the existing debt forms were to be entered
as a unified 5 per cent debt. The annuities were afterwards
added. The book entries were treated as conclusive evidence
of the claim. After this reorganization the capital value of the
debt in 1793 was nearly 3,500,000,000 francs, and the interest
charge 174,000,000 francs, of which only one-quarter was paid
in money and the remainder in assignats. In 1797, however,
81
National
Monetary
Commission
depreciation of the assignats and general financial
confusion
induced the Government to " p a y off" two-thirds of the debt in
bonds exchangeable for land; in other words, the debt was
reduced to one-third of its original value, and after some further
confiscations amounted a t the end of the eighteenth century to
800,000,000 francs with an annual charge of 40,000,000 francs.
Under Napoleon's rule and t h a t of his two excellent finance
ministers, Gaudin and Mollien, the issues of inconvertible paper
ceased, and loans were as far as possible avoided.
As a result
the Restoration in 1814 found the debt charge, after fourteen
years of unprecedentedly
costly war,
augmented
by
23,000,000, i. e., from 40,000,000 to 63,000,000 francs.
only
Of this
additional 23,000,000, 6,000,000 were the debts of the countries
taken over by Prance and 10,000,000 were obligations incurred
b y the Directory.
Only 7,000,000 (or a capital increase of
140,000,000) were a t t r i b u t a b l e
to the Empire.
Napoleon's
policy of making war " p a y its w a y " imposed very heavy annual
burdens on Prance and the conquered territories.
Nevertheless,
in consequence of this policy, the financial situation of the
French Government a t the end of the Napoleonic wars was
enviable compared with t h a t of the victorious Government of
Great Britain.
(C) THE BOURBON AND ORLEANIST GOVERNMENTS AND THE
SECOND REPUBLIC, 1814-1852.
The restoration government had to meet the war indemnity
imposed by the allies, to compensate the emigrants, and to t a k e
u p t h e large unpaid balances of the imperial expenditure.
all this large loans were required.
For
Although urged b y some of
its supporters to repudiate the existing debt, it had the honesty
and sagacity to take longer views.
Even so, such was the scar-
city of capital and the suspicion of the few who had money to
invest, t h a t for some time the French Government was unable
to borrow at par even on a 5 per cent basis.
82
F r o m 1815 to 1818
The
Credit
of
Nations
5 per cent loans were actually issued at prices varying from 52.50
to 67.60—that is, practically at from 9% per cent to 7 ^ per cent.
It would have been wiser, as M. Leroy Beaulieu observes, to
create 6 or 7 per cent stock at a price nearer par. The actual
burden would have been much the same, and it would have
eased the work of redemption later. Yet stock of even lower
denominations was issued, notably the emigrants' indemnity
of 25,000,000 francs at 3 per cent.
In 1819 a law was passed creating auxiliary "grands livres"
in every department, and so giving facilities to the provincials
for investment in government stock. From this point public
credit steadily rose; in 1821 a 5 per cent loan was issued at 85.55,
and another in 1823 at 89.55. A steady policy of debt redemption and budget surpluses had such an effect that the last loan
contracted by the Bourbon government (80,000,000 of 4 per
cent rentes in 1830) was issued at 102^—the only French loan,
it is said, that was ever emitted above par. The debt existing
in 1814 had been practically redeemed, but the additions since
that date involved an annual charge of 164,500,000 francs, a
good deal more than double the legacy of Napoleon, but a mere
fraction of the British war debt.
During the July revolution the 3 per cent funds fell to 46, and
when in 1831 the Orleanist government emitted a loan of
120,000,000 at 5 per cent they could only obtain a price of 84,
which made the real charge 6 per cent. A "patriotic" loan of
100,000,000 5 per cents at par in the same month proved an
utter failure, for only one-fifth was subscribed. Several loans
followed for public works, military preparations, and to meet
the persistent budget deficits. They were issued, not in 5 per
cents, which had risen well above par, or even in fours, but in
threes, which for many years after were not near enough par to
make an advantageous form of loan. The prices ranged from
75.25 to 84.75.
83
National
Monetary
Commission
The strength of the funds under Louis Philippe is a curious
phenomenon, and marks the extreme of French credit as compared with the early years of the Bourbons. Professor Bastable
observes: a
"The position of the stocks over 3 per cent would have easily
admitted of conversion without any increase of capital into a 4
per cent or even 3% per cent stock, but to avoid popular hostility
this evidently prudent course was not taken/' He gives a table
showing the position of the various stocks in 1845:
Lowest.
116.45
in
106
80.85
5 per cent
4/4 per cent .
4 per cent
3 per cent
In spite of eighteen years of peace and a considerable amount
of debt redemption, 13,000,000 had been added to the debt
charge, leaving it at 177,000,000 francs, or a total capital debt
of 3,540,000,000 francs.
The three years of the Second Republic passed amid grave
financial disorder. As a result of the February revolution the
3 per cents collapsed to 32.50, and when the new government
tried a "patriotic" loan of 100,000,000 5 per cents at par only
26,000,000 were taken up. During the three years the 5 per
cents fluctuated between 50 and 75. The difficulties of the government induced them to resort to such questionable measures
as forced "conversions." In July, 1848, some treasury bonds
which fell due were not paid off, but were arbitrarily changed to
3 per cent rentes at 55. This stock was quoted on the Bourse
at 43, so that the unfortunate holder lost 20 per cent. At the
same time some savings bank deposits on current account were
"converted" to 5 per cents at 80, quoted on the Bourse at 73,
or a loss of 10 per cent. In spite or because of these wretched
a
Public Finance,
84
p. 646.
T h
Credit
of
Nations
expedients the Second Republic increased the debt charge in
three years by 53,000,000 francs, making the total charge, in
1852, 231,000,000 and the capital debt 4,620,000,000 francs.
(D) THE SECOND EMPIRE, 1852-1870.
In all, eight loans were issued under the Second Empire, most
of them at 3 per cent, which was much below par. In 1854-55
the investors in the Crimean war loan were given the option of
4^/2 per cent at 92 and 3 per cent at 65, but only a very small
proportion of the former were applied for. All the loans were
issued by public subscription, and in the grandiose language of
the time Finance Ministers would speak of the " suffrage universal des capitaux." As a matter of fact the loans were generally much oversubscribed by speculators, and the policy
certainly had the effect of disseminating "rentes" among the
French people. In 1830 the number of rentiers was 125,000;
in 1869 it had risen to 1,254,000, and in 1881 to 4,000,000—
these figures of course do not allow for duplicates. The extravagance and borrowing propensities of the Second Empire increased the debt charge by 129,000,000 francs, mainly owing to
the Crimean, Mexican, and Italian wars, to the undertaking of
huge public works, and the necessity of meeting budget deficits.
The total cost of the Crimean war to France was 1,650,000,000
francs, of which 1,538,000,000 v/as raised by loans—a proportion
which contrasts very unfavorably with British borrowing for
the same purpose.
On September 4, 1870, the account for the debt stood as follows :
[In million francs.]
Capital.
Perpetual rentes
Redeemable rentes
Unfunded debt
!
I
j
n , 662
1,332
794
Total
j
13,788
a Annual charge.
85
Interest.
362
a 149
National
Monetary
Commis s to n
The annual charge on redeemable rentes consisted of
55,127,034 francs in annuities and 94,168,631 francs in rentes
for terms and lives, amounting, as above, to 149,296,265 francs.
(E)
THE WAR OF
1870.
From 1870 to 1872 France endured a period of war finance
unexampled in European history, and thenceforward till 1878
a period of repayment and reorganization of the vast obligations
then contracted. There were large borrowings during the war
with Germany; and at its conclusion two great loans were raised
to pay the indemnity. The following table gives a conspectus
of the amounts raised and the burden placed on the state.
[In million francs.]
Date of loan.
August, 1870 - _
October, 1870a
June, 1871
July, 1872
Denomination.
Per cent.
3
6
5
5
Amount
received.
2, 293
3-498
6,803
Nominal
capital.
Amount
of interest
.327
250
39-8
. 779
, 140
139- o
207. o
8,496
15.0
400. 8
a The so-called "Morgan'' loan.
To these must .be added the debt incurred to the Bank of
France for its issue of inconvertible paper—1,470,000,000
francs—and the indemnities by means of annuities to the Eastern Railway Company and to towns and private individuals,
which raised the total amount of indebtedness incurred during
and as a result of the war to over 9,000,000,000 francs. The
enormous stored-up wealth of France and the recuperative
powers of the nation were then wonderfully displayed. The loan
of 1871 was subscribed for twice over and that of 1872 thirteen
times over. But half of the second loan was taken up abroad, and
both these great issues drew forth the contents of many French
hoards and led to the sale of foreign securities by French invest-
86
Cr e d i t
T h
of
Na t i o n s
ors on such a scale t h a t for the succeeding three years there was
very little French capital seeking investment.
The effect of the war on credit, which was very marked, m a y
be gauged by the course of 3 per cent rentes.
Their highest
price during the fifteen years before the war was 75.45 in 1856,
their lowest 60.50 in 1859.
During the years 1869 to 1872
fluctuations were as follows:
High.
i869«18700.
1871&_
1872c .
73-90
a Before w a r .
c
° During war.
Low
69.80
75- 10
50. 80
58.45
5o.35
57- 25
52.40
After war.
Extreme prices quarterly.
First quarter.
High.
1870.
18711872.
Low
7 1 . 60
69.80
74. 72
73-05
52. 90
57- 25
6
5o.35
55-45
Second quarter.
Third quarter.
Fourth quarter.
High,
High.
Low
High.
69. 90
73-30
55-oo
58.45
54.80
72.
7554
56.
j
10
10
20
00
Low.
70. 10
1
72. 25
50. 90
50.65
53- 20
53-55
53- 15
a W a r d e c l a r e d J u l y 16, 1870.
Low
7i 50
50.80
55- 25
52.40
0 P e a c e s i g n e d F e b r u a r y 26, 1871
The average prices for each year were 1869, 71.41; 1870, 65.82;
1871, 53.85; and 1872, 54.75.
The debt to the Bank of France
was discharged by annual p a y m e n t s from 1872 to 1879 of 200,000,000 francs or over.
The total payment, including interest,
a m o u n t e d to over 1,512,000,000 francs.
(F) RECENT HISTORY OF THE FRENCH DEBT, 1878-1908.
The debt history of the last thirty years falls under three
heads.
F r o m 1878 to 1882 loans were undertaken to carry out
those ambitious schemes of public works which are associated
with the n a m e of M. de Freycinet.
87
After the crisis of 1881-82
National
Monetary
Commission
it was obvious that the country's resources were not yet equal
to such undertakings, and the loans during the next ten years
were mainly incurred to meet chronic budget deficits. Since
1891 expenditure and receipts have gradually been equalized,
and only one small funded loan has been issued—in 1901.
The first estimate of the cost of M. de Freycinet's plans
(including a state railway system) was 4,000,000,000 francs,
and in 1878 a loan for 278,000,000 francs was issued under a
new form, 3 per cent rentes terminable in seventy-five years.
In all, between 1878 and 1890, there were eight issues of 3 per
cent redeemable rentes, with a total nominal capital of over
4,000,000,000 francs, and a real capital of nearly 3,000,000,000.
The issues added 127,000,000 francs to the interest charge of
the debt. In 1878 and 1880 the loans were for the purpose of
the "great programme." But the crisis of 1881-82 showed
the danger of this policy to French finance. The fluctuations
in the funds at that time were as follows:
Highest.
3 per cent rentes
3 per cent redeemable _
5 per cent
86.88
88.30
52. OO
120.95
113.00
81.50
In 1882 the budget deficit (the first since 1877) was 42,500,000
francs and the floating debt rose from 1,023,000,000 to 1,187,000,000 francs. In the same year the railway policy was definitely modified under an arrangement with the great railway
companies (whose interest is guaranteed by the State) by which
these undertook the responsibility for loans for railway development. From 1882 onward the state issues have been mainly
used to cover budget deficits or to consolidate the floating debt.
In December, 1884, the floating debt stood at 1,100,000,000
francs rn 1885, at 1,430,000,000; and in 1888 there was a budget
deficit of 180,000,000. M. Cavaignac, in his report on the
88
The
Credit
of
Nations
budget of 1892 gave a striking instance of the financial slackness which prevailed from 1881 to 1892. ''In 1883 a sum of
834,000,000, which ought, strictly speaking, to have been covered by the ordinary resources of the Sta1:e, was put down as
an extra-budgetary expense and increased the public debt by a
net total of 646,000,000." From 1881 to 1891 the net total of
extra-budgetary expenses was over 5,000,000,000 francs, or
more than the amount of the German war indemnity. The
last great loan in 1891—869,000,000 francs—added 28,000,000
to the annual debt charge.
The French debt increased from 13,000,000,000 francs in 1870
to 31,000,000,000 in 1891—that is, by 18,000,000,000—and the
annual charge from 511,000,000 in 1870 to 1,286,000,000 in
1892—that is, by 775,000,000. The total increase in public revenue during the same period was 1,082,000,000, so that 71 per
cent was absorbed by the service of the debt. The main causes
to which this gigantic and alarming increase of public indebtedness since 1870 must be ascribed are—
Francs.
The war of 1870 and the Commune
Reparation of the effects of the war, and army and navy
reform
Public works and education
Subvention to the Caisse des Retraites
Other expenses
Total
8, 418, 000, 000
2, 118, 000,
5, 637, 000,
348, 000,
1, 575, 000,
000
000
000
000
18, 096, 000, 000
The capital items of the debt stood as follows on January 1,
1908:
Francs.
Consolidated, 3 per cent-- _ ..
Redeemable, 3 per cent. Floating debt
Annuities, etc
_ 22, 188, 000,
3, 637, 000,
1, 102, 000,
4, 224, 000,
Total
000
000
000
000
30, 161, 000, 000
89
National
Monetary
Commission
The following table shows the variations in the capital value
of the interest-bearing debt since 1877:
Francs.
19, 909, OOO,
24, 6 6 1 , 0 0 0 ,
25,984,000,
25, 959, 000,
25,934,000,
25,884,000,
25,850, 000,
25,825,000,
25,510,000,
1877
1887
1903
1904
1905
1906
1907
1908
1909
OOO
000
000
000
000
000
000
000
000
At the present time the French debt is the largest in the
world. It is double the English in annual charge. The only
alleviations which seem probable are the gradual redemption
of the new 3 per cents, a process which will be completed in
1952, and the reversion of the chief railway lines to the state
between 1950 and i960 which should bring in a very large and
expanding revenue.
The variations in French credit since 1877 may be gauged by
the yield of the 3 per cent rentes. In that year, when the
influence of the war was still felt, the yield was 4.27, more than
that of the 4 per cent German imperial loan. In 1881 it fell to
3.58, but in 1884 rose to 3.91, when it was 0.7 above the German
yield. In 1897 it reached its lowest point, 2.91 (0.46 below
British consols for the same period), while at present (June,
1910), it is 3.12, while the yield of British 2% per cent consols
is about 3.03. The annexed table gives fuller details.
90
The
Credit
of
Nations
Price of 3 per cent French rentes on the Paris Bourse.
Highest.
i877-i878_.
1879-1880..
74- 25
77- 25
83.50
86.00
86.00
83-50
81.25
78. 75
8i.75
83.25
I88I_.
1882..
1883-1884-.
i885_.
i886_.
1887-i888_.
1889-1890-.
1891-1892..
1893-1894-1895-1896..
82. 0 0
83. 0 0
87.75
95-00
95-50
99.5o
98.50
103.50
103.73
1897-1898..
Average.
66. 00
70.50
75-75
80.75
82. 0 0
79. 25
75- 25
75- 13
75-50
80. 00
75-50
8 0 . 00
8i.75
86.50
9 i . 75
94oO
94- 25
96.50
99.65
103.30
100.40
105.20
101.90
104. 28
101.32
103.01
98.83
102. 07
99- 20
1901..
I902_.
102. 4 0
1903-1904-.
100.09
1905-1906-.1907-1908 a
100.45
99-94
98-55
96.31
94.58
97- 7o
94-95
93-78
94-36
1899-1900-.
101.95
99.05
99.90
96. 12
97. 62
70.57
74- 61
80. 02
83-54
84. 18
81.62
78.40
77- 19
79-57
81.61
80. 13
81.64
84.94
90. 72
94. 28
97-39
97- 22
100.05
102. 03
102. 16
103.33
102.85
101.24
100. 60
101.22
100.60
98.13
97-54
99- 21
97.65
94- 85
96. i s
a To October 31.
II. METHODS OF ISSUE—REDEMPTION, CONVERSION.
Under the Bourbons and Louis Philippe loans were generally
floated with the help of the bankers; under the second Empire,,
as already mentioned, they were thrown open to public subscription. The first payment was generally 10 per cent of the
total, and there were 18 <<termes.,)
91
National
Monetary
Commission
The terminable annuities are not generally open to the public,
but are arranged by the State with large corporations, such as
the Bank of France, the railway companies, chambers of commerce, and municipalities. The 3 per cent stock, repayable in
seventy-five years, created in 1878, is quoted in terms of 100
francs, but can not be delivered in amounts of less than 500
francs. It is not much favored by small investors.
The method of redemption by periodical drawing has some
peculiarities. The stock is divided into 175 series, and each
subscriber has the option of taking each "coupure" from a different series, so that the subscriber for 175 "coupures" may hold
one in each series. They are redeemed by lot—1879-1907, 1
series in each year; 1908-1925, 2 series in each year; 1926-1938,
3 series in each year; 1939-1945, 5 series in each year; 19461953, 6 series in each year.
The policy of debt redemption in France has not been carried
out with conspicuous success, owing to the failure of French
statesmen to grasp the rudimentary principle that the only real
sinking fund is a surplus of revenue over expenditure. In 1816
a sinking fund (Caisse d'amortissement) was begun and endowed with 20,000,000 francs a year, which sum was raised in
1817 to 40,000,000, and again from 1818 to 1825 to 77,000,000.
But the State was buying its funds back at a higher price than
that at which it had issued them, the difference amounting to
105,000,000 francs during the eighteen years 1816 to 1834. In
1833 the sinking fund was reduced to 44,000,000, and it was
suspended by Louis Napoleon from 1848 to 1852. The caisse
still existed in name, but its funds were diverted to other objects. In 1866 it was reorganized, but finally suspended in
1871.
An Old Age Pensions Savings Bank (Caisse de Retraites) was
founded by the State in 1852, and any profits on its management were to be applied to the reduction of the debt. But the
92
The
Credit
of
Nations
rate of interest on deposits—5 per cent—proved too high, and a
loss instead of a profit was shown. In 1886 the institution was
converted into an ordinary savings bank.
A more successful method of debt reduction during the last
half century has been by conversions effected in years when the
national credit has been rising. But for this process the existing debt would present an even more portentous total. It may
be noted that owing to the large number of fundholders conversion has not always been easy, and to avoid unpopularity opportunities have been neglected at times when the price of the
funds would have favored the operation—e. g., under Louis
Philippe, and more recently from 1878 to 1883.
In 1852 the government of the Second Empire converted
3,500,000,000 five percents to 4 X per cent stock, with a
saving to the State in interest of 17,500,000 francs. Less
than 75,000,000 of capital had to be paid to dissenting
creditors. The conversion of 1862 was not so satisfactory.
"For the sake of a premium the 4*^ and 4 per cent stocks were
converted into 3 per cent, with a proportionally increased
capital. This unjustifiable measure brought a premium of
157,500,000 francs to the State, but, on the other hand, it increased the capital of the debt by almost 1,600,000,000 francs
and precluded the hope of further speedy conversion." a In
1883 the old 5 percents were converted into \Y2 percents
without any increase of capital, but with a proviso against
further conversion for ten years. An annual saving in interest of 34,000,000 francs was the result. In 1894 the high
price of this stock allowed a successful conversion to 3 ^ per
cent. Out of a capital of nearly 6,800,000,000 only about
1,400,000 was demanded by the holders and the gain in interest
amounted to 67,000,000 annually. In 1902 M. Rouvier carried
out a further conversion of this stock to 3 per cent, with a bonus
« Bastable, Public Finance p. 647.
82300 0 —10
7
93
National
Monetary
Commission
of i per cent to the acceptors and a g u a r a n t y t h a t no further
conversion would be a t t e m p t e d
for eight years.
By
this
measure all the existing funded debt was consolidated under
one denomination.
The remarkable steadiness in the price of
French rentes has often been remarked and is ascribed to t h e
wise policy of the French Government in appealing to t h e
small investor's appetite for small bonds which are u n k n o w n
to holders of British consols.
The 3 per cent rentes are dis-
tributed now among more t h a n 4,500,000 persons.
Another
explanation of this stability of price may, however, be found in
the fact t h a t since 1890 the debt of France has been practically
stationary, and yet another in the policy of the Bank of France,
which sets its face against changes in the discount r a t e — a
policy which, however, is only possible because of the law enabling it to refuse p a y m e n t in gold.
Thus France is removed
from t h e fluctuations of the international money m a r k e t and
Paris, though a great capital market, cannot vie with London
as a center of international banking and exchange.
III.
LOCAL I N D E B T E D N E S S IN
FRANCE.
T h e unit of French local government is the commune, a
division which varies in size from a tiny parish of less t h a n 50
to a great city.
Cantons, arrondissements, and d e p a r t m e n t s
are all multiples of the commune, though in exceptional cases a
large commune m a y cover several cantons.
The commune has
both a territorial and a personal basis, being a t once a t r a c t of
territory and a union of citizens inhabiting a common locality
with common interest in communal property.
In t h e latter
sense it is a legal person and possesses all the ordinary rights of
a corporation.
The commune is administered by an elected
council of varying size, with a m a y o r and one or two " ad joints "
or assistants of the mayor.
T h e m a y o r of the commune has
general charge of the finances of the commune and has to present
94
The
Credit
of
Nations
a report on their condition to the council before they consider
the annual budget.
B u t the mayor's report must tally with an
independent report presented by the municipal treasurer, who
is a government official appointed, according to the size of the
commune, by the prefect of the department or the President.
Both reports go to the prefect or to the Minister of the Interior
for scrutiny.
After the report is accepted by the council the mayor draw r s
up the budget.
In Paris the administration consists of a large
municipal council of 80 members and
two prefects.
The
prefect of the Seine undertakes all the duties of a communal
mayor, except those connected with police, which pertain to
t h e prefect of police.
The municipal budget is voted by the
council, b u t when passed a copy must be sent to the prefect of
t h e d e p a r t m e n t for his approval.
If the total revenue is
estimated a t more t h a n 3,000,000 francs, another copy must
be sent to the Minister of the Interior to be approved, on his
advice, by the President of the Republic.
Both copies must be
accompanied by sufficient explanatory data.
The prefect or
the minister has power to reduce b u t not to increase any item
of estimated expenditure.
The council of the commune has power to authorize loans for
public improvements; b u t when they are for large sums they
must be approved by the prefect and (if a special t a x levy for
a long period is necessary) by the Government.
Thus the bor-
rowing power of French local authorities is circumscribed, and
their loan must be authorized by a superior authority.
The
State forbids French departments and municipalities to contract any loan not redeemable within a fixed period.
These
constitutional restraints and regulations m a y account for the
fact t h a t the French municipalities generally are less enterprising and have smaller debts than those of Great Britain and
Germany.
95
National
Monetary
Commission
The growth of local debt has, however, been almost as
marked as that of state indebtedness during the last fifty years.
For the period before 1862 little statistical material exists; but
it is estimated that in 1836 the debts of all the communes,
excluding Paris, amounted to 19,500,000 francs. That of Paris
in 1830 was 39,400,000 francs.
The average annual increase of local debt, excluding Paris,
has been as follows:
Million francs.
3 5 , 700, OOO
2 1 , 600, 0 0 0
5 3 , 800, 0 0 0
36, 4 0 0 , 0 0 0
1862-1868
1868-1877
1877-1886
1886-1890
The total amount of local indebtedness, including Paris,
since 1862 has risen as follows:
Local debts. i
Paris.
1862
1868
1877
1886
1896
1900
1903
1904
1905
1906
342
1.475
1,988
Other
communes.
34i
573
757
1, 242
1. 777
2,043
1,468
2,357
2, 297
1, 491
r.536
2, 266
1-564
1,567
1,588
2,425
2,433
Total.
683
2,049
2,745
3,020
3,5n
3,848
3,834
3.831
3,992
4, 021
Total.
Without
Paris.
Francs.
Francs.
9-50
i5-8o
18.30
53-80
74- 40
8 0 . 20
91-59
100. 38
98. 41
98.30
102.43
105.16
2 1 . 70
35- 10
4 1 . 00
4 1 . 66
42.39
42.51
4 2 . 62
4 1 . 74
o In million francs.
The per capita increase has been, 1862-1877, 128.3 P e r cent;
1878-1890, 73.2 per cent; 1890-1900, 10.8 per cent. Paris
borrowed heavily before 1870 to carry out the great improvement schemes of Baron Haussman, and since that date to repair
the damages incurred during the war. The amount per head of
the Paris debt in 1899 was 941.02 francs, and in 1900 the city :
96
T h
Cr e d i t
of
N a t i o n s
paid for the service of the debt 112,000,000 francs, or onethird of her total expenditure for the year. Upon the whole,
as we have remarked, French local debt outside Paris, though
it rose rapidly in the latter half of the nineteenth century, is not
very heavy. The debt of Paris, it will be seen, is five-eighths of
the whole, an extraordinary proportion, considering the ratios of
population. In 1907, the last year for which figures are available, the aggregate local debt amounted to 4,060,000,000 francs,
to which Paris contributed 2,456,000,000 and the rest of France
1,604,000,000. In the same year the total debt of Marseille
was 115,000,000 francs, of Lyon 63,000,000 francs, of Rouen
and Bordeaux 37,000,000 apiece, of Havre 31,000,000, of Nantes
29,000,000, and of Tours 3,000,000. The last issues of Paris
loans were 2 percents in 1898 and 1899, 2% percents in 1904,
and 2 2^ percents in 1905. The 400-franc stock of these 2 ^
percents was issued at 380 and now stands at 308.
The following is a list of the existing loans contracted by the
city of Paris, with their prices on the Paris Bourse:
Nominal
price.
Francs.
1865, 4 per cent
1869, 3 per cent
1871, 3 per cent
1874, 4 per cent
1876, 4 per cent
1892, 2 XA per cent
1894-96, 2^2 per cent
1898, 2 per cent
1899, 2 per cent
1904, 2V2 percent
1905, 2 54 per cent
!
j
|
. —
500
400
400
500
500
400
400
500
500
500
400
Price October,
Issue price.
1909
Francs.
45o
345
Francs
546
Reimbursed.
277 J
440 J
46S :
340 J
Divers.
435
410
440
380
\
'
I
j
|
407
556
555
380
378
424
414
454
308
The reason for the apparently low rate of interest upon the
Paris bonds is that they all include lottery prizes at the halfyearly or quarterly drawings for redemption. This vicious
97
National
Monetary
Commission
system is applied by many of the other French municipalities,
but not by those whose bonds are quoted upon the Paris Bourse.
The 500-franc bonds of Bordeaux, yielding 4 per cent, stood at
517 in 1898 and at 511 in 1908. The 3 percents of Lyon, issued
in 100-franc bonds, stood in 1908 at 105. The 3 percents of
Marseilles in bonds of 500-francs, stood at 407 in 1898 and at
408 in 1908, while bonds of similar denomination issued by
Marseille and yielding 3 ^ per cent stood in 1898 at 498 and in
1908 at 482.
98
The Debt and Credit of the United States*
99
THE DEBT AND CREDIT OF THE
UNITED STATES.
I. HISTORY OF THE NATIONAL DEBT,
(A) 1775-1789. THE CONTINENTAL CONGRESS.
During the last years of the seventeenth and throughout the
eighteenth century most of the British colonies in North America
had embarrassed their finances by large issues of bills of credit
and paper money—first to meet war emergencies and then for
the ordinary expenses of Government. These usually depreciated
rapidly until in some cases they became worthless. Virtual
or open repudiations by some of the colonial assemblies were
not uncommon. The English merchants who gave large credits
suffered heavily, and there were many disputes between the
colonial governors and their legislatures.
The Continental Congress at the outbreak of the Revolution
also resorted to paper currency, and the individual States
continued their issues. Between 1775 and 1779 $241,000,000
worth of continental paper was issued, while the States were
responsible for $209,000,000. The Congress tried to enforce a
redemption of its own issues upon the States but failed, and
depreciation was very rapid. In November, 1779, the ratio of
the real value of the paper to its face value was 3 8 ^ to 1.
"Boston was, in October, 1779, on the verge of starvation;
money transactions had nearly ceased, and business was done
by barter.'' a In 1780 an attempt was made to replace the
money by "new tenor," but depreciation continued. The new
bills started at a depreciation of 2 to 1, which became 3 to 1
a
White: Money and Banking, p. 98.
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Monetary
Commission
before they were paid to the army, and dropped to 6 to i in a
few months. "Old tenor went at a galloping pace down to
500 for 1 in Philadelphia, when it ceased to circulate. In the
remoter districts of the South it continued in circulation nearly
a year longer, and until the depreciation had reached 1,000
for 1." a
The Congress also contracted about $11,000,000 of domestic
loans (reduced to a specie basis) at rates varying from 4 to 6
per cent. After March 1, 1782, the interest was not met, but
certificates of value were given to the holders, and these were
received by the Government in payment for taxes. Further,
the Government gave receipts for impressed supplies to an estimated total of $16,700,000.
External loans and subsidies were raised from the Governments of France and Spain and from private bankers in Holland, to the amount of $7,830,517, at par, for the most part at
5 per cent, although a small proportion of the French loan was
at 4 per cent. The French government subsidies were mainly
spent in France on supplies, but one instalment reached America
in specie and helped to pay the interest on the domestic loans.
By 1782 Holland, having gained confidence in the success of
American arms and the integrity of the American Government,
became an important lender.
A superintendent of finance (Robert Morris) was created in
1781, but resigned three years later. The capital indebtedness
in 1784 was—
Foreign debts and arrears of interest
Loan office certificates
Unliquidated certificates of indebtedness
Arrears of interest on home debt
Total
$7,921, 886
11, 585, 000
16, 708, 000
3, 109, 000
39, 323, 886
The indebtedness of the individual States stood at about
$21,000,000. From 1784 to 1789 loans of $2,296,000 were
a
Op cit., p. 99.
102
The
Credit
of
Nations
raised in Holland at 4 per cent, nominally at par; although
various bonuses and "gratifications" raised the rate to nearly
6% per cent. In 1787 the Federal Constitution among its
other far-reaching enactments laid down that the new Federal
Congress should "have power to borrow money on the credit
of the United States" (Art. I, sec. 8), that "all debts contracted and engagements entered into before the adoption of
this Constitution shall be as valid against the United States
under this Constitution as under the Confederation" (Art. VI,
sec. 1), and that "no State shall coin money or emit bills of
credit" (Art. I, sec. 10).
In 1789 the Department of the Treasury was founded, and
Alexander Hamilton became its first Secretary. I have
touched upon this early history very briefly. Its chief interest
and importance for present-day controversies lies in the fact
that the Government of the United States inherited from the
States of which it was composed the vicious principle of confounding debt with currency. The crude notion of raising
money by debasing the currency whether by adulterating the
metal or by issuing an excess of paper has now been relegated
to the least civilized and intelligent states of the world. But
traditions die hard, and the system of propping up credit by
currency regulations may still be traced in the laws of the
United States.
(B) 1 7 9 0 - 1 8 1 2 .
After the passage of the Constitution Hamilton prepared
his first report on public credit (January 9, 1790), in which
he summarized the amount of debt as follows:
Foreign debt, with arrears of interest
Estimated domestic debt
Accrued interest on the domestic debt
Unliquidated debt
Total
$11,710, 000
27, 383,000
13, 030, 000
2, 000, 000
54, 123,000
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Monetary
Commission
The question of funding was complicated by the depreciation that had occurred. Were the holders of continental certificates to be paid at their face value, or at their face value
plus the accrued interest, or at the sum they had actually given?
This was hotly debated, and a wild speculation in certificates
ensued. But Hamilton prevailed, and it was agreed that all
holders should receive the face value of their certificates plus
the accrued interest. The only exception was in the case of
the outstanding continental bills of credit, which were funded
into 6 per cent bonds at the rate of $100 of bills to $i of specie.
But of these bills comparatively few were ever presented.
Out of the $21,500,000 of state debts the Federal Government took over the larger part, $18,000,000, on the ground
that they had been incurred for war purposes. The Southern
States during the war had composed their embarrassments
either by taxation or repudiation, and, as their existing debts
per head of population were much less than those of the
Northern States, they opposed the measure. Hamilton, whose
aim was political—to consolidate the interests of the States
and to procure national unity—pacified them by a bargain
through which the Federal Capital was to be in the South, and
Washington accordingly stands on territory taken from Virginia
and Maryland.
By the funding act of 1790 three loans were authorized:
1. A loan of not more than $12,000,000 for the payment of
the foreign debt.
2. A loan to the full amount of the domestic debt, which
could be subscribed in any of the old certificates of indebtedness
issued by the Continental Congress. In return subscribers
received two certificates, one for an amount equal to two-thirds
of the subscription with 6 per cent interest, the other for onethird not bearing interest till 1801. As the old debt bore 6
per cent interest, this practically meant a reduction for ten
years to 4 per cent.
104
r e d i t
T h
of
Nati o n s
Conversion was not compulsory; but as the old debt was
redeemable at pleasure and there was a general expectation
that it would soon be extinguished, it was to the interest of
holders to make the exchange. A 3 per cent loan was also
issued to clear off the arrears of interest.
3. The third loan, to take up the state debts, could be received
in the certificates issued by the States for war purposes. The
interest provisions in this case were also complicated. The
government agreed to limit the amount of the new debt redeemed in any one year, and offered quarterly instead of annual
payments of interest at 13 different places. The national
revenue, subject to the prior claim of the foreign debt, was
pledged to the payment of interest.
Six per cent loans were raised in Holland and Antwerp to pay
off part of the foreign debt to France and Spain and to extend
the remainder. Allowing for commission and expenses these
were floated at from 9 6 ^ to 94K. The act was complicated,
and created too many varieties of stock, but on the whole it
proved successful, and the old floating obligations disappeared,
as these figures show:
1791.
Old debt:
Funded
Unfunded
Foreign
Total.
._
_
_ -
______
-
___
__
__
_
_
- ______
- _ ___
|i,500,000
_ _
75,300,000
1801.
$57, 000, 000
61,000,000
12,SOO,OOO
12,400,OOO
In 1791, through Hamilton's exertions the first bank of the
United States was chartered (the Government subscribing
$2,000,000 to its capital of $10,000,000) and proved a financial
success. During the subsequent ten years the expenditure of
the Government forced it to borrow many small loans from the
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Monetary
Commission
bank. In all, these mounted up to about $10,000,000, of which
one-third was outstanding in 1801. In 1798 a loan of $5,000,000
and in 1800 another of $1,500,000 for appropriations and military purposes were authorized. These were limited to fifteen
years, and the fear of invasion forced the Treasury to pay 8
per cent.
In 1792 a sinking fund was created, but its operation did not
prevent the growth of the debt.
With Jefferson's administration in 1801 the policy of public
retrenchment with a view to the reduction of debt and taxation
took the field, with Gallatin at the Treasury as its director.
" H e had been unceasing in his demand for economy, for
specific instead of general appropriations, for the extinction of
the debt in preference to military and naval expenditures, and
for a change in the form of the sinking fund." a The result was
a remarkable reduction of debt between 1801 and 1812. The
net amount paid off was $38,000,000, but the real reduction was
larger; for the Louisiana purchase accounted for an addition
of nearly $15,000,000. At the same time some unpopular
excise duties and the salt tax were repealed. The foreign debt
with the costly loans of 1798 and 1800 v/ere wiped out, and no
further recourse was had to temporary loans.
In 1803 Gallatin to meet the $15,000,000 incurred by the
Louisiana purchase issued a loan of $11,500,000, at 6 per cent,
redeemable after fifteen years in four annual instalments. The
balance was met from the revenue chiefly from customs, as it
was a period of expanding trade. The loan was very successful.
In 1811, in spite of Gallatin's support of the United States Bank,
the renewal of its charter was lost in the Senate by 1 vote,
owing to political reasons and the jealousy of the state banks,
of which 88 were by this time in existence,
a
Dewey: Financial History of the U. S., p. 119.
106
The
C r e d i t
of
N a t i o n s
(C) THE WAR OF l 8 l 2 .
Gallatin had long foreseen the approach of war, and on
several occasions had declared t h a t he should propose to raise
the necessary money by loans; taxes would only be increased
in so far as might be needed to pay interest on new debt.
Congress was very ready to agree to a loan policy,-and in
March, 1811, it authorized a loan of $5,000,000, at 6 per cent,
not to be sold under par. In December, 1811, however, Gallatin proposed the revival of the unpopular excise taxes, declaring
t h a t Congress, by its destruction of the United States Bank, had
deprived him of an i m p o r t a n t credit instrument. I t was,
however, too late to resort to a strong policy of taxation; the
proposals were rejected, and loans continued. An increase of
customs duties produced little revenue, for commerce with
Europe was almost destroyed by the war.
In October, 1814, Dallas replaced Gallatin a t the Treasury
and had to deal with a serious situation. The following is, in
outline, the financial history of the war period: a
1812.
Mar. 14. Loan of $11,000,000, at 6 per cent.
June 12. War declared.
June 30. Issue of $5,000,000 of Treasury notes.
July 1. Customs duties doubled.
1813.
Feb 8. Loan of $16,000,000, at 6 per cent.
Feb. 25. $5,000,000 of Treasury notes,
j u y 22. l i n ^ - e r n a | _ r e v e n u e duties and some direct taxation imposed.
Aug. 2.
1814.
Mar. 4.
Mar. 24.
August.
Dec. 15.
Dec. 24.
Dec. 26.
1815.
Jan. 18.
Feb. 24.
Feb. 24.
Loan of $7,500,000, at 6 per cent.
$10,000,000 of Treasury notes.
Loan of $25,000,000.
Specie payments suspended.
Internal-revenue taxes increased.
Treaty of peace.
$10,500,000 of Treasury notes.
New internal taxes.
$25,000,000 of Treasury notes.
Loan, at 7 per cent.
a
Dewey: Financial History, p. 132.
107
National
Monetary
Commission
The ordinary rule of policy was not to issue government
stock below par; but public credit began to fall, and it was
found necessary to accept lower bids for the loan of February
8, 1813, for most or which 88 was taken. It was difficult to
get subscribers in the Eastern States, where the commercial
interest had been antagonized by Jefferson's policy of embargo,
nonintercourse, and war. In New England only $3,000,000
were subscribed out of the $41,000,000 raised to the end of
1814. The loss of the bank was much felt by the Government.
For the loan of August 2, 1813, special terms had to be made;
it was not to be sold under 88 and was actually placed at 88XIn the case of the loan of March 24, 1814, the Government
agreed that if more favorable terms were offered to later subscribers they would be extended to earlier purchasers. Thus it
became the interest of the earlier holders to depress the price.
From 88 the loan dropped to 80, and later on to 65. Public
credit rose with the conclusion of peace, and the average price
received for the loan of March 3, 1815, was 95. A Committee of
Ways and Means of the House of Representatives estimated
in 1830 that during this war the actual value in specie of the
Treasury receipts was only $34,000,000 for loans of over
$80,000,000 nominal.
During the war period Treasury notes were issued to the
amount of $36,500,000 (part to replace earlier issues), and all
except $3,392,994 were payable to order at a definite time and
bore interest at 5 § per cent. Two-thirds were in denominations
over $100. They did not become, and were not intended to
become, part of the circulating medium, though they were
receivable in payment of taxes. A proposal to issue Treasury
notes as legal tender was decisively rejected by the House of
Representatives in 1814. The notes remained generally at
par until the suspension of specie payments.
108
The
Credit
of
Nations
(D) i816-1846.
In 1816, when Dallas was Secretary to the Treasury, and
Madison, President, the second bank of the United States was
founded to reorganize the currency. Of its capital ($35,000,000)
one-fifth, or $7,000,000, was subscribed to the Government.
By the terms of the charter government funds were kept in the
bank or its branches but could be removed at the discretion of the
Secretary of the Treasury. Up to 1819 its career was inglorious,
but after that date it became very prosperous. Between
1811—the refusal of the charter to the first bank—and 1816 the
number of state banks rose from 88 to 246. After the suspension of specie payments their notes fell to a discount of 10 to 30
per cent, yet they were accepted by the Government in payment
of taxes. This naturally led to increased issues. The circulation—$45,000,000 in 1812—had risen to $100,000,000 in 1817.
"The monetary derangement was so acute that the Treasury
Department was obliged to keep four accounts with its depositories, in four standards of value—cash, or local currency;
Treasury notes bearing interest; Treasury notes not bearing
interest; and special deposits." a
In January, 1816, the debt stood at $127,000,000; the following March Congress ordered an annual appropriation of
$10,000,000 to the sinking fund and in 1817 $9,000,000 more
were added. The succeeding years, however, were marked by
deficits, and in 1819 there was a severe crisis throughout the
country—a reaction after the forced growth of manufactures during the war and the speculation and bad banking that followed
it. Since 1817, $32,000,000 of debt had been redeemed, but
now loans were called for to tide over the financial difficulties.
In May, 1820, a small loan of $3,000,000 was issued, two-thirds
at 6 per cent, redeemable at pleasure, which sold at 102, the
remainder for twelve years at 5 per cent at par.
<* Dewey ; Financial History, p. 145.
82300 0 —10
8
109
National
Monetary
Commission
In 1821 several millions of the public debt fell due, and in
March another loan of $5,000,000 for fourteen years at 5 pet
cent was issued, and it was readily taken at a premium of from
5 to 8 per cent, foreshadowing the revival of trade and confidence
which took place in this year. After 1822 there were constant
surpluses, but as the debt ran for fixed periods they could only
be used to purchase stock at a premium in the open market.
In 1826 $19,000,000 became due, more than the sinking fund
could discharge. Attempts were made at refunding which were
not markedly successful, but in spite of the handicap of fixed
loans the conditions favored rapid debt reduction, and by 1835
the debt had been extinguished.
The political antagonism against the bank of the United
States culminated in 1833 when President Jackson withdrew
the government deposits. During the crisis of 1837-1843 the
Government issued treasury notes to the amount of $47,000,000,
about one-third being reissues. They bore interest, some even
at a nominal rate, 1 "mill" ( T ^ G ) P e r $100. They all ran for
a definite time, for the Committee on Ways and Means of the
House of Representatives declared that if payable on demand
they were "bills of credit," which by the Constitution Congress
had no power to issue.
From 1841 to 1843 the new Whig Government proposed loans
to fund these notes and for current needs. In 1841 the loan
was for three years with interest from 5 ! to 6 per cent. It
could not be sold at less than par, and of the $12,000,000
authorized less than half was issued. In 1842 and 1843 the
stock could be sold at less than par and the loans ran for ten
and twenty years, respectively. In 1842 $8,000,000 was disposed of from 97>£ to par, and in 1843 $7,000,000 at a premium
of 1 to 2>K- But the effects of the crisis and the suspicion
caused by State repudiations prevented a wider success.
110
The
Credit
of
Nations
(E) 1846-1848—THE) MEXICAN WAR.
The net indebtedness created b y this war was $49,000,000.
All the loans, a t 6 per cent, were floated at, or even above, par.
As they ran for ten or twelve years and remained a t a premium,
redemption proved costly.
One loan of $18,000,000 was bid
for in specie to the a m o u n t of $57,750,000—the first on a specie
basis since the Government entered office.
Treasury notes were
also issued to the a m o u n t of $26,000,000, bearing interest at
5 ! and 6 per cent.
Like the notes of 1837 to 1843, they were
"merely government loans of which the securities were in small
denominations and had only short periods to r u n . " a
(F) 1848-1860.
In 1851 the debt stood a t $68,000,000, b u t it was steadily
reduced until it reached $28,700,000 in 1857.
I n t h a t year a
sharp commercial and banking panic ensued upon feverish railroad construction and the gold discoveries, though protectionists
blamed the low tariff of 1846 and the further reductions which
took place in 1857.
T h e bank note circulation, which was
$58,000,000 in 1843, was $214,000,000 in 1857.
I n i860 the debt was $65,000,000, or $2 per head of t h e population.
During the period 1836-1860 its capital a m o u n t rarely
exceeded and was sometimes much below the annual receipts of
the Federal Government.
Since the establishment of the Con-
stitution it had stood as follows:
1791
1801
1804
1812
1816
1819
$75,400,000
83,000,000
86, 400, 000
45,200, 000
127,300, 000
95, 500,000
1835
1851
i860
68,300, 000
64,800, 000
a
White: Money and Banking, p. 107.
Ill
National
Monetary
Commission
(G) 186l-l866—THE CIVIL WAR.
(a) Federal Finance.—The result of the elections in November, i860, gave a shock to credit, and in December, in order to
float a treasury note issue at par, 10 to 12 per cent interest
had to be offered. On February 8, 1861, a 6 per cent loan for
$18,000,000 was issued with no restrictions as to price, and sold
at an average price of 89.
In March Lincoln appointed Chase Secretary of the Treasury,
and in April war broke out. The debt in July stood at
$74,985,000, about $18,000,000 of which had been incurred
since the secession movement began. Chase estimated that
during the next year about $320,000,000 would be required, of
which he proposed to raise $80,000,000 by taxes and $240,000,000 by loans. In August he negotiated $50,000,000 in
three loans from the banks of New York, Boston, and Philadelphia, at par, with interest at 7.3 per cent. Chase did not
believe that he had the power to leave the money in the banks
till actually required, and then draw it by check, and consequently ordered the banks, in spite of their protests, to pay the
gold by weekly installments into the subtreasury at New York.
As the government creditors in their turn paid it back to the
banks, the effect at first was not great. But in December the
Trent affair caused a fear of war with England and Chase
asked for another loan of $200,000,000.
The government credit declined, so that the banks could
not sell government securities except at a loss, and people
stopped depositing or even withdrew money. The reserve
dwindled rapidly, and on December 30 the banks suspended
specie payment and were, of course, followed by the Treasury.
Before these loans $60,000,000 of noninterest-bearing treasury
notes had been issued, of which $33,000,000 were outstanding.
These were payable on demand and receivable for taxes, but
were not legal tender.
112
The
Credit
of
Nations
In January, 1862, the Committee on Ways and Means, by a
majority of one vote, proposed a legal-tender system and the bill
passed Congress by narrow majorities. It provided (1) for the
issue of $150,000,000 of notes ($50,000,000 to take up the outstanding demand notes). They were payable to bearer, for
denominations of not less than $5 and noninterest bearing.
They were legal tender and exchangeable for bonds. (2) Of
these bonds $500,000,000 were authorized at 6 per cent, redeemable in five years, payable in twenty years—the wellknown "five-twenties." These sold at a fractional premium
when reckoned in the depreciated paper currency. (3) Certificates of deposit bearing 5 per cent interest in exchange for
United States notes left on deposit for not less than thirty
days, payable at ten days' notice.
A sinking fund was established.
The Senate added amendments: (1) The interest should be
payable in coin. (2) The Secretary of the Treasury should have
power to sell the 6 per cent bonds at any time at their market
value for notes or coin (to obtain gold for the interest). (3) All
import duties should be payable in coin.
Chase was in fact opposed to legal-tender notes, but he had
not the courage of his convictions and yielded, partly out of
hostility to the bankers. "A delegation of bankers from New
York, Boston, and Philadelphia came to Washington to remonstrate against the bill. * * * Mr. James Gallatin presented
a plan of national finance which would, in the opinion of these
gentlemen, procure the means for carrying on the war without
recourse to legal-tender notes. One of the proposals was to
'issue 6 per cent twenty-year bonds, to be negotiated by the
Secretary of the Treasury without any limitation as to price
he may obtain for them in the market/ Mr. Spaulding (the
proposer of the bill) * * * objected 'to any and every
form of "shinning" by the Government through Wall or State
113
National
Monetary
Commission
street to begin with; objected to the knocking down of government stocks to 75 or 60 cents on the dollar, the inevitable result
of throwing a new and large loan on the market without limitation as to price/ In order to avoid selling government stocks
at 75 or 60 cents on the dollar in an honest way Mr. Spaulding
initiated a policy which ended in selling those stocks at 40 cents
on the dollar in a roundabout way, and cheating creditors,
soldiers, and laboring men out of more than half their dues in
an incidental way."°
On July 11, $150,000,000 more notes were issued, $35,000,000
in denominations of less than $5. In January, 1863, $59,000,000
of army and navy pay had not been met, and there was great
distress. Chase was asked for an explanation. He said: "The
Secretary, solicitous to regulate his action by the spirit as well
as the letter of the legislation of Congress, did not consider
himself at liberty to make sales of the 5-20 bonds below their
market value, and sales except below were impracticable." On
this Mr. White comments: 6 "What Mr. Chase meant was that
the quoted value of 6 per cent bonds on a particular day—the
3d of January, 1863, f° r instance—was 98 in currency. But if
the Secretary should offer any large lot the price would fall
below 98."
On January 17, 1863, $100,000,000 notes, later increased to
$150,000,000, were issued. The price of gold at this time was
142; by the end of the month it was 159. The former issues
had been fundable within five years at the option of the holder
into the 6 per cent gold bonds, which was a method of indirect
redemption. Chase hoped that if this provision were repealed
he could issue 5 per cent bonds, and he persuaded Congress to
pass the law of March 3, 1863, which repealed the conversion
clauses of the legal-tender act by fixing July 1 as the date when
the right of redemption would cease. This was a breach of
a
White: Money and Banking, p. n o .
114
*>Op. cit., p. 114.
The
Credit
of
Nations
contract which destroyed the previous standards of value, injured government credit, and hindered the conversion of the
currency at the end of the war.
At the same date treasury notes (as distinguished from the
noninte rest-bearing ''greenbacks") were authorized, the act
providing for $400,000,000 in denominations of not less than
$10 to run for not more than three years and bear interest
in "lawful money" at not more than 6 per cent. They were
legal tender for their face value, minus interest. Thus it was
hoped the holder would have an inducement to keep the
note, and if he used it as money the recipient would have an
inducement to keep it. Under these provisions $44,520,000
of one-year and $166,480,000 of two-year notes at 5 per cent
were issued, besides $266,595,440 compound-interest notes for
three years at 6 per cent. These latter were semiannually
compounded, and the interest was payable with the principal
at maturity. Thus $10 were worth $10.30 at the end of the
first half year and $11.94 a*: the end of three years. They
were the most scientific form of legal-tender notes issued, as
the owner had an increasing inducement to hold them as an
investment.
In 1862 silver coins grew scarce and about $27,000,000 of
fractional currency notes were issued. On March 3, 1863, there
was an issue of bonds at 6 per cent "ten-forties," of which both
the principal and interest were payable in coin. (Some were
already suggesting the payment of government obligations in
greenbacks.) Of these $75,000,000 were issued at an average
price of 1 0 4 ^ . On March 3, 1864, another issue of ten-forties,
at 6 per cent, was authorized, $196,000,000 in all, at prices
ranging from par to 107. In June, 1864, an act limited the
amount of greenbacks issued or to be issued to $450,000,000.
During the same month Chase insisted upon the unfortunate act
prohibiting the sale of gold on "futures." He believed the price
"5
National
Monetary
Commission
of gold had been advanced by brokers' gambling, and declared
"it must and shall come down." On the day of the bill's
passage the price of the gold dollar was 198 cents in legal
tender, the next day 208, the next 230, and soon 250. Never
before had there been so rapid an advance, and after two weeks'
operation the law was repealed without debate. On June 30
Chase resigned and was succeeded by Fessenden. During this
year taxation was resorted to with more effect.
Various estimates have been formed of the loss incurred
through this debasement of the currency. In 1865 Prof. Simon
Newcomb estimated the loss up to the end of 1864 a t $180,000,000
and the loss still to be incurred as $300,000,000, a total of
$480,000,000. Professor Adams's (Public Debts) estimate is
$850,000,000, reckoning the difference between the debt created
and the gold value of the currency which the Government
received in return. Mr. Wesley Mitchell (Journal of Political
Economy, March, 1897) put the loss at $528,400,000, on the
supposition that the government receipts were increased
$228,700,000 by the use of the greenbacks. He assumed that
the receipts from internal revenue were increased to the full
extent of the greenbacks, but admitted this to be doubtful.
The main features of Chase's loan policy were: (1) His
endeavor to obtain moderate rates of interest. Early issues
were at 7.30 per cent, later at 7, 6, and 5 per cent. He steadily
refused to borrow except on his own terms, and evinced a great
aversion to the terms of the money market. This eagerness for
low interest led to the blunder of substituting 5 per cent for 6
per cent bonds in 1863. This raised the price of gold 20 per
cent, and led to further legal-tender issues, and so to a further
rise in the price of gold. (2) His wish for a general distribution
of the loans led him to favor popular subscription, e. g., through
Jay Cooke's agencies. This again arose partly from his hostility
to the banks. (3) Another object was future controllability
116
T h
of
r e d i t
N a t i on s
and hence his opposition to long loans. This has been criticised
on the ground that it made foreigners distrust the debt and also
because "the country was flooded * * * with short-time
paper, which served in many instances the purposes of currency,
expanded prices, and increased the speculation and extravagance always incidental to war. Temporary obligations falling
due in the midst of civil conflict were a source of double vexation to the Treasury Department, which was obliged to conduct a series of refunding operations and at the same time to go
into the money market to borrow ever-increasing sums." a
The proportion of long to short term indebtedness each
year may be seen from the following table:
Long term. Short term.
1862-63__
1863-64._
1864-65.-
Per cent.
iS
29
67
39
Per cent.
85
7i
33
61
1861-1865
40
60
I86I-62__
Another table (Bastable, p. 653) gives the relation of loan
to tax revenue:
[In millions of dollars.]
Revenue.
Year.
I86I_
i862_
186318641865i866_
•
4i.5
t
1
;
5i-9
112.6
264.6
333-7
538.o
Loans.
23-7
433.6
595-6
696. 0
864.8
92. 6
a Dewey: Financial History, p. 317,
117
Total.
65- 2
485.5
708. 2
960. 6
1,198.5
650. 6
Percentage
of loans to
total
receipts.
National
Monetary
Commission
The growth of the debt (including notes and treasury bills)
was as follows:
June 30—
1861
1862
1863
1864
1865
1866
$90, 600,000
524,200,000
1,119,800,000
1,815,800,000
2, 680, 600,000
2, 773, 200,000
In 1866 the interest charge was $133,000,000, and the interestbearing debt was thus divided on August 31, 1865:
5 per cent bonds
6 per cent bonds
7.3 per cent bonds
$269, 100, 000
1, 281, 000, 000
830,000, 000
Several of the loans issued in 1864 and 1865 were sold at from
102 to 104, and others at par, interest being 6 per cent.
(b) Confederate finance.—The Confederate States met their
expenses almost wholly by treasury notes, which served as the
currency of the people. " Those notes were not made legal tender by legislative authority, but were made practically so by
public opinion and by the repeal of state laws for the collection
of debts. Their course was similar to that of the Revolutionary
bills of credit. They became nearly worthless before the close
of the war and were repudiated in part by the Confederate
government and were superseded by another batch, a sort of
'new tenor/ which pursued the same downward career. Secretary Memminger said that it was impossible to carry on
war by means of taxes alone. This was a mistake. Except
money borrowed abroad, every country pays the cost of a war
at the time of the war. The Southern Confederacy presents an
easy illustration of this maxim, because it was for the most
part isolated, having little communication with the outer world,
and because all of its debts were obliterated at the end of the
* * * There being nobody else to pay it, the people of
war
118
The
Credit
of
Nations
the Confederacy must have paid it, and must have paid it during the time of the war, and not a moment later/' a
The following were the issues under the Confederacy:
March, 1861, $2,000,000 treasury notes at 3.65 per cent payable to order. These were not currency; $15,000,000 borrowed
in gold on the security of 8 per cent bonds.
May 16, 1861, $20,000,000 treasury notes for $5 and $10,
noninterest bearing. These were redeemable in specie in two
years and convertible into 8 per cent bonds. They acted as
currency. The issue of bonds was increased to $150,000,000.
This was in part a produce, especially a cotton, loan.
August 19, 1861, $100,000,000 treasury notes, later raised to
$150,000,000. They were convertible into 8 per cent bonds or
6 per cent call certificates.
At the end of 1861, $105,000,000 treasury notes were outstanding and the premium on gold was 15 to 20 per cent.
April, 1862, $165,000,000 8 per cent bonds; $50,000,000 treasury notes; also a new kind of notes for $100, bearing 7.3 per
cent interest and payable for taxes. These also passed into
circulation, owing to the rapid rise in prices. Up to this time
9 per cent of the expenses of the war had been met by bonds,
85 per cent by notes, and 6 per cent by taxes, donations, and
the confiscation of federal property.
September, 1862, an act was passed authorizing note issues
limited only by the public expenses.
December, 1862, the outstanding notes, including state
issues, amounted to $500,000,000. Gold in relation to notes
was worth 3:1.
March, 1863, a loan for £3,000,000 was raised abroad (by
Erlanger & Co., of Paris). It was secured by the cotton in the
Confederate States at a valuation of 6d. per pound (the selling
price in England being 2 id.). The issue price was 90, and it is
«White: Money and Banking, pp. 148, 149.
119
National
Monetary
Commission
said to have been five times oversubscribed in England alone.
Yet after deducting brokers' commissions, interest on the
bonds, repurchases to sustain the market, and other expenses
the net amount realized (on $15,000,000) was $6,500,000. This
paid for the confederate cruisers.
Attempts at compulsory funding, i. e., repudiation, 1863-64.
January, 1864, outstanding notes $700,000,000. Gold quotation, 20:1. "Old notes and the new notes circulated side by
side, were equally discredited, and continued to depreciate
together.''
January, 1865, gold quotation, 53:1.
March, 1865, bill for $80,000,000 notes passed over the President's veto; attempt at a forced specie loan of $3,000,000,
failing this a tax of 25 per cent on all the specie in the Confederacy. This was just before the end of the war.
(H) 1865-1890.
THE FUNDING OF THE FEDERAL DEBT.
The highest point of the debt was reached on September 1,
1865, when it stood at $2,846,000,000 against a cash reserve
in the Treasury of $88,000,000, the net liabilities thus being
$2,758,000,000. Its composition was as follows:®
Funded debt
$1, n o , 000,000
Inconvertible paper (of which $26,000,000 was fractional
currency)
460, 000, 000
Floating debt (mostly immediately repayable)
1,276,000, 000
Total
2, 846, 000, 000
According to Adams (Public Debts, p. 248) the interestbearing obligations stood then at $2,381,000,000. On June 30,
1866, the interest-bearing debt consisted of loans at 5 different
rates of interest maturing at 19 different periods, there were
12 different 6 per cent bonds and notes, 5 different 5 per cent
and 5 different 7.3 per cent. Part of the interest was payable in coin and part in currency. Only one-ninth of the
aBolles: Financial History, p. 306.
120
The
Credit
of
Nations
debt ran for longer than two years, the remainder was in transient forms, expressing in the aggregate nearly a hundred
contingencies of duration, option, conversion, extension,
renewal, etc.
The problems which faced McCulloch, the new Secretary to
the Treasury, were: (i) How to pay off or fund the floating
debt; (2) how to provide a permanent scheme of debt reduction. In rather over two years the floating debt was brought
down to $408,000,000 (a decrease of over $900,000,000), and
the inconvertible paper was reduced by $20,000,000. The
act of April 12, 1866, authorized the conversion of temporary
into long-term obligations. In accordance with this new
funded debt to the amount of $686,000,000 at 6 per cent was
issued at a slight premium. The temporary obligations were
cleared off in 1868. A sinking-fund law had been enacted in
1862; but as there was no real surplus until 1866 it had been
inoperative, nor was later debt reduction carried out in conformity with it. In 1870 and 1871 refunding acts were passed
authorizing the creation of $500,000,000 bonds redeemable in ten
years, $300,000,000 at 4 ^ per cent redeemable in fifteen years,
and $1,000,000,000 at 4 per cent redeemable in thirty years.
None of these issues was to be sold at less than par in gold.
Both interest and principal were to be paid in "coin," and
later the question arose whether gold alone was meant, or gold
and silver. These stocks unexpectedly went to a high premium, and so were difficult to redeem. Before thirty years
were over the Government could borrow at 2 ^ per cent. By
1876 the five-twenties of 1862 were converted to 5 per cent due
in 1881, and by 1879 the five-twenties of 1865-1868 were converted into the same denomination. The 4 per cent thirtyyear bonds were not placed till 1877, and were therefore not
redeemable till 1907, and the 4 ^ per cent fifteen-year bonds
were not placed till 1876, and were therefore not redeemable
till 1891.
121
National
Monetary
Commission
The surplus of 1882 was used to cancel temporary and
outstanding debt; but by 1886 all bonds subject to optional
redemption had been canceled, so that in 1887 the question
was whether the Treasury had power to buy bonds in excess
of the amount apportioned by the sinking fund. Great haggling with the bondholders ensued.
In the summer of 1887
the Secretary to the Treasury called for offers toward redemption. The ^y2 per cents at once ran up from 109 to i n , and
most offers were above n o . The Treasury refused all above
1 0 9 ^ , and the offers dropped to between 1 0 6 ^ and 109.
Between 1880 and 1890 the old war loans disappeared. The
5 per cents, which fell due in 1881, were continued at 3 ^ and 3
per cent, but extinguished in 1890. The following table 0
shows the progress of reduction of the interest bearing debt:
Year.
September, 1865
November, 1868
November, 1884
December, 1889.
June, 1892
Rate of
interest.
Interest charge.
Per cent.
6-34
5 "
3
3
3
(6x51, 000, 000
126,400,000
47,300,000
41,000,000
22,900,000
Capital.
$2,756,400,000
2,484,900,000
1,408,500,000
i,056,100,000
585,000,000
Thus, in twenty-seven years $2,100,000,000 were removed
from the capital liability, and the annual charge was reduced
by nearly $130,000,000. The reasons for this success were the
rapid rise of the United States credit by which the 6 per
cent and 5 per cent bonds as they fell due were reduced to
^]/2 per cent, and even 3 per cent; also, the large annual surpluses which resulted from the high duties on imports. "The
protective system was in this way the cause of the repayment
of the war loans. From the financial point of view it is plain
that a like result could have been reached at much less real
a Bastable, p. 654.
122
The
Credit
of
Nations
cost and sacrifice if moderate duties had been used; but then
it is doubtful whether in that case the policy of repayment
would have been so firmly adhered to. The result was that
the federal debt became unimportant except in connection
with the management of the Treasury and the banking system."
(Bastable.)
On the other hand, Mr. Horace White (Money and Banking,
p. 166) criticises the attitude of the Federal Government toward
the legal tender issues. Suspension of specie payments lasted for
fourteen years, during which time the policy of Congress underwent many fluctuations. In December, 1865, it voted in favor
of the early resumption of specie payments, and accordingly,
in April, 1866, passed a law to retire and cancel the legal tender
notes at the rate of $4,000,000 per month. In February, 1868,
after $44,000,000 had been canceled, it repealed this act. In
1873 the Treasury Department reissued $26,000,000 of the retired notes, without authority of law. The following year Congress passed a bill to reissue the entire $44,000,000, but President Grant vetoed it, and it was not passed over the veto. In
1875 a law provided for the resumption of specie payments on
the 1st of January, 1879. Two years later the House of Representatives passed a bill to repeal this resumption act, but it
was defeated in the Senate by one vote. Both Houses then
passed an enactment that the legal tender notes should not be
retired when redeemed, but paid out and kept in circulation.
The amount then outstanding was about $346,000,000. Specie
resumption accordingly took place on January 1, 1879.
In 1890 Congress passed a law for a new emission of legaltender notes in payment for silver, bullion to be stored in the
Treasury. The new issues were followed by the exportation of
gold, and a disastrous financial panic, the history of which falls
within the next period.
123
National
Monetary
Commission
From the price quotations of the 4 per cent bonds after 1878
we find that their yield in t'he first year was rather under French
rentes, in 1879 a n d 1880 it was above them, but from 1880 to
1889 considerably below, partly owing to the currency law.
Highest.
Lowest.
Average
price.
Yield.
Per cent.
1878.
1879
1880
1881
1882
1883
1884
1885
1886
1887
1888
1889
1890
102K
104X
i
99K
99
100.672
3-966
100.609
3-963
113^8
103
106.322
3631
118$<$
112H
H5-375
3- 134
121K
117K
119.2690
2. 912
I255<8
n8J4
119.8446
2. 912
124^8
118^
121.5529
2.758
I24H
121^
122.2833
2.680
123
126.2147
2.427
I29H
124^
127.1751
2.317
I30
123K
126.7252
2. 266
129^
126K
127.8331
2. 134
126^2
121^
122.7499
2.372
I29H
(I) I 89O-I 898.
In 1873 by a coinage revision act no provision was made for
the coinage of the silver dollar; at that time it was worth more
than 100 cents in gold. In 1876 the price of silver fell and the
dollar was only equal to 89 cents. Those interested in the mines
as well as the inflation party set on foot an agitation toremonetize
silver, wThich ended in the bill of 1878. This provided for a limited
coinage of silver dollars from bullion purchased by the Government. It remained in force till 1890, when it was repealed and a
new act was passed enlarging the purchases of bullion and providing that payment be made with legal tender treasury notes which
should be redeemable in "coin." This act remained in force for
three years. Under it legal tender notes were issued to the
amount of $156,000,000. At the same time changes in the tariff
largely reduced the revenue culminating in 1894 in a deficit,
124
T h
r e d i t
of
Nations
and the issue of notes was followed by an almost equal exportation of gold. The "greenback redemption fund" in the
Treasury fell below $100,000,000 in April, 1893.
A financial panic was followed by a prolonged commercial
crisis during which the Government had four times to sell bonds
to replenish the gold reserves. Congress repealed the act of
1890 but did nothing more, since the majority of its members
were unfavorable to the gold standard.
Years.
Gold drawn from the Treasury (by redemption of legal
tender notes)
Do
Gold exported
Borrowed by the Government
Bonds issued
1879-1892
1893-1896
1893-1896
1893-1896
1893-1896
Amount.
$43,310,887
483,538,788
344,248,036
293, 481,894
262,315,400
Bonds issued for the gold redemption fund.
Year.
$100,000,000, at 4 per cent for 30 years (original loan)
$50,000,000, at 5 per cent for 10 years
__
$50,000,000, at 5 per cent for 9 years_
_
$62,000,000, at 4 per cent for 30 years_
_ _
$100,000,000, at 4 per cent for 30 years . __
1878
1894
1894
1895
1896
Interest
(to 1908).
$120,000,000
25,000,000
22,500,OOO
74,700,000
362,200,000
The amount of the greenbacks is only $346,000,000, but to
keep these and also the treasury notes issued under the silver
act of 1890, alive and equal to gold $362,000,000 of bonds have
been issued and $362,000,000 of interest incurred, while the
amount of the greenbacks is still owed. The total liability to
the Government, according to an official estimate of the Treasury
Department in the Congressional Record, April 29, 1908,
has been $1,081,881,562. If the notes had been funded on
823000—10-
125
National
Monetary
Commission
January i, 1879, into 4 per cent thirty-year bonds and canceled, the cost of the principal and interest to July 1, 1907,
would have been $741,897,340, or a saving of $339,984,222.°
(J) 1898.
THE FINANCES OF THE) SPANISH WAR.
To meet the expenses of the Spanish war internal revenue
taxes were promptly increased and Congress also authorized
the is^iie of not more than $100,000,000 of treasury certificates,
and not more than $400,000,000 of 10-20 bonds at 3 per cent.
In fact, the Treasury raised $200,000,000 by the sale of 10-20
bonds, while the additions from the new internal taxes were
more than $100,000,000 per annum. In July, 1898, the interestbearing debt amounted to about $847,000,000—$100,000,000 at
5 per cent and the remainder at 4 per cent. The 4 percents
payable in 1925 were quoted at 125.34, the average for the
month (or a yield of 2.704 per cent), and it was accordingly
argued that it was foolish to place the new loan at 3 per cent.
The bonds were subscribed seven times over, and rose to a premium of 111.79 in May, 1901. These were far better terms
than had ever before been secured by the United States Government in war time. The main reasons for the success were
that the bonds were offered for popular subscription at small
amounts, and they formed a better basis for the national-bank
note circulation than the old bonds at 125.34, a n d a much
better basis than those bonds at 1 2 8 ^ , a point reached before
the end of the war. One hundred thousand dollars in old
bonds, quoted October 31, 1898, at 1 2 8 ^ , deposited as security for circulation, yielded a profit of $302.93, with interest
at 6 per cent. Moreover the international market for giltedged stocks was then highly favorable. It was in this year
that British consols touched the high-water mark of 113.
^ White.
Money and Banking, pp. 191-192.
126
The
Credit
of
Nations
As Congress had prescribed that it should be a popular loan
the offers of banking houses to take it at a slight premium were
refused. It was issued in denominations as low as $20; subscriptions were received through the post-office, and every
bona fide offer under $500 was accepted. More than half the
issue was taken by 230,000 of these small subscriptions, and
no subscription of more than $4,500 was accepted. In all,
320,000 persons offered subscriptions and an amount of
$1,400,000,000 was tendered. The bonds soon advanced to 102
and 105^6, and the subscribers made from 3 to 5 per cent in a
few days. The Government certainly lost an original premium
by refusing the offers of the bankers, and owing to the small
size of the bonds and the number of the holders incurred greater
cost and trouble in handling the loan and paying interest. But
the success gave financial prestige to the Government.
The funded debt, which was $585,000,000 in 1892, had
advanced to $1,046,000,000 in 1899, an increase of $461,000,000,
or 78 per cent. The interest charge, in spite of low rates, had
risen from $23,000,000 to $40,000,000.
(K) 1899-1909.
In 1864, at the instance of Secretary Chase, Congress had
passed a bill to set up a national banking system, by which the
bank-note circulation of the country was used to promote
the sale of government bonds. The sole merit of the plan was
that it helped public credit in time of need. By the act each
bank on commencing business was bound to deposit in the
United States Treasury bonds of the United States bearing a
certain proportion to its capital. (If the capital was under
$150,000, it must deposit bonds equal to one-fourth of its capital; if it was more than $150,000 at least $50,000 must be deposited.) In return the bank was entitled to circulate notes
equal to the par value of the bonds deposited, but not exceeding
127
National
Monetary
Commission
the market value. Thus the note circulation of the country
was made to depend largely on the amount of the national debt.
After the Spanish war, instead of providing a new basis for note
circulation the Government extended a large part of the maturing debt for thirty years. In 1900 by an act of Congress
the 3, 4,. and 5 per cent loans were converted into 2 per cent
bonds at par, to run thirty years. Up to this time, says Mr.
White, "it had always been the policy of the Government to
pay its interest-bearing debts as soon as possible in order to
avoid unnecessary burdens upon the taxpayers. Thus the 5-20
bonds issued during the war were made redeemable at any time
after five years, but payable at the end of twenty years. Under
this system the Treasury could use its surplus revenues to pay
bonds at par instead of buying them in the market at a premium.
* * * Now nearly $550,000,000 of the public debt was put
beyond the chance of extinction for nearly a quarter of a century, except by purchase in the open market. The Government
paid a bonus of nearly $50,000,000 on the old bonds, of which
it recovered less than $2,000,000 as premium on the new ones." 0
Mr. White adds that the loss was enormous. For example, a
surplus of $240,000,000 in 1907 might (but for the refunding)
have been applied to the extinction of debt, and thus annulled
the interest on that amount. "The excuse for this kind of
financiering was that if the Government's interest-bearing debt
were paid, there would be a shortage of bonds to be held as
security for national-bank notes."
A law of 1902 provided for the issue of $130,000,000 2 per
cent bonds, interest payable quarterly in gold, the bonds redeemable in 1916 and payable in 1936 in gold. These were for
the Panama Canal expenditure, and a first issue in 1906 of
$30,000,000 took place.
a White: Money and Banking, p. 405.
128
T h
r e d i t
of
Nati o n s
The panic in the autumn of 1907, followed by a general bank
suspension for two months, demonstrated the dangers of an
inelastic and artificial currency. During the course of the
panic the Treasury, on November 17 offered to issue $50,000,000
of Panama Canal bonds and $100,000,000 of one-year certificates
of indebtedness. This, of course, involved borrowing money
from a market which already could not meet the demands upon
it. The idea was that the offer of 3 per cent interest would
attract hoarded money and that the increase of 2 per cent bonds
would increase the amount of national bank notes. Doubt was
thrown on the legality of the issue of certificates, and the banks
feared to deplete their reserves still further by buying bonds.
To meet this it was arranged that 75 per cent of the certificate
subscriptions and 90 per cent of those for the Panama bonds
should remain in the vaults of the subscribing banks. On this
inducement $25,000,000 of bonds and $30,000,000 of certificates
were sold. Bankers generally held that the Government's
intervention had been the reverse of helpful.
The interest-bearing debt of the United States in 1908 was
thus divided:
At 4 per cent
At 3 per cent
At 2 per cent
$118, 490, 000
78, 132, 000
700, 882, 000
Total
897, 504, 000
The variations in the funded debt since 1870 have been as
follows:
F u n d e d debt.
1870.
$2,046,000,000
&SII9, 0 0 0 , 0 0 0
1875.
1,722,000,000
97,000,000
1880.
1,724,000,000
80,ooo,000
1885.
1,196,ooo,000
47,000,000
1890.
725,000,000
29,000,000
1895-
716,000,000
29,000,000
1900.
I,023,000,000
33,000,000
1907.
895,000,000
22,000,000
I29
National
Monetary
Commission
In 1889 the yield of the 4 per cent bonds was 3.13, it then
rose till it was 3.58 in 1893, and between 1892 and 1895 was
occasionally higher than the German and Dutch 4 per cent.
From 1896 the 4 per cent 1925 bonds fell constantly until the
yield in 1901 was 2.90 and American paper was the highest
valued in the world. The yield has risen since then, and has been
generally about equal to French rentes and higher than consols.
In 1907 it was 3.17—the lowest yield of Government stock next
to consols.
The following table gives details of the fluctuations:
1891-1894 4 P E R CENT 1907 BONDS.
Year.
Highest.
Lowest.
Average.
1891-
122
116
118.76
1892-
118H
114
1893-
us
108
116.11
112.27
1894-
116
112H
114.51
Real
Yield.
3.38
3 46
3-58
3-Si
1895-1907 4 P E R CENT 1925 BONDS.
189518961897189818991900.
19011902-
124^
I20H
129^
118K
111K
120 y%
121.58
116.60
125.04
3-
129^
117H
3-
I34J4
138 H
1397A
I39H
128
125.57
130.24
134-83
138.59
138. 00
2.
1903-
137^
1904-
134
19051906-
13454
132K
130H
1907-
131K
136^
136K
134K
130H
13°%
i2gH
117
33-
32.
2.
2.
135-72
132. 26
3-
133-02
3-
130.47
126.70
33-
In 1862, 1864, and 1878 the Government issued in all some
j.,000,000 of 6 per cent bonds on behalf of the Pacific railways,
but these were redeemed by 1900 and most of these railway
loans have been paid back to the United States Government by
the railways.
An article in the London Economist (November 13, 1909)
explains the existing situation. The value of the 2 per cent
130
Th
re d it
of N a t i o n s
United States bonds is artificially high, because the national
banks have to hold them. They are always higher than 3 per
cent rentes or 2% per cent consols, sometimes even than 3 and
4 per cent United States bonds. They act (1) as the basis for
the note circulation, (2) as a guaranty for the government
deposits in the national banks, (3) as a means of raising money
for federal needs. As a result of the act of 1900 many state
banks took the opportunity of becoming national banks, of
receiving bond-secured government deposits and issuing bondsecured notes. In eight years the capital of the national banks
rose by 50 per cent and their circulation by 100 per cent.
Circulation.
$331,693,000
380,476,000
457,281,000
583,172,000
665,845,000
1900
1902
1904
1906
1908
2 per cent bonds
held by banks.
$270,007,000
320,738,000
416,973,000
506,653,000
593,259,000
103
109
105
104
104
The reduction of interest from 4 to 2 per cent drew the
securities out of the hands of the public, and a reduction of
one-half per cent in taxation made it cheaper for the banks to
hold 2 per cent than 4 per cent bonds. In November, 1909, the
2 per cents for the first time fell below par. The prospect of
fresh issues for the Panama Canal, the lessened demand for
currency and the expectation of banking reform were factors in
this decline. When the price is below par the national banks
have to make good the deficiency in their guaranty deposit by
buying fresh bonds, and thus lose their profit.
II.
SINKING
FUND
AND D E B T
REDUCTION.
The systematic reduction of debt began in 1790 with the application of any surplus revenue from the tonnage fees and imports to the purchase of public bonds. In 1792 the bonds pur-
131
National
Monetary
Commission
chased were made the basis of a definite sinking fund, the interest on them to continue and to be paid to a commission for
the future purchase of bonds. In 1795 the commissioners were
allotted certain revenues to be applied to the purchase of definite
portions of the debt. Hamilton has been accused of following
Price's compound interest fallacy in his plan for debt reduction;
but Professor Dunbar considers that Hamilton's scheme was
based on the expectation of a surplus, and that its failure
resulted from an unanticipated growth of expenditure.
Gallatin formulated the true principles of debt reduction in
1800 in a debate upon the sinking fund, when he observed
(with a side reference to Hamilton):
" I know but one way that a nation has of paying her debts,
and that is precisely the same that individuals practice, 'spend
less than you receive/ and you may then apply the surplus of
your receipts to the discharge of your debts. But if you spend
more than you receive, you may have recourse to sinking funds,
you may modify them as you please, you may render your accounts extremely complex, you may give a scientific appearance
to additions and subtractions, you must still necessarily increase
your debt."
Still he did not abolish the old sinking fund, but increased the
annual appropriations. In 1791 the debt had been $75,400,000.
This old debt was reduced by Hamilton to $72,700,000 by 1801,
but in the same period new loans had been made, mostly at 8
per cent, so that Jefferson's Government inherited $83,000,000.
Gallatin's sinking fund extinguished $46,022,810 between 1801
and 1811, while the purchase of Louisiana added 11^4 millions of
new debt. On January 1, 1812, the debt was $45,154,189, or 31
millions less than the original revolutionary debt. In fairness
to Hamilton we must remember that his sinking fund enabled
some conversions to be made, which reduced the charge. The
132
The
Credit
of
Nations
following table shows details of debt reductions between 1801
and 1812: a
1801.
1804.
1812.
$57,000,000
2,800,000
$53,5oo,ooo
$33.200,000
Old debt:
Funded
_ __
Unfunded
Foreign
_
_ __
1,800,000
12,400,000
7,700,000
Previous time loans
7,200,000
7,200,000
Temporary loans
3,200,000
900,000
Louisiana:
Debt -
11,200,000
3 , 700, 000
82,600,000
Total
86,000,000
45,200,000
During the war of 1S12 the operation of the sinking fund
was suspended. At its close (in 1817) the arrangement of the
sinking fund and debt account was much simplified by an enactment that all certificates of the public debt when redeemed
should be destroyed. At that time there were 14 types of
stock, bearing 7 different rates of interest. In the years following the war a series of large surpluses favored debt reduction,
although the fixed periods for which loans had been contracted
proved an inconvenience. In 1824 $9,500,000 of 6 per cents
were converted to\Y2 per cents redeemable in eight or nine years.
Other attempts at refunding were not markedly successful, as
too low interest was offered. By 1835 the debt was almost paid
off, and the sinking fund was transferred from the management
of the commissioners to that of the Secretary of the Treasury.
During the civil war the law of February 25, 1862, enacted
that a sinking fund should be created by the surplus from
import duties after they had been used to pay the interest on
the debt. The surplus was to be used to buy 1 per cent of the
debt each year, and this was to be set apart as a sinking fund,
the interest on which was likewise to be applied to debt reduction. The residue of the customs receipts (if any) was to be
a
Dewey: Financial History, p. 125.
133
National
Monetary
Commission
paid into the Treasury. There were no surpluses during the
war, nor were the above provisions observed after it was over,
but the debt as we have seen was redeemed with amazing rapidity
by means of annual surpluses. The history of the refunding
of the civil-war debt has already been related.
III.
DEBTS OF THE STATES, CITIES, AND OTHER LOCAI, BODIES.
During the first half of the nineteenth century many of the
Northern States borrowed for internal improvements, such as
railroads and canals. The States in the South and West also
raised loans for state banks, and in the West for various commercial enterprises. These undertakings were often unremunerative, and the newer States sometimes failed to meet the obligations which they had incurred. For example, in 1838
Mississippi invested $5,000,000 in a bank which broke. The
governor recommended that the bonds should be repudiated, on
account of certain irregularities, and a legislature elected on
this issue carried out the repudiation. Florida acted in much
the same way. Foreigners who invested in state securities
found that under the Constitution the Federal Government
had no power over defaulters. It was during this period that
The Times called the States "one vast swindling shop." Even
Sidney Smith, an admirer of America, was provoked by these
scandals to unaccustomed bitterness.
In 1843 it was proposed that Congress should assume the
state debts. This course was not adopted, and American
credit continued to suffer for the dishonesty of some and the
incompetence of other States. Owing to these experiences
amendments were gradually introduced into many state constitutions imposing restriction on public borrowing, as, for
instance, that the loans must be temporary and that the
amount of each must not exceed a certain sum varying from
$50,000 to $1,000,000. In 17 States loans must be accom-
134
T h
of
r e d i t
N a t i on s
panied by legal provision for redemption, and in 16 every act
proposing a fresh loan must be referred to a popular vote.
The civil war caused a large increase in state debts, but they
have lately been reduced. In 1902 their total amount was
$235,000,000, as against the $925,000,000 of the federal debt.
The burden per head was $9.15 in 1870, $5.48 in 1880, $3.37 in
1890, and $2.99 in 1902. Thirty-one States in 1902 were below
this average, and only a few markedly above it—Nevada with
an average of $14.70, Arizona $23.86, and Massachusetts $22.87.
The rate of interest on state debts in 1902 varied from 3 per
cent to 7 per cent. In 1902 the amounts were thus distributed—
At
At
At
At
At
3 per cent
3.5 per cent
4.5 per cent
6 per cent
7 per cent
$90, 000,
60, 000,
30, 000,
35, 000,
20, 000,
000
000
000
000
000
235,000, 000
The service of the debt for states, cities, and smaller local authorities in 1902 claimed $78,900,000, or 7.1 per cent of their
total expenses. But against this it is to be remembered, especially in the municipalities, that a considerable part of the capital debt (whose total in 1902 stood at $1,864,900,000) is applied
to productive purposes, the revenue from which covers about 70
per cent of the service of the debt.
The payments for interest are as follows:
Amount.
States.
_ __._
_
.. _
Towns over 25,000 inhabitants
Towns under 25,000 inhabitants.
Counties
Other divisions__
_
_ _
_ __
_ _ _ _
Per cent
of total.
$9,560,000
42,770,000
7,180,000
9,6io,000
9,770,000
12.
54.
912.
12.
1
2
1
2
4
79, 090, 000
10.0
The total indebtedness of the United States for certain years
from 1870 to 1902 is classified in the table on the next page.
135
Net liabilities.
1870.
Mill, dolls.
Federal Government _ 2 , 3 3 1 . 10
States and Territories.
352.80
Counties
187.50
Cities, townships, e t c
I 328.20
School districts
Total..
3,199.80
1880.
1890.
Per head of population.
1902.
1908.
Mill, dolls. Mill, dolls. Mill, dolls. Mill, dolls.
938. 13
1,919.30
925-00
851.90
274.70
124.10
J
1
706.80
17.60
3,042,60
211.20
145-00
744-20
36. 70
234.90
196.50
1.387.30
46. 20
1,989.10
2,790.00
1, 7 1 0 . 5 9
1870.
1880.
1890.
1902.
1908.
Dolls.
Dolls.
38.30
5.5o
Dolls.
Dolls.
Dolls.
60. 40
9. 10
4.90
J
8. so
83.0
f
14.10
1
-35
13- 60
3-4o
2.30
11. 90
.60
60. 70
31.80
2. 50
11.80
35-5Q
3- 00
2.50
17. 60
.60
10. 72
71.70
* Wealth, Debt, and Taxation, Census Office.
ON
3
The
Credit
of
Nations
In 1887 Adams (Public Debts a ) remarked of the States that
they had no financial standing and never appeared on the market
as large borrowers, because of the restrictions on their administrative capacity. Some of their original functions, such as
banking, have been taken over by the Federal Government, and
others, such as railway management, by private corporations.
During the last forty years, in fact ever since the conclusion
of the great civil war, the credit of the American States and
cities has advanced rapidly and steadily. As in all parts of the
civilized world the standards of civic life, and consequently of
communal expenditure, have risen very rapidly. In respect of
lighting, sanitation, water supply, and transit the American
city, like its European rival, has been transformed. The movement for municipalization of natural monopolies has, however,
not gone so far in the United States as in England or Germany;
and this fact, together with the severe restrictions imposed by
state legislatures, accounts for the generally lower ratio of
municipal debt to population in the New as compared with the
Old World. In spite of the loud and too often just complaints
of extravagant waste and even corruption American municipal
credit is good, and the bonds of the chief cities find a ready
market, if not a free market, in the English or German sense.
The market for city bonds in the United States has been
described by a recent financial writer as "sufficiently close for
the investor's purpose," except as regards minor municipalities.
These smaller issues are generally taken over by private banking
houses, mainly in New York or Boston, who then distribute the
bonds among their clients at a good profit. The table on the
next page shows the growth of municipal indebtedness in the
United States in the last ten years for twelve of the largest
cities.
a
P . 303-
137
National
Monetary
Growth of American Municipal
Commission
Debts,
1898-1908.
Net debt, January 1.
Debt per capita.
Cities.
1899.
Dollars.
New York.
Chicago,
__
_ _ __
Philadelphia _
__
__
St. Louis
- _
Boston
__
__
Baltimore.
_ __
Cleveland _ _
_
San Francisco
__
Cincinnati
Buffalo
_ _ _ _
Pittsburg
_
_
_ New Orleans
_
_ .. _
244, 2 2 0 , 4 3 5
15,104,636
3 6 , 3 8 0 , 082
1 3 . 9 2 4 . 278
55,084.172
12,408,434
8, 1 3 9 . 0 0 3
68,105
25,169,532
11,286,397
9, 1 7 2 , 9 5 6
1 4 , 0 0 9 , 137
1909.
1898.
1908.
Dollars.
672,019,244
24,844,400
79, 6 3 5 , 0 2 0
19,966,000
74,099,388
22, 5 0 7 , 0 4 8
22,567,077
3,787,725
29,242,667
13,258,863
12,118,987
26,126,600
68.79
7-74
29-33
26. 50
109.31
23-65
20.34
- 19
65-37
29. 70
30.57
5o.94
156.82
8. 73
26. 48
3 9 . 67
4 2 . 98
9. 46
68.81
3 3 . 14
3 0 . 39
74. 64
New York City has suffered much for its extravagance; in
the crisis of 1907 it was glad to sell \% per cent bonds at very
little above par, and again in March, 1910,° it issued a loan for
$50,000,000 in \% per cent bonds at par. At the beginning of
1910 a survey of the credit of twenty-four cities showed yields
varying from just under 3 ^ per cent in the case of Detroit to
just over 4 per cent in the case of Portland.
The conditions governing the credit of American municipalities may be realized by a selection of typical instances. Let me
take Cleveland, Ohio, where one may follow the researches of a
careful student. 6 The city debt was insignificant before the
civil war, with the exception of half a million dollars borrowed
o Copenhagen was borrowing in t h e same week on a 4 per cent basis.
&The Finances of Cleveland (Columbia University Studies in History,
Economics, and Public Law. Volume XXV, number 3), by Charles C.
Williamson, Ph. D. New York. The Columbia University Press. London, P. S. King & Sons, 1907. See Chapter VI and Appendix D.
138
The
Credit
of
Nations
for the erection of water works. Yet in 1843 Cleveland's finances
were "embarrassed," largely owing to the practice of issuing
orders recklessly on the treasury. In 1847 the total debt was
$22,000, of which $8,000 were treasury orders, worth about 62.5
cents on the dollar. Thus the city had to pay in its own depreciated currency of treasury orders from 25 per cent to 33 per cent
more for labor and materials than the cash prices, and it became
necessary to fund part of these orders and bring the rest to par.
But "funded debt" does not appear in the city accounts till
1856. After 1861 floating obligations accumulated and were
periodically refunded. Even current charges, such as interest or
lighting expenses, were allowed to run for some time and then
funded into interest-bearing debt. In 1872 30 per cent of Cleveland's indebtedness was due to such charges, and for several
years later over one-third of the interest was paid on bonds to
meet current expenses. Bonds were issued for the building of a
viaduct, for water works, and other special improvements.
Between 1871 and 1877 $9,500,000 was raised by loans. Cleveland was only following in the steps of other cities. From 1866
to 1875, while the population of 15 of the principal cities of the
United States increased by nearly 71 per cent, their indebtedness
increased by 271 per cent. In the same period the increase in
Cleveland's population was 72 per cent and the debt rose by 355
per cent, although in i860 her mayor had warned the city that
"such a policy (of loaning) is unwise and to be deprecated." We
may note, however, that in the earlier period it was not easy to
attract investors. After the civil war city bonds gradually came
into favor with investors, and this has been an important factor
in the growth of municipal indebtedness. There have been few
cases of repudiation or composition in the history of cities of
any standing in the United States. Pittsburg for a time refused
to pay interest on some street-improvement bonds that were
139
National
Monetary
Commission
issued in 1879. Memphis once compounded with its shareholders after the fever epidemic of 1878, and Galveston scaled
down its debt after being nearly wiped out by a flood.
At first the increase of Cleveland's debt was obscured by a
division into "general" and "special'' indebtedness, the latter
incurred for local improvements and paid for by special
assessments on the property benefited. From 1870-1875 this
"special" debt was almost quadrupled and amounted to nearly
$3,000,000, while the general debt increased by only 50 per cent.
Opposition arose to these bond issues on the ground that they
were controlled by private interests, especially by land speculators. Various irregularities were discovered, for example, a
method of paying contractors not in cash, but in interest-bearing bills or "certified estimates" which the treasurer would
discount at from 3 to 5 per cent.
From 1870 to 1880 a wave of borrowing afflicted American
towns. Municipal indebtedness in the State of Massachusetts
increased from $34,800,000 to $80,427,000 between 1870 and
1874. This expansion led to limitations being imposed by
various States upon the borrowing powers of their cities.
Pennsylvania (1873) limited municipal debts to 7 per cent of
the tax valuation, Maine (1877) limited them to 5 per cent, and
in 1881 Indiana forbade any municipal debts in excess of 2 per
cent of the valuation. In 1874 Ohio limited the debt of her
cities and towns to 5 per cent of their tax valuation, but this
maximum has since been raised more than once. Between
1878 and 1891 the debt of Cleveland decreased by $500,000, but
in 1891 the net indebtedness was very near the 5 per cent limit,
although the waterworks debt was not included in the maximum. Of late the city of New York has also reached its maximum, and leading financiers have expressed grave anxiety as
to the financial outlook unless strong measures of retrenchment are adopted.
140
The
Credit
of
Nations
In 1896 in connection with a new scheme of municipal improvement the mayor of Cleveland brought forward arguments
for the extension of the debt limit. No American city of the
same class (he pointed out) had so small a debt, except San
Francisco and Detroit, and (according to his calculation) the
debt of Cleveland in proportion to population "was anywhere
from a sixth of to something less than merely equal to the
debt of a dozen of fifteen other large cities. ,, Real and personal
property he maintained was valued at about 35 per cent of its
actual worth, and consequently the tax rate was really only
1 per cent instead of 2.87.® He pointed to the example of great
cities, such as St. Louis and Chicago, which had overstepped
their debt limits. The council protested, but the legislature
raised the limit to 7 per cent, with the result that between 1896
and 1900 the total debt rose from $10,675,000 to $14,503,000.
In 1877 the mayor of Cleveland had attributed the growth
of debt partly to the partisan (or "spoils") system of administration, and partly to the government by "boards/' which led
to large annual deficits, partly again to a vague notion that the
"special'' debt need not be taken into account. Since 1902 the
debt of Cleveland and other cities in Ohio has been governed
by the Longworth bond act, which laid down the main conditions under which new loans might be contracted. Interest
must not exceed 6 per cent, but there is no limit to the period
the bonds may run. A loan issue must be authorized by a
two-thirds vote of the council, and if the amount issued in any
year exceeds 1 per cent of the valuation it must be submitted
to a popular vote.
The total debt of Ohio cities must not exceed 4 per cent of
the valuation, unless an extension is authorized by popular
vote, in which case the maximum is fixed at 8 per cent. Bonds
to be paid by special assessment are not included, nor, according
« P . 209.
823000—10
10
141
.
National
Monetary
Commission
to a decision of the Supreme Court in 1906, are debts contracted
before the act. Also waterworks bonds and sinking funds have
recently been excluded. Nevertheless, Cleveland has reached
the limit which requires submission to the popular vote. In
October, 1906, the people rejected proposals for the issue of
$2,300,000 worth of new bonds. In addition to the powers
under this act, the council may raise temporary loans for sanitary purposes, and can issue "deficiency bonds" to meet a
revenue deficit. These, however, must not exceed 1 per cent
of the valuation, and popular consent is required.
In 1873 more than one-third of the city taxes went to meet
the interest on the debt, and throughout the decade the per
capita expenditure of interest was heavy, the highest point
being $2.73 from 1876 to 1880. From 1896 to 1900 it was $1.66,
but had increased to $1.95 in 1904. This is larger than the
average for Chicago, Philadelphia, St. Louis, Detroit, or Milwaukee—cities of the same class as Cleveland—and the only
city in Ohio where the burden per capita is as heavy is Cincinnati. But the credit of Cleveland (as of other American cities)
has risen steadily. Before 1875 it was 7 per cent, in 1875 some
bonds were issued at 6 per cent and sold slightly under par, the
true rate being 6J4 P e r cent. The next year 6 per cent bonds
sold at a premium, and after 1878 no further 7 per cent bonds
were issued. From 1887 to 1891 the general rate was 5 per
cent. Some 4 per cent bonds sold at par in 1881, and since
1893 nearly all issues have been at that rate, $1,000,000 of waterworks bonds in 1902 selling at a premium, which made their
real yield less than 3.3 per cent. Under a recent act the city of
Cleveland must offer all its bonds at par to the sinking-fund
commission, and can then offer them for public sale to the
highest bidder, after the sale has been advertised thirty days in
advance. They can not be sold privately until this public offer
has been made. ^ Before 1877 all bonds were sold in the eastern
142
The
Credit
of
Nations
markets by the personal exertions of the treasurer. Although
various sinking funds have been initiated since 1862, and their
existence may have helped to secure stability in the city's
credit, yet the steady increase of net indebtedness shows that
their operation has not been very effective.
Net indebtedness of Cleveland.
1841
1865
1870
1875
1880
1885
1890
1895
$20, 000
410, 000
1, 764, 000
3, 189,000
6, 520, 000
5,671, 000
6,983, 000
8,930, 000
1900
12,082, 000
1906
24,274, 000
The existing debt is divided under the following main heads:
General government, protection to life and property, health and
sanitation, highways, charities and corrections, education,
recreation, municipal industries, temporary loans, assets of
sinking funds. Of these in 1906 the most important items were,
health, $6,825,000; highways, $6,952,000; and municipal industries (waterworks, cemeteries, and market), $4,476,000.
From this more detailed illustration we may turn to glance
briefly at the debt and credit of some other important municipalities—Boston and Philadelphia in the East, Chicago and Kansas in the Middle West, and Richmond, Va., in the South. For
the information received I am indebted to the officials of the respective cities. In general, it may be noted that the high price
of American municipal issues is due partly to the restrictions
on borrowing imposed on their cities by the various States, so
that as a rule the total debt can not exceed an amount equal to
a small proportion of the valuation made for the city taxes.
143
National
Monetary
Commission
(A) RESTRICTIONS ON MUNICIPAL BORROWING.
In Philadelphia the debt must not at any time exceed 7 per
cent of the valuation, and in any one year no new debt can be
incurred to an amount exceeding 2 per cent of the valuation
without a consenting vote of the citizens. The debt of Boston
must not exceed 2}i per cent of the average valuation for three
years. In practice these restrictions are not rigid, as various
classes of debt—waterworks debt, for example—are considered
to be of a special character, and are omitted in reckoning the
limit. In Richmond the limit of the total debt is considerably
higher—18 per cent of the assessed value of the taxable estate
of the city—and there is still a comfortable margin between
the actual and the possible indebtedness.
( B ) AMOUNT AND GROWTH OF THE) DEBT.
The statistics for Boston are the most complete, dating back
to its incorporation in 1822. Before 1875 the city annexed several smaller municipalities.
Gross funded
debt.
Sinking
funds, etc.
$100,000
1 , 0 1 1 , 775
Net debt.
$100,000
712,678
$299,096
228,028
663,902
6,195.144
I7L439
310,259
5,884,884
8,491,599
18,687,350
967,175
9,215,831
891,930
1,698,232
1,526,793
7,524,424
4 2 , 0 3 0 , 125
14,188,021
9,47i,5i9
27,842,104
53,930,095
86,996,978
22, 8 5 4 , 262
31,075,832
28,663,641
58,333,337
The total debt on January 1, 1908, for the city and county, including sinking funds, was $103,732,906, but this included
$60,211,900 of debt outside the limit and $14,456,366 of sinking
funds devoted to the redemption of this debt. When these are
144
T h
of
r e d i t
N a t i o n s
deducted the remainder, $29,064,639, is well under the statutory
limit—iy 2 per cent of the valuation, which in 1908 amounted to
$31,945,756.
The debt of Philadelphia (which has been denned by the supreme court of Pennsylvania as the authorized debt less the
amount of city certificates purchased and uncanceled in the
sinking fund) has grown as follows during the last ten years:
1899
1904
1909
Amount authorized, 7 per
cent of valuation.
Gross funded
debt.
Sinking fund.
Net debt.
$60,516,122
$51,241,295
$16,078,000
81,345,181
56,337,245
92, 2io,443
88,770,220
4,995.575
9,135,200
$35,163,295
51,341,670
79,635,020
It is apparent that the margin between actual and possible
indebtedness has shrunk rather severely of late. But the
assessed valuation reported for taxation rose from $864,000,000
in 1899 to $1,317,000,000 in 1909. In Richmond the figures for
the last thirty years are these:
Population.
63,600
1890.
1900.
85,050
1909-
a 114,050
Bonded debt.
Floating debt.
$ 4 , 4 7 8 , 245
5,928,015
7,227,447
9 , 2 8 2 , 758
$2,162
180,000
Rates of
interest.
Per cent.
6,8.
8,6,5.4.
8,6,5.4.
8,6,5,4,3%.
a Local census in 1907.
The salable assets of the municipality, which were only
$4,023,513 in 1880, are now estimated at $14,701,627, while the
limit of the bonded debt under the city charter (18 per cent of
the valuation) is now $10,340,906. The city has no floating
debt. All accounts are closed at the end of each financial year.
A new tax assessment is made every five years.
145
National
(C)
Monetary
Commission
ISSUE AND SALE OF BONDS—PRICE AND RATES OF INTEREST.
In Boston (of which the secretary to the statistics department
remarks " t h e credit of the city is good and always has been")
the municipal bonds are little dealt in on the stock exchange,
being usually taken by a syndicate of bankers who sell them
to their own customers. Within the last twenty-seven years
the city treasurer has three times sold bonds over the counter,
when the money market has been unsettled. The last occasion
was in 1907. Annual loans are made in anticipation of taxes
and the city pays the ruling rate of interest, or a little less, for
such loans. They are almost always paid off within the fiscal
year in which they are raised.
The average annual rate of interest on the funded debt is
now about 3.68; on the total debt it is about 3.7. The whole
interest charge in 1908 was $3,836,646. The highest prices
realized at the issue of bonds since January, 1874, have been:
Year.
1889
1896
1900
Bond issue.
$200,000, 4 percents, for 30 years at
$100,000, 4 percents, for 40 years a t
$700,000, 3XApercents, for 40 years at
Price.
$115. 43 7
114.330
108.817
In 1906 three issues at twenty, thirty, and forty years at 4
per cent all realized 106.44. No stock during the period 18741909 has been issued below par, though during 1903-1906 3%
percents were issued just above par. In 1906-1908 the 4 per
cent issues realized 101 and over.
The bonds of Philadelphia are as a rule sold privately only
at the counters of the leading bankers after they have been
awarded by the mayor of the city in accordance with the bids
of the said bankers. This award is always to the highest and
most responsible bidder, after due advertisement of the loan
has been made. The following prices have been paid during
146
The
Credit
of
Nations
the last decade by the sinking fund, for bonds issued by the
city, and may be taken as a fair average:
Issue.
1899
1900
1902
1904
1905
1907
1908
1909
Price.
3 per cent
[3 per cent
[3 % per cent—
3 per cent
3XAper cent—
3 14. per cent__
4 per cent
4 per cent
4 per cent
4 per cent
$103,270
100. 583
104-400
101.178
105.000
101.036
104.299
104.299
103.590
103.250
The decline in credit of the last ten years reflects the international movement, and is less than that of New York City.
Most of the city bonds of Chicago are taken by investors, and
few are bought and sold on speculation. They are seldom
listed on the stock exchange. In the crisis year of 1907 some
difficulty was experienced in disposing of the bonds, but this
was felt in all cities—New York raising its rates to \]/2 per
cent. Between 1893 and 1908 issues were made at from 3 ^
to ^]/2 per cent, the price varying from par to 106. In 1898
two issues of 3 K per cent stock were floated at over 106.
Official statement of bonds sold by the city of Chicago from 1803 to 1908,
inclusive.
Date of issue.
July,
Jan.,
1893
1894
July,
1894
July,
1895
Jan.,
July,
1898
1896
Kind.
River
Municipal
Water
Sewerage
River improvement
Water
River
_
Water
Tunnel
do___
__
tit.
Per cent,
4
4
4
4
4
4
4
4
4
147
Sale.
$Soo, 0 0 0
Par.
60, 0 0 0 $103.26
130, 0 0 0
103.26
785, 0 0 0
102. 83
346, 0 0 0
102.83
446, 0 0 0
103.26
I,263, 0 0 0
1,485, 0 0 0
104. 64
104.64
100, 0 0 0
103.66
100, 000
103.78
Premium.
National
Monetary
Commission
Official statement of bonds sold by the city of Chicago from
inclusive—Continued.
Date of issue.
July,
Oct.,
Jan.,
July,
Sept.,
Jan.,
July,
July,
July,
Apr.,
May,
July,
Aug.,
Sept.,
Oct.,
Nov.,
Dec,
July,
Kind.
Tunnel
1898
do
1899
do
1899 Municipal
1899
do
1904 Judgment funding
1904 Permanent improvement.
1905 General corporate pur
poses
1906 General corporate
do
1908
1908 Judgment funding
1908 General corporate
1908 Judgment funding
1908 General corporate
do
1908
1908 Judgment funding
General corporate
do
1908
do
1909
Judgment funding
1898
Rate.
Per cent.
SXA
ZlA
ZV*
lV*
zY*
1893 to 1908,
Sale.
$98, 0 0 0
100,000
98,000
618,OOO
228,000
Premium.
S103. 6 6
103.28
104.41
106.07
106.II
4
5,250,000
$6, 6 0 0 . 0 0
4
3,000,000
50,197.00
4
4
4H
2,000,000
1,400,000
II,620.00
I,OOO,OOO
28,127.00
4lA
5,614.00
300,000
8,439.00
4
I,000,000
4
4
115,000
I,OOO,OOO
Par.
Par.
Par.
4
500,000
3,150.00
4
85,000
4
750,000
4
4
4
1,500,000
535-So
6,521.00
1,106.10
10,216.66
1, 540. 00
IOO,OOO
200,000
The population of Kansas City at the beginning of the year
1910 was estimated at about 375,000, and the debt of the city
was $4,000,000. The city's credit has only fluctuated between
4 and 43^2 P e r cent during the last twenty years. "Bond
brokers and trust companies/' writes the city clerk, "usually
buy our bonds at a premium of 4 to 7 per cent." Kansas City
has no means of borrowing for temporary deficiencies. I t
"must live within its current income."
After the civil war the city of Richmond 8 per cent bonds
were as low as 80, but in recent years Richmond Fours have
touched 106%. That they are little affected by panics is shown
by the fact that in the worst months of 1907 they sold at par
less Yi per cent brokerage. They are sold chiefly in New York,
Baltimore, and Richmond. For many years all moneys to meet
148
The
Credit
of
Nations
temporary deficiencies have been supplied by local banks, a the
rate of interest not exceeding 6 per cent and usually being 4
per cent.
For many years Richmond's bonds have been considered good
investment securities. By refunding at 4 per cent the city has
saved $25,000 in annual interest; the charge was $380,383 in
1900 and $354,972 in 1908, although the debt had increased by
$1,250,000. Of the whole debt ($9,282,758) more than
$7,000,000 is in 4 per cent bonds, and only $184,000 in 8 per
cent. Part of the debt matures each year between 1909 and
1942.
(D) MUNICIPAL SINKING FUNDS.
The arrangement for municipal debt redemption is generally
under the control of sinking fund commissioners. In Boston a
certain percentage is required by law to be raised for the redemption of outstanding loans at maturity. In the fiscal year 1907-8
(ending January 31) the various sinking funds of this city
amounted to $31,734,763, and during the year $2,611,700 of
debt was paid and canceled, while $5,249,000 of new issues were
created; but of these $3,447,800 was taken at par by the commissioners of the sinking funds, and of various trust funds held
by the city.
The city of Richmond has also sinking fund commissioners,
and by an ordinance of the council \% per cent of the entire
gross bonded debt must be appropriated to the sinking fund.
By a law of the State of Virginia, 1903, Richmond was empowered to issue bonds to redeem outstanding bonds. They were
to be sold to the highest bidder for cash, not under par, with
interest at not more than 6 per cent. The existing sinking fund
in 1909 was $1,723,361. In Philadelphia the sinking fund in
1909 stood at $9,135,000.
a Another method of meeting temporary deficiencies is that pursued by
Springfield and other cities, which borrow on short-term bonds usually
bearing interest at 6 per cent.
149
The Trade Balance of the
United States
BY
GEORGE PAISH
151
THE TRADE BALANCE OF THE
UNITED STATES.
I . — O N TRADE BALANCES.
The term "trade balance" is generally used for the
purpose of indicating the excess value of a country's
exports of merchandise over the value of its imports
of merchandise or the excess value of a country's imports of merchandise over the value of its exports of
merchandise. In monetary circles the term is employed
to denote the ability of a country to import supplies of the
precious metals. If the rate of exchange of one country
upon other countries is at the level which permits of gold
imports, it is said that the balance of trade is in favor of
the country importing the gold. On the other hand, if the
rate of exchange of any country is at a level which admits of gold exports, the balance of trade is said to be
against the country exporting the gold. In the sixteenth,
seventeenth, and eighteenth centuries a favorable trade
balance was a matter of great concern to statesmen and
to financiers. At that time it was supposed that any
country which imported goods of greater value than the
goods it exported would be seriously injured by having to
make payment in the precious metals for the difference
between the value of the goods imported and the value of
the goods exported, and that any country which persisted
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National
Monetary
Commission
in purchasing goods of greater value than the goods it exported would be totally drained of its stock of the precious metals and would be ruined. The theory of the
supreme importance of a balance of exports over imports
was known as the " Mercantile system." Efforts to secure favorable trade balances led to the passage of many
laws for restricting imports and for stimulating exports.
As commerce developed and international banking advanced it was recognized that a nation could under certain circumstances purchase goods of a greater aggregate
value than it exported without sustaining any drain upon
its stock of the precious metals or suffering any inconvenience whatsoever, and in recent time no one has paid any
great amount of attention to the question of the trade
balance other than for the purpose of ascertaining the factors which caused the imports of certain countries largely
to exceed their exports or of discovering the reason for
the exports of certain countries largely exceeding their
imports.
The great change in the theory of commerce that has
taken place in modern times is due to the recognition of
the fact that the volume of trade which any country
enjoys quickly adjusts itself to the needs of that country,
and that the effect of a sudden disturbing influence to
trade—such as a crop failure, labor troubles, etc., which
temporarily reduce a nation's exporting power—can be
got over by financial operations in the great international
money markets, and that excessive drains of the precious
metals are not now to be apprehended. Experience has
shown that apart from sudden catastrophes the foreign
154
Trade
Balance
of United
States
trade of every country is of a very elastic character,
that the volume of imports or of exports quickly responds
to the necessities of the case, and that no country can have
an adverse balance of trade except for a short time and as
a consequence of some unexpected disaster which temporarily diminishes its power to make payment for goods
imported. Even at such times countries in good credit
have no difficulty in borrowing temporarily or permanently the sums required to settle the balance due to other
countries for commodities purchased or obligations
incurred prior to the disturbing event—a process which
averts any excessive denudation of the stock of the
precious metals possessed by the country experiencing the
disaster.
II.—CAPITAL INVESTMENTS AND TRADE BALANCES.
The nations of the world may roughly be divided into
two classes. In Class I are the countries whose imports
exceed their exports, and in Class II are the countries
whose exports exceed their imports. Generally speaking,
the nations in Class I are the lending countries; those in
Class II are the borrowing countries. The lending country
has to receive payment for two things, (i) for the goods
it exports and (2) for the interest upon the capital which
it has in former years supplied to other countries. Excluding all other considerations the imports of a country
which has placed capital in other lands must necessarily
exceed the value of its exports to the extent of the produce it receives from other countries in payment of the
interest upon its capital. On the other hand, the country
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National
Monetary
Commission
that has borrowed capital from other countries, other
factors being excluded, must export a larger amount of
produce than it imports in order to pay, first, for the
produce imported and, second, for the interest upon the
capital it has previously borrowed from other nations.
Hence the exports of the borrowing countries exceed their
imports and the imports of the lending countries exceed
their exports.
The situation is not usually confined to the mere receipt by a lending country of interest upon capital previously lent or the mere payment of interest by a borrowing country upon capital previously borrowed, and it will
be worth while briefly to indicate the normal course of
the trade balance, first, of a country which invests capital
in other lands, and, secondly, of a country which borrows
capital from other countries. Were there no interfering
conditions the value of the goods, in which I include the
precious metals, imported by a country must exactly balance the value of the goods exported in exchange. But
when a country commences to invest capital in other
lands its exports begin to exceed its imports. Capital investment by one country in other lands means that that
country is willing to sell goods to other lands and to take
payment in securities of one class or another. Should
the capital investments extend over only one year the
exports of the lending country in the year in which
the loan is made would exceed its imports to the extent
of the sum invested. Should no additional investments
be made, the imports of the lending country in the following years would exceed its exports to the extent of
156
Trade
Balance
of United
States
the interest or dividends it received upon the capital
invested. As time goes on, and the total amount of capital invested by it in other lands attains to larger and
larger figures, the annual sum received as interest upon
the capital embarked rises correspondingly. In this case
the balance of exports over imports resulting from the in
vestment of capital becomes smaller and smaller in consequence of the increasing sums received per contra from
the interest upon the capital previously invested. After
a time the annual sums which a lending country receives
for interest exceeds the additional sums it lends in each
year, and in spite of its continued investment of capital in
other lands its imports exceed its exports. For the clearer
understanding of the matter I set out supposititious
statements to show how investments of capital and the
receipt of interest affect the trade balance of a country—
i. That neither lends nor borrows capital.
2. That is beginning to invest capital in other lands.
3. That has in the past invested capital in other lands
but has temporarily ceased to make new investments.
4. That has both invested capital in other lands in the
past and is still investing annual sums equal to the interest
received on former investments.
5. That has in the past invested capital in other lands
and is investing fresh amounts equal to less than the
interest received.
1. A country that neither lends nor borrows and which
has an exchange trade of $500,000,000:
Exports
Imports
tboo, 000, 000
500,000,000
Balance
82300 0 —10
Nil.
11
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National
Monetary Commission
2. A country beginning to invest capital in other lands
and which places $100,000,000 of capital abroad in a year:
Exports
Imports
$600, 000,000
500, 000, 000
a
Balance of exports over imports
100, 000, 000
3. A country that has invested abroad in the past a
sufficient amount of capital to yield an income of $100,000,000 per annum from interest and which temporarily
ceases to make fresh investments of capital:
Exports
Imports
$500, 000, 000
600, 000, 000
,
Balance of imports over exports
&
100, 000, 000
4. A country that has in the past invested capital in
other lands, is receiving an income of $100,000,000 a year
from interest upon that capital, and is investing an additional amount equal to the interest received:
c
Exports
Imports
$600, 000, 000
600, 000, 000
d
Balance
NiL
5. A country that having invested a large amount of
capital in other lands, is receiving an income of $150,000,000 per annum from interest upon that capital, and is
investing $100,000,000 of additional capital in a year:
Exports
Imports
« $600, 000,000
/ 650, 000,000
Balance of imports over exports
a
50, 000, 000
Sum invested by exporting country.
Received as interest on capital previously invested.
c Of this sum, $100,000,000 is for new capital investment.
d Of this sum, $100,000,000 is interest on capital previously invested,
e
Of this sum, $100,000,000 is new capital investment,
/ $150,000,000 is interest on capital previously invested.
6
158
Trade
Balance
of United
States
In the same way the trade balances of countries which
borrow capital from other lands are affected by the
produce they import in respect of the capital they borrow
and by the export of produce for the payment of interest.
A country beginning to borrow from other lands imports
a larger amount of produce than it exports. When the
interest payments of a borrowing country amount to
large figures its exports appreciably exceed its imports
even in years in which it borrows freely.
I I I . — E F F E C T OF CAPITAL, INVESTMENTS UPON TRADE.
The effect of capital investments by one country in
other lands is an exceedingly interesting inquiry. A loan
of capital means that the lending country concedes a
portion of its purchasing or consuming power to the
borrowing country and that the latter's purchasing or
consuming power is increased to a corresponding extent.
Imports of capital usually bring a period of active trade,
although sometimes it happens that capital is borrowed
to tide over a calamity, in which event the purchasing
and consuming power of the nation suffering from disaster
is maintained by means of the money borrowed at a
higher level than otherwise it would be.
Not infrequently a country which obtains supplies of
capital from abroad does not desire to import that capital
in goods from the country advancing the capital. Nevertheless, this does not affect the general statement that
capital must be received by the borrowing country by
imports of commodities and must be dispatched by the
lending country by exports of commodities. What happens in this case is that the country which borrows the
159
National
Monetary
Commission
capital, buys the goods it needs out of the proceeds of the
loan from the countries that can supply them, that the
purchasing power of the latter is thereby increased and
that they in turn buy the goods they desire to obtain in
exchange for the goods they sell until eventually the chain
of purchases started by the original loan of capital extends
to the lending country and the transaction is completed
by the export of goods from that country.
Thus loans of capital from one country to another frequently result in a world-wide expansion of trade in
consequence of the increased purchasing power of the
borrowing country. Further in practice loans of capital
to other lands do not mean that the lending country's
purchasing power is reduced to the extent of the capital
lent. Loans of capital create an increased demand for
the lending country's goods, and by stimulating production
cause the lending country to produce a great many more
goods than otherwise it would do.
Loans of capital by one country to another do, in fact,
increase both the producing and the consuming power of
the lending countries as well as of the borrowing countries
if the proceeds of the loans are wisely and productively
expended.
Hence the immediate effect of loans of capital by one
country to another is to increase the exports of the lender
and the imports of the borrower and to increase both the
imports and the exports of all other countries. Subsequently, when interest is paid on the loans the imports
of the lending country and the exports of the borrowing
country are increased.
160
Trade
Balance
of United
States
The export of capital by the lending countries is more
or less intermittent and the fluctuations in the amounts
of the fresh capital invested in the new countries from
period to period largely explains the fluctuations in the
value of the exports of the lending countries. In the same
manner the import of capital by the borrowing countries
greatly varies from period to period and the fluctuations in
the amount of capital imported from year to year is one of
the causes of the wide movements in the value of the
imports into the borrowing countries from period to
period.
I V . — T H E N E W COUNTRIES AND IMPORTS OF CAPITAL.
Although somewhat outside the scope of the present
inquiry it may not be altogether irrelevant to indicate the
immense influence upon the development of the new
countries and the expansion of their foreign trade of the
investment of capital by the lending countries. Most of
the new countries are endowed by nature with almost
unlimited natural wealth which can be made available
for consumption by the expenditure of a relatively small
amount of labor and of capital. In proportion to their
natural resources the new countries possess but a small
supply either of labor or of capital and they attract supplies of both from the older countries.
The construction of railways across fertile prairies opens
up great tracts of virgin country to cultivation at a very
small expenditure both of effort and of money. The rapid
expansion of agriculture which ensues gives to the new
countries a large amount of agricultural produce to exchange for the goods of the other lands and to pay interest
161
National
Monetary
Commission
upon the capital borrowed. The introduction of large
sums of capital into the new countries for railways and
other purposes causes, during the period of its introduction, large imports of manufactured goods into the countries borrowing the capital and as a consequence the imports of these countries largely exceed their exports.
After a time the new countries increase their production
of foodstuffs and raw materials so largely that they are
able to provide a much larger proportion of the capital
they need for themselves and they obtain the goods
they require from other countries to an increasing extent
by exchange of their own production and less by capital
borrowings. I calculate that capital wisely expended
upon new railways through districts containing fair agricultural and mineral resources brings about an annual
production of wealth much more than equal to the total
amount of capital spent upon the construction of the
railways, a rate of production which could not possibly be
secured if capital were not provided for railway construction. The capital needed for the direct development
of agriculture, for mining, for house building, for manufactures, and for retail trade is chiefly provided by the
inhabitants of the new countries themselves. Nevertheless, a portion of the capital required for these purposes
is also provided by the older countries.
The net effect of the capital investments of the older
countries in the newer ones is thus to bring about the creation of an immense quantity of new wealth of all kinds
and descriptions and to cause the foreign trade both of
the newer and of the older countries to show immense
expansion from decade to decade.
162
Trade
Balance
of United
States
V.—FOREIGN TRADE AND THE PRECIOUS METALS.
Imports and exports of the precious metals play an important part in international trade. Until what may be
termed the "capital investment system" was initiated
the part played by gold and silver in paying for exports
and imports of other commodities was considered to be of
immense importance. Indeed, for several centuries it was
believed that the chief object of foreign trade was to secure
supplies of the precious metals and that the greatest thing
to be desired was to obtain payment for produce exported
entirely in gold or silver. These crude notions have long
since disappeared, and it is now generally recognized that
the great value of foreign trade is to enable each country
to purchase all those things which it cannot advantageously produce for itself and which it needs or desires to
consume.
The development of banking, both national and international, has brought with it great economy in the use of
gold and silver for currency and for international settlements. Of course, precious metals are still largely used
both in national trade and in international commerce;
but the chief medium of exchange in national trade is the
cheque, and the chief factors in the settlement of international balances are loans and repayments of capital.
Only in countries where banking is in a relatively backward condition, and where credit is lacking do the precious
metals play any great part either nationally or internationally. In modern times the precious metals have been
mainly employed as banking reserves to serve as a basis of
credit, as a provision against periods of discredit, such as
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National
Monetary
Commission
arise in times of war and in periods of disaster, and for
ornament. Occasionally a lending country suffers from
nervousness, created either by political or financial events,
and buys gold in order to strengthen its bank reserves, but
most of the annual output of gold and silver, over and
above that required for industrial purposes and the arts is
sent to the young, backward or borrowing countries, whose
banking and credit systems are not so highly developed as
those of the lending countries. These countries have no
difficulty in paying for the gold and silver they thus import for currency by means of their exports of produce
and by means of the capital they borrow. Only in times
of discredit do the young, backward or borrowing countries experience difficulty in retaining their stocks of the
precious metals or in making the additions to their currency, rendered necessary by the growth of their populations, the expansion of their trade, and their unscientific
banking systems.
In these days it may be said that the movements of gold
and silver are brought about not so much by trade balances as by the currency and banking needs of the various
countries. If a country desires to obtain gold, it has no
difficulty in buying it, provided that its credit is good.
One of the greatest accumulations of gold in modern times
was made by a country which obtained the means of paying for the gold entirely by borrowing. The really essential matter to be considered by countries desiring gold is
the state of their credit. Not infrequently it happens that
countries possessing credit balances in other lands elect to
leave them abroad for employment rather than withdraw
164
Trade
Balance
of United
States
t h e m in gold. Only in periods of great alarm and anxiety,
political or financial, does any country experience difficulty in obtaining supplies of the precious metals. I n t h e
statement of trade which I shall subsequently give I shall
set out separately the amounts of t h e precious metals imported and exported from year to year b y the United
States. B u t it should be clearly understood t h a t t h e
factors involving t h e import and export of gold are practically t h e same as those which govern t h e imports and
exports of other commodities. These factors are, first,
the real need of t h e precious metals b y the various countries importing t h e m ; second, ability to p a y for t h e
amounts they desire t o obtain; and, third, t h e extent of
the available supplies. I t should be specially noted t h a t
the demand for gold and silver is quite a limited one;
t h a t nations are not usually anxious to obtain greater
stocks t h a n they really need, and t h a t the lending countries are quite willing to make loans to any country in
good credit desirous of obtaining supplies of the precious
metals.
I n brief, cheques, notes, and securities are now t h e medium b y which national and international trade balances
are mainly settled, and t h e employment of the precious
metals for national or international settlements is entirely
subsidiary t o t h e use of credit.
V I . — T H E P R E C I O U S M E T A L S AND CAPITAL I N V E S T M E N T S .
I n view of t h e somewhat common fallacy t h a t t h e investment of capital by one country in another must lead
to corresponding exports of gold or silver from t h e lend-
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National
Monetary
Commission
ing countries to the borrowing countries, it may not be
out of place to deal briefly with this phase of the question of trade balances.
It should, in the first place, be recognized that the
lending countries do not produce the precious metals
and that the mining countries are borrowers and not
lenders of capital; secondly, the lending countries can
not, except when they dip into their own accumulated
stocks, supply the borrowing countries with gold; third,
that only a very small portion of the capital invested by
the lending in the borrowing countries is used by the
latter to buy supplies of the precious metals, and that
most of it is used to purchase other commodities than
gold or silver, such as machinery, railway material,
clothing, etc.; fourth, that the lending countries receive
considerable sums of gold each year on balance from the
mining countries; fifth, that the borrowing as well as the
lending countries must obtain the supplies of the precious
metals they need from the mining countries; and, lastly,
that the purchase of gold in London is merely due to the
free market for gold in that centre which causes a large
part of the world's supplies of new gold to be sent there
for sale.
VII.—SERVICES AND TRADE BALANCES.
Beyond the effect upon the trade balances of individual
countries of investments of capital and the payments of
interest thereon several other important factors have to
be taken into account. The greatest of these is the services rendered by the countries possessing great fleets of
166
Trade
Balance
of United
States
mercantile ships to those countries which possess little or
no shipping. The imports of produce of the countries
possessing great mercantile navies are swollen by the
produce they receive in payment for the services rendered
by their shipping, while the exports of the countries
owning but few ships are increased by payments to other
lands for marine transportation. The mercantile marine
of Great Britain renders very valuable services to the
whole world, and a substantial portion of the imports of
goods into the United Kingdom is received in payment of
the services rendered by the British mercantile fleet.
A third factor of moment in determining the trade
balances are the amounts expended by tourists. Large
numbers of travellers, mainly from the new countries,
visit the older lands for the purpose of recreation, and
during their sojourn they expend great sums of money in
the aggregate. The means of defraying these expenses
have to be provided by shipments of produce from the
countries of which the travellers are citizens and from
which they draw their incomes. The amounts expended
in Europe by visitors from the United States, from
Canada, South America, and Australasia are very large
and are an important factor in causing the imports of
the older countries to exceed their exports and the exports of the newer countries to exceed their imports.
There are several other factors of minor importance
tending to increase the imports of the older countries and
the exports of the newer. The most important of these is
the temporary employment found in various of the newer
countries by the citizens of Europe. In the spring large
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numbers of Europeans of various nationalities visit the
United States, Canada, Argentina, and other of the new
countries in order to obtain employment during the summer and autumn, and they return with their savings to
spend the winter in Europe. Further, many Europeans
who dwell in the new countries for a period of years ultimately return to their native land with large savings.
This movement of population and of money tends to
increase the imports of goods into the older countries and
the exports of goods from the newer countries. Again,
large sums of money are sent by citizens of the new
country to their friends in Europe, and these remittances are settled by imports of produce into the recipient countries and by exports of produce by the countries
from which the remittances are made. Further, a considerable number of children are sent to Europe for education
by their parents living in various parts of the world, and
the sums remitted for school fees increase the exports of
the newer countries and the imports of the older ones.
It is unnecessary to go into less important matters other
than to say that insurance, commissions to bankers and
to brokers, and fees to members of a great many other professions all tend to increase the volume of imports into
the older countries and to enhance the exports of the
newer ones.
On the other hand, there is an important offset in the
number of persons emigrating from the older to the newer
countries. The amount of money carried by these emigrants is considerable. How much of it is borrowed by
the emigrants, and subsequently returned with interest to
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Trade
Balance
of United
States
the friends who provided them with the means of emigrating, no one can calculate. On balance, however, the
money taken from the older countries into the newer
countries by emigrants is an offset to be reckoned with in
analyzing the factors responsible for the balance of imports over the exports of the European countries and the
balance of exports over imports of the newer countries.
VIII.—LENDING AND BORROWING COUNTRIES.
Prior to dealing specially with the trade balance of the
United States it may be useful to discuss briefly the
effect upon trade balances of the more important countries of the world of exports and imports of capital and
of the receipt and payment of interest thereon. There
is practically no country which neither exports nor imports
capital with the exception of Thibet. This type of country
may be left out of consideration. The chief countries
which supply capital to other lands are Great Britain,
Germany, France, Holland, Belgium, and Switzerland. Of
these countries, Great Britain is by far the most important
lender. This country has about $15,000,000,000 of capital
invested abroad and is adding to its colonial and foreign
investments at the rate of upwards of $500,000,000 a year.
Germany and France come next with investments of about
$8,000,000,000 each. The investments of Holland, Belgium, and Switzerland are of much smaller amount, but
are nevertheless considerable. The imports of all these
five countries largely exceed their exports in consequence of the receipt of interest and of tourist expenditures. In the case of Great Britain the excess of im-
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ports over the exports is further largely increased by
the earnings of British ships, the tonnage of which forms
so large a portion of the world's international shipping
facilities. The fleets of other countries are not much
more than sufficient to take care of their own trade in
the aggregate; indeed, in most cases they are insufficient
for this purpose, and the deficiency is made good by
the British mercantile marine.
The principal countries whose exports exceed their
imports in consequence of the large amount of interest
they have to pay on capital borrowed from other lands
are the United States, the Australasian colonies of Great
Britain, British India, Argentina, Brazil, and Mexico.
Several other countries whose imports now exceed their
exports will eventually come into this category. At the
present time Canada's imports largely exceed her exports
in consequence of the vast amount of capital—about
$200,000,000 a year—which she is borrowing from other
lands—almost entirely from Great Britain. In the course
of time the Canadian indebtedness to other countries and
the expenditures of her tourists, etc., will be so great that
her exports will exceed her imports, although large amounts
of capital will continue to flow into the country each year.
Of course Canada will have no difficulty in making these
interest payments, having regard to the rapid growth in
the annual amount of wealth created by means of the capital she is importing. China, Japan, and Chile are other
instances of borrowing countries whose imports exceed
their exports in consequence of the inflow of large amounts
of foreign capital.
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Trade
Balance
of United
States
Parenthetically, I would ask the reader to note that
in the case of the United States the excess of exports
over imports arises only in part from payment of interest on capital previously borrowed. The excess of exports is in part due to the expenditures of American
visitors to Europe, to Egypt, and elsewhere, in part to
the remittance of money by American citizens to friends
in other lands, and in part to the payment for ocean
transport of freight. But at the moment I wish to
refer more particularly to the effect upon trade balances of the lending and borrowing of capital and of
the receipt and payment of interest thereon. In this
respect it should be noted that Great Britain is by far
the largest lender of capital, and that the United States
has obtained a greater amount of capital from other
countries than any other State, that in the case of Great
Britain the great balance of imports over exports is
mainly due to the receipt of interest on capital invested in other lands, and that in the case of the United
States the excess of exports over imports arises in large
part from the payments of interest upon capital borrowed from other countries.
Foreign trade of countries that have invested large amounts of capital in other
lands and receive a considerable income from their foreign investments.
Merchandise.
Country.
Year.
Net imports
Great Britain
Germany
France
Holland
Belgium
1907
1906
$2,695,711.000
1,842,822,000
Domestic
exports.
Excess of
imports over
exports.
$ 2 , 0 7 3 , 3 0 0 , OOO
$ 6 2 1 , 586,0001
i , 5 0 1 , 717. 000
3 4 1 , I 0 5 , OOO)
i,080,047,000
120,984,000=
1907
I , 2 0 I , 0 3 1 , OQO
1907
I,068,823,©OO
883,926,000
184,897.000
1907
707, 4 4 9 , 0 0 0
545.349.000
162,100,000
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IX.—EUROPE'S CAPITAL INVESTMENTS IN THE UNITED
STATES.
Almost from the day that it was discovered the United
States has obtained supplies of capital from Europe.
In the sixteenth, seventeenth, and eighteenth centuries
the capital was imported for the development of sugar,
tobacco, and cotton plantations and for mercantile purposes. Early in the nineteenth century large sums of
money were invested by Great Britain in the securities of
the United States Government and in state and municipal government bonds. In 1800 there were no American securities quoted in what was then regarded as the
London Stock Exchange " official list," but in 1825 nine
issues of United States government bonds were quoted
in London and a number of state and city loans. These
latter were New York state 5 percents and 6 percents,
Virginia 6 percents, Pennsylvania 5 percents, various
Louisiana loans, and the bonds of the cities of New York
and of New Orleans. United States Bank shares were
also quoted in London.
The application of steam to land traction greatly
widened the need for capital in the United States, and
London was asked for capital for railway construction.
The first record of a loan in London for an American railway was the purchase in 1836 by the Messrs. Baring
Brothers of $2,000,000 of bonds of the Baltimore and Ohio
Railroad. But it was not until the fifties and sixties that
any large amount of capital was raised in London for
railway construction. This is indicated by circulars
issued in the early fifties by the Messrs. Baring Brothers
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Balance
of United
States
in which they directed the attention of their British
clients to the attractive yields afforded by the loans of the
United States Federal Government, by the state loans
of Alabama, Indiana, Illinois, Kentucky, Louisiana,
Maryland, Massachusetts, New York, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, and Georgia,
as well as by the loans of the cities of Boston and of New
York, all of which bore interest at the rate of from 5 per
cent to 6 per cent. No mention was made in the circulars issued in the early fifties of railroad bonds or
stocks. In the fifties, sixties, and early seventies large
sums of capital were invested by Europe, mainly by
Great Britain and Holland, in the federal and state government loans, in municipal securities, in railroad bonds
and stocks, and in the shares of land, mining, and other
ventures. But the chief borrowers were railways. By
1883 the amount of American railway securities quoted
in London amounted to the large total of $1,535,000,000.
Since the early eighties the accumulation of capital in the
United States itself has been on a great scale, and the
federal and state governments have been able to borrow
at home at lower rates of interest than the rates
at which they could obtain capital from the investors of
Europe. But the amounts of capital needed by American railways have been beyond the power of the American
people to supply, and large amounts of capital have been
invested by Europe in American railway and other securities. At the end of 1908 the securities of American railways quoted in the London Stock Exchange " official
list" were of the nominal value of $7,500,000,000.
823000—10—12
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Further, there are a large number of American industrial
and other securities quoted in London which raises the
total to over $9,000,000,000. Only a portion of this
vast amount of securities quoted in London is owned
by British investors. Great Britain possesses about
$3,500,000,000 of American securities. To this sum has
to be added the considerable amounts invested by the
Continent. Large amounts of German, Dutch, and
French capital are embarked in American undertakings,
principally railways. A statement drawn up in 1902
at the instance of the French Minister of Finance from
reports supplied by French diplomatic agents and consuls in various parts of the world placed the total amount
of French capital invested at that time in the United
States at 600,000,000 francs, or $120,000,000, but this
figure appears to have been an underestimate. It is
true that few issues of American securities are publicly
quoted on the Paris Bourse, but relatively large amounts
have been purchased privately by French investors in
London and in New York. The French investments
in the United States, including the Pennsylvania Railroad and other loans placed in Paris since 1902, amount
to nearly 2,500,000,000 francs, or $500,000,000.
Estimates of the amount of capital invested by Germany
in the United States were made in 1905 by the German
Admiralty and published in a work entitled "Die Entwicklung der Deutschen Seeinteressen im letzten Jahrzehnt." These estimates placed the amount of German
capital in the United States and Canada in 1904 at
from 2,500,000,000 marks to 3,000,000,000 marks, say,
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Trade
Balance
of United
States
$625,000,000 to $750,000,000. Since 1904 considerable
additional sums of German capital have been invested
in the United States. German bankers place the amount
of the German investments in American securities at
about $1,000,000,000. The amount of Dutch capital in
the United States is about $750,000,000. American
securities are also held in Belgium, Switzerland, and
in other countries. In the aggregate the amount of
European capital invested in "permanent" securities in
the United States is approximately $6,000,000,000.
Beyond the fixed capital invested by Europe in the
United States account has to be taken of the floating
loans made by Europe to America. These floating loans
are mainly incurred in the spring and summer months
in anticipation of the produce shipments from the
States in the fall months and they are then largely
liquidated. The amount of the floating debt of the
United States to Europe in the form of produce bills,
finance bills, loans against securities, overdrafts, etc.,
averages about $400,000,000, reaching a larger sum in
July and early August and falling to a much lower
sum at the end of December. The rate of interest paid
upon this floating debt insofar as it consists of produce
bills is a very low one, the rate of interest charged
on this class of loan being less than that on any other
kind of security.
Including both the fixed investments and the floating
loans, the amount of capital borrowed by the United
States from other countries is about $6,500,000,000, the
annual interest charge upon which is about $300,000,000.
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An offset to the large amount of capital invested in
the United States is the capital invested by American
citizens in other countries, more especially in Mexico,
Canada, in the South American States, in the Philippines,
in Cuba, etc. It is true that a portion of the capital
of these foreign undertakings in which American capital is invested has been provided by European investors; nevertheless, as these corporations are American and the amounts invested in the United States by
Europe include investments in these foreign companies,
it is necessary to place the interest received from these
foreign investments by American corporations against the
interest paid to Europe. Beyond the capital of public
corporations which have been formed under state laws
in America the capital invested privately by American
citizens in other lands reaches to a considerable total.
The amount of American capital invested in other lands
in this manner both publicly and privately is probably
$1,500,000,000, yielding an income of about $75,000,000
a year. By deducting the interest—$75,000,000—received
upon American capital placed abroad from the interest—
$300,000,000—which the United States pay upon capital
supplied to them by other lands, I arrive at a net payment of $225,000,000 by the United States to other countries for interest and dividends upon capital. This sum
the United States has to remit each year by exports of
produce.
X . — T H E VALUE TO THE UNITED STATES OF LOANS OF
CAPITAL, BY OTHER LANDS.
I have dealt in a general way with the effect of capital
investments by the older countries in the newer lands; I
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Trade
Balance
of United
States
will now refer in somewhat greater detail to the effect of
the imports of capital from the older countries upon the
growth of trade and of prosperity of the United States.
The capital obtained by America from other lands, mainly
from Great Britain, was chiefly for the purpose of extending and improving the railway system of the country.
No one can survey the remarkable growth in the production, wealth, and population of the United States without
expressing his appreciation of the great part played by
railway extensions in bringing about that growth. The
extension of railways alone made it possible to bring into
cultivation the vast tracts of virgin lands that are now
under the plough. Without railways the United States
could not now produce annually agricultural wealth of the
value of about $8,000,000,000. Again the extension of
railways alone made it possible to reach and to develop
upward of $2,000,000,000 of mineral wealth per annum.
It is the railways that enable the people of the United
States to reach and to obtain for their use the vast quantity of lumber annually cut from the forests. Lastly, the
m
immense manufacturing industries of the States which
now distribute over $3,000,000,000 in wages could never
have been built up but for the construction of railways.
The provision of some $6,500,000,000 of capital to the
United States by older countries, mainly for railway
construction, has enabled the American people to devote
their rapidly growing savings to the building and furnishing of homes, to the equipment of manufactories, to fitting
out retail establishments, and to other purposes to a much
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greater extent than otherwise would have been possible,
and in this way the foreign capital has greatly accelerated
the growth of population, production, and wealth. By the
use of the $6,500,000,000 of capital obtained from other
countries the annual production of wealth by the United
States has, I calculate, been increased to a nearly corresponding extent and the accumulated wealth of the country
has been increased by many times the amount of the capital borrowed. The additional value given to land alone
by the construction of railways is so vast and so apparent
that it needs no demonstration. The increase in the
annual production of wealth by the United States rendered possible by the importation of capital has been at
least twenty times greater than the sum paid for interest.
The investment of this capital by the older countries in
the United States has thus brought advantages which
cannot easily be exaggerated.
XI.—TOURIST AND OTHER EXPENDITURES.
Their great prosperity permits a large number of American citizens to visit other countries each year and to
expend for this purpose a large aggregate sum. No statistics are kept of the number of American citizens leaving
the shores of the United States for other lands, but complete figures are available of the number of citizens that
return to their country from these visits. The number
of American citizens who make visits to other lands is
steadily increasing. In the year to June 30, 1908, the
number returning was 200,447. The numbers in recent
years have been as follows:
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Trade
Balance
of United
States
Number of United States citizens returning to the United States from other
lands.
Year to June 30—1898
93, 602
1899
95, 196
1900
120, 477
1901
_
I57>050
1902
142,058
1903
140, 669
1904
147,974
1905
167,227
1906
177,488
1907
191,797
1908
200, 447
Thus, the number of American citizens visiting other
lands in the course of the year is now upward of 200,000.
The data I have been able to obtain as to the expenditures
of these tourists shows that the sum expended by them
approximates to $1,000 per person. This sum includes
merely the passage money and the sums expended in
other countries for food, transportation, and other miscellaneous expenditures. It does not include the sums
expended upon works of art, jewelry, clothing, etc., which
are declared at the customs and are included in the value
of the goods imported into the United States. In the
aggregate, tourist expenditures for the purpose I have
mentioned reach a total of about $200,000,000. On the
other hand, a number of foreign tourists visit the United
States and their expenditures should be placed against those
of American citizens. In 1907-8 the number of persons
arriving in the States who were neither American citizens
nor immigrants reached 142,000, but a large portion of
these were immigrants destined for Canada who expended
but a very small sum of money per person for transportation on their way to destination. Apparently the number
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of visitors, other than immigrants passing through to
Canada, was about 30,000. The expenditures of visitors
to the United States may be taken at about $1,000 per
person, excluding all shipping transportation, or an aggregate sum of visitors' expenditures in the United States of
$30,000,000. On balance, therefore, the United States
has to pay to other countries a sum of about $170,000,000
a year to cover tourist expenditures.
XII.—EXPENDITURES OF IMMIGRANTS AND EMIGRANTS.
There is another movement of population which creates
large debit and credit items in the American trade balance. Each year a considerable number of persons, who
previously had migrated to the United States, return to
take up their residence in Europe. The numbers of these
persons greatly fluctuate. In periods of trade depression
the numbers of wage-earners that return Lo Europe rise
to great figures. Indeed, in the trade depression of
1907-8 the number of persons that left the United States
of the wage-earning classes was nearly as great as the number of immigrants—637,905 left the United States and
782,870 arrived. For the period from October, 1907, to
October, 1908, the number of persons that left the United
States of the wage-earning class largely exceeded the
number that arrived. In calculating a trade balance it is
necessary to deal with a normal rather than with an
abnormal situation. Probably such a movement as that
witnessed in 1907-8 will not recur for a great number of
years. Therefore in my calculation I propose to take the
average number of persons of the wage-earning class that
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Trade
Balance
of United
States
leave the United States. In the four years to 1907 they
averaged somewhat over 300,000 a year. But the whole
of this number did not consist of persons who had made a
modest fortune and who desired to return to Europe to
enjoy the fruits of their labors. Large numbers of the
working classes visit their friends in Europe from time to
time and travel in the steerage because of its cheapness.
Persons traveling for this purpose and intending to return
to the United States do not carry with them nearly as
much money as others who are returning to live in Europe
after having accumulated what is to them a fortune.
Again a certain number of immigrants are unable to find
congenial occupations in the country and return to Europe
with practically no resources. Thus the average amount of
money carried by the 300,000 "emigrants" who leave the
United States each year is not a very large sum, on the
average it was probably not more than $200 per head, or a
total sum of about $60,000,000. On the other hand, account has to be taken of the money brought in by immigrants from other lands. In 1908-9 the number of
immigrants into the United States was about 1,000,000 in
comparison with 783,000 in the previous twelve months
and 1,285,000 in 1906-7. The number of immigrants
arriving in the States in the last eleven years are as follows:
Year to June 30—1898
1899
19001901
1902
1903
1904
1905
1906
1907
1908
229, 299
311,715
448,572
487,918
648,743
857,046
812, 870
1, 026, 499
1, 100,735
1,285,349
782,870
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Commission
The average sum brought into the country is about $50
per head. In the aggregate the money brought into the
country by immigrants probably reaches $50,000,000 per
annum.
For all practical purposes I calculate that the money
brought into the country by immigrants about counterbalances the money taken out of the country by emigrants
returning to their native lands and by " other than cabin
passengers" visiting other countries.
XIII.—REMITTANCES TO FRIENDS.
The great prosperity of the United States enables many
of its citizens who have come from other lands to make
gifts of large sums of money in the aggregate to friends
in the old countries. The remittance of this money
means that the United States have to send considerable
quantities of produce abroad for which there is no corresponding item on the import side of the account, as the
produce goes for the purpose of providing the funds necessary to cash the postal money orders and other drafts
remitted to friends. The amount of these remittances is
exceedingly difficult to calculate, but that it is large
everyone admits. I have endeavored to make an independent calculation of the amount of these remittances,
but unfortunately there is a controversy between the
banks and the express companies as to the sale of these
drafts and neither the banks nor the express companies
are willing to furnish the necessary information to enable
an estimate to be made of the situation at the present time.
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Balance
of United
States
However, the bankers have referred me to a paper written
by Mr. Charles F. Speare and published in the North
American Review of January, 1908, in which Mr. Speare
calculates the total amount of money remitted to friends
in Europe by immigrants. Mr. Speare estimates that out
of the savings of the foreign born in America $250,000,000
a year are going abroad and that the annual rate of increase
is about 10 per cent. The annual distribution of this great
sum throughout Europe is, he says, in the following proportions :
Italy
Austria-Hungary
Great Britain
Norway and Sweden
Russia
Germany
Greece
All others, including
Denmark
$70, 000, 000
65, 000, 000
« 25, 000, 000
25, 000,000
25,000, 000
15, 000, 000
5, 000, 000
1
France,
Switzerland,
Belgium,
and
10, 000, 000
The foreign-born population of the United States
numbers about 15,000,000 and the remittances per head
were estimated as follows:
Number.
Italian
Austro-Hungarian
British
Scandinavian
Russian
German_
Greek
_
____
_
_..
_
__
_
2,300,OOO
2,250,OOO
3,500,000
i,600,000
_ _ _ _
1,700,000
3,700,000
_ _
100,000
Per capita
remittance.
$30.00
28.10
7.14
i5-oo
14.S0
4.05
50.00
a In 1906 these remittances included about $10,000,000 to Ireland alone—$5,500,000
through banks and over $4,000,000 by the post-office.
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The amounts of foreign money orders issued by the postoffice of the United States to all countries in the world in
1906-7 and in previous years were as follows:
Year to June 30—1885
1890
1895
1900
1905
1906
$6,840,358
13,230, 135
12,890,744
16,749, 018
47,516,028
63,047, 867
1907
71, 000, 000
Beyond the post-office all sorts of outside agencies are
employed. The greater portion of the remittances are
made through bankers of the nationality of those remitting.
There are nearly 1,000 Italian bankers in the United States,
several hundred Hungarian bankers, and numerous small
Russian bankers. Beyond these private bankers there
are many large banking institutions which remit large
sums of money for account of immigrants. The express
companies also do a large business, calculated at from
$20,000,000 to $25,000,000. Considerable sums are also
remitted in other ways. That there is this large sum sent
abroad by small remittances, as calculated by Mr. Speare,
cannot, I think, be questioned. American citizens
undoubtedly are very liberal and generous to their friends
in Europe. I have personal knowledge of large sums of
money remitted by individuals to friends. Nevertheless,
from the data I have been able to obtain, I can not confirm the calculation that the remittances to friends are as
much as $250,000,000 a year. In the first place, a portion
of this money is remitted by persons returning to live in
Europe whose remittances I have already allowed for in
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Balance
of United
States
Chapter XII. Secondly, many of the money orders and
drafts are sent to Europe to pay for goods purchased.
Very large numbers of small parcels of goods are imported
and figure in the imports of produce. These small parcels
are usuallly paid for by small drafts or by postal money
orders. It is impossible to determine if a small remittance
is for the purpose of purchasing articles of attire, presents,
books, etc., or is merely a gratuity, against which no produce is received. The amount of the remittances for the
purchase of small articles imported through express companies and others undoubtedly reaches a large sum. That
all foreign postal money orders are not gratuities is evident
from an examination of the foreign money orders issued by
other countries. In comparison with the $63,000,000 of
foreign money orders sold by the United States postoffice in 1905-6, Austria remitted $50,854,000 to other
countries in this manner, Hungary $45,251,000, Germany
$33,233,000, France $13,074,000, the United Kingdom
$9,664,000, and Switzerland $9,265,000. Certainly the
remittances of Austria-Hungary, Germany, France, the
United Kingdom, and Switzerland were not in the nature
of gratuities—they were mainly remittances for value
received. With the data at my disposal I do not feel justified in placing the amount of money remitted by American citizens to friends in other countries at a larger figure
than $150,000,000. This is still a very large sum, and
is a factor of great importance in calculating the trade
balance of the United States and the amount of produce
which has to be remitted for various purposes other than
to pay for goods imported.
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Although I am unable to accept Mr. Speare's conclusions that America remits each year $250,000,000 in gifts
to friends in other lands and have reduced the sum to
$150,000,000, I wish to express my indebtedness to Mr.
Speare for the assistance he has afforded me and my
appreciation of the work he has done in compiling the
total of the small foreign drafts sold by bankers, by the
express companies, and by the post-office.
XIV.—FREIGHTS.
The United States possesses a mercantile marine large
enough to convey but a small portion of the produce they
export and import, and considerable payments have to be
made for shipping services. In 1907-8 the imports into
the United States by sea were valued at $1,123,000,000.
Of this amount $152,000,000, or 13.5 per cent, was carried
in American vessels and $971,000,000, or 86.5 per cent,
in foreign vessels. In the same year the exports from the
United States were valued at $1,670,000,000, of which
amount the produce conveyed in American vessels was
valued at $120,000,000, representing a proportion of only
7.2 per cent and the balance of $1,550,000,000, or 93.8
per cent, was conveyed in foreign vessels. The sum
which the United States had to pay to other lands for
marine transportation is much smaller than is usually
calculated. In the first place, other countries have to
pay the cost of transporting the produce they purchase
from the United States, and there is no burden upon
America for freight upon goods shipped to other lands.
Indeed, there is a credit item on goods exported, inasmuch
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Trade
Balance
of United
States
as $120,000,000 worth of produce, or 7.2 per cent, of the
whole of the goods exported in 1907-8 was conveyed in
American vessels. The freight which the United States
has to pay for is that upon the $971,000,000 of imports
conveyed in foreign vessels less the freight earned by
American vessels in conveying $120,000,000 of exports.
Thus the net amount of freight payable is in respect of
goods amounting in value to about $850,000,000. That
was the amount in 1907-8. In 1908-9 the imports have
shown large expansion, and it is probable that the value
of the freight imported in foreign vessels has been about
$1,150,000,000, and that after allowing for the credit item
in respect of exports conveyed in American vessels, the net
amount of goods upon which freight was payable was about
$1,000,000,000. There are, however, other credit items
to be taken into consideration. The foreign vessels
carrying goods from the United States to other countries
are usually coaled and provisioned for the outgoing
voyage in American ports, and the value of the coal and
provisions supplied to them must be deducted from the
payments which the United States has to make for freight
brought into the country in foreign vessels. After taking
all these factors into consideration I calculate that the
net sum which the United States pays to other countries,
for the transportation of merchandise is about $25,000,000
per annum. Payment of this sum has also to be remitted to other lands by exports of produce.
The values of the exports from and imports into the
United States carried in American vessels and in foreign
vessels, respectively, since 1890 are shown, in the tables,
following.
187
Value of imports of merchandise into the United States carried in American vessels, 1800 to 1008.
By sea.
Year ended June 30In American
vessels.
1890
$ 1 2 4 , 9 4 8 , 948
1891
1 2 7 , 4 7 1 , 678
1892
1 3 9 , 1 3 9 , 891
1893
127,095.
1894
189s
1896
1897
1898
1899
1900
1901
1902
1903
1904
1905
1906
1907
1908
434
1 2 1 , 5 6 1 , 193
1 0 8 , 2 2 9 , 615
117,299, 074
1 0 9 , 1 3 3 . 454
93,535. 867
8 2 , 0 5 0 , 118
94o
104,304,
93,05s,
102,188,
123,666,
132,253,
160,649,
168,488,
493
002
832
065
57i
129
716
733
I5i,9i9,
176,550,
In foreign
vessels.
$623, 740,100
676, 5 H , 7 6 3
648, 535,976
695, i84,394
503, 810,334
59o, 538,362
626, 890,521
619, 784,338
492, 086,003
581, 673,550
701, 223,735
683, 015,858
744, 766,235
835, 844,210
790, 595,186
878, 138,230
971, 397,27o
I,163, 698,060
971, 111,234
Total.
$748, 689,048
803, 983,441
787, 675,867
822, 279,828
625, 37L527
698, 767,977
744, i89,595
728, 917.792
585. 621,870
663, 723,668
805, 528,675
776, 071,351
846, 954,237
959. 511,042
9 2 2 , 848,251
1 , 0 3 8 , 787,801
1 , 1 3 9 , 885,399
i , 3 4 0 , 248,776
1 , 1 2 3 , 030,967
Per cent in1
American
vessels.
By land
vehicles.
16. 7
$ 4 0 , 6 2 1 ,3 6 1
15-9
17-7
755
3 9 , 7 2 6 , 595
15.5
44,121, 094
40,932,
19.4
29,623, 095
15.5
33,201, 9 8 8
15-7
35,535, 079
15.0
35,8i2, 620
16. o
30,427, 784
12.4
3 3 , 4 2 4 , 821
12. 9
44,412, 509
12. o
47,100, 814
Total by land
and sea.
$789, 3 1 0 , 4 0 9
844, 9 1 6 , 1 9 6
827, 4 0 2 , 4 6 2
866, 4 0 0 , 9 2 2
654, 9 9 4 , 6 2 2
731, 969,965
779, 724,674
764, 7 3 0 , 4 1 2
616, 0 4 9 , 6 5 4
697, 1 4 8 , 4 8 9
849, 9 4 1 , 1 8 4
823, 172,165
12. I
5 6 , 3 6 6 , 711
903, 3 2 0 , 9 4 8
12. 9
6 6 , 2 0 8 , 195
1,025, 7 1 9 , 2 3 7
14.3
6 8 , 2 3 9 , 120
991, 087,371
15.5
78,725, 270
1,117, 5 1 3 , 0 7 1
14.8
86,677, 047
1, 2 2 6 ,5 6 2 , 4 4 6
13.2
94,172,
649
7 i , 3 i o , 825
1,194, 3 4 1 , 7 9 2
13.5
1,434, 4 2 1 , 4 2 5
Value of exports of merchandise from the United States carried in American
vessels, i8go to 1008.
By sea.
Year ended June 30—
1890
1891
1892
1893
1894
189s
1896
1897
1898.
1899
1900
1901.
1902
1903.
1904.
1905.
1906.
1907.
1908.
In American
vessels
$77,502,138
78,968,047
81,033,844
70,670,073
73,707,023
62, 2 7 7 , 5 8 1
70,392,813
79,941,823
67,792,150
78,562,088
90,779,252
8 4 , 3 4 3 , 122
83,631,985
91,028,200
97,482,054
129,958,375
153.859,076
1 4 1 , 780, 310
120.593,589
I n foreign
vessels.
$747, 376,644
773, 569,324
916, 023,675
733, 132,174
7 6 9 , 212,122
6 9 5 , 357,830
7 5 1 . 083,OOO
9 0 5 , 969,428
1 , 0 9 0 , 406,476
1 , 0 6 4 , 590,307
1 , 1 9 3 , 220,689
1, 2 9 1 , 520,938
1, 174, 263,079
1, 190, 262,178
1, 2 1 0 , 608,328
1 , 2 2 5 , 063,232
i,396, 270,084
1 , 5 2 0 , 598,231
1 , 5 4 9 , 628,630
Total.
$824, 878,782
852, 5 5 7 . 3 7 1
997. 057,519
803, 802,247
842, 9 1 9 , 1 4 5
757, 6 3 5 , 4 H
821, 4 7 5 , 8 i 3
985, 911.251
1,158, 198,626
1, 143, 1 5 2 , 3 9 5
1,283, 999,941
1,375, 864,060
1,257, 895,064
1,281, 290,378
1,3o8, 090,382
1,355, 021,607
i,55o, 129,160
1,662, 3 7 8 , 5 4 1
1, 6 7 0 , 2 2 2 , 2 1 9
Per cent in
American
vessels.
9-4
9-3
8.1
8.7
8.2
8.5
8.1
5-9
6.9
7- 1
6.1
6.6
7- 1
7-5
9.6
9-9
8.5
7.2
By land
vehicles.
#32,949, 902
31,923, 439
33,220, 629
43,862, 947
49, 221,427
49,902, 754
61, 131,125
65,082, 305
73,283, 704
83,870, 907
no, 483,141
III,900, 931
123,&<24, 337
138,851, 301
152,736, 889
163,540, 059
193,735, 340
218,472, 537
190,551, 127
Total by land
and sea.
$857, 828,684
884, 480,810
1,030, 278,148
847, 665,194
892, 140,572
807, 538,165
882, 606,938
1,050, 993,556
1, 231,482,330
i, 227,023,302
1,394, 483,082
1,487, 764,991
1,381, 719,401
I, 420,141,679
I, 460,827,271
I,5i8, 561,666
1,743, 864,500
1,880, 851,078
1,860, 773,346
Co
National
Monetary
Commission
It should be noted that the values of the exports are
those at the seaboard of the United States, while the
values of the imports are those in the countries consigning
the produce.
XV.—INSURANCE.
A large amount of fire insurance is written each year in
the United States by English and other offices and the
sums payable to those offices in respect of insurance
reaches a considerable figure. On the other hand, the
fire losses of foreign offices in the United States are heavy
and the profit which alone accrues to other countries is
not a large item, at any rate it has not been a large item
in the recent past. On the other hand, American lifeassurance offices transact a fairly large business in foreign
countries. Here again the claims have to be placed against
the premiums received and the net sum coming to the
United States is not an important item. In recent years
the experience of American life offices has been abnormal.
They have transacted very little new foreign business and
their claims have represented a much larger proportion
of their premium income than usual. Still, this situation will doubtless pass away and America will receive
the normal amount of income from the business transacted
in other lands by her life-insurance offices. On balance,
if all kinds of insurance and assurance are combined,
America probably has to pay very little on balance to
other lands and the factor of insurance in calculating the
trade balance may consequently be ignored.
190
Trade
Balance
XVI.—SUMMARY
TOURIST
OF
of United
REMITTANCES
EXPENDITURES, GIFTS
TO
FOR
States
INTEREST,
FRIENDS,
AND
FREIGHT CHARGES.
Thus I arrive at the conclusion that the United States
have on balance to pay other countries a net sum of
$250,000,000 for interest upon foreign capital invested
with them; that the expenditures of American citizens in
other lands exceed by $170,000,000 the outlays of foreign
tourists in the United States; that the remittances of
foreign-born citizens to friends in Europe and elsewhere
amount to $150,000,000, and that the net sum paid for
ocean freight to other countries is $25,000,000. Thus
America has to make an annual payment of about
$595,000,000 for purposes other than for the purchase of
goods from other countries. In other words, the exports
of merchandise, gold, and silver from the United States
must exceed the aggregate value of the merchandise gold
and silver imported by nearly $600,000,000 in order that
payment may be made for interest, tourist expenditures,
etc. That is to say, America requires an excess of exports over imports of nearly $600,000,000 per annum in
order to settle her trade balance. If she has a larger
balance of exports over imports than this figure, she is
repaying a portion of her obligations to other lands. If
she has less than this sum, she is borrowing additional
capital from other lands. It should, however, be clearly
understood that this amount is subject to wide fluctuations, and is by no means a hard and fast obligation.
The interest upon foreign capital invested in the country
fluctuates to some extent with the rate of dividend earned
upon the capital invested. If the country is in depression,
191
National
Monetary
Commission
the rate of dividend on much of the capital declines, and
if the nation is prosperous it advances. The figure given
is calculated upon the return upon capital in recent years.
Again the tourist expenditures vary widely. In years of
trade activity and prosperity American visitors to Europe
and other countries spend money freely, whereas in years
of depression they are more economical. Further, the gifts
of American citizens to their friends in Europe fluctuate
with the condition of trade. In a period of depression
the gifts are appreciably smaller than in years of activity.
In this respect, however, it should be noted that depression in trade causes a great many persons to return to
Europe; that these persons take with them large sums of
money, and that this outflow of money has to be placed
against the smaller gifts to friends at such times. Taking all these circumstances into account, I calculate that
in a year of depression the obligation of the United States
to other countries for interest, tourist expenditures,
remittances to friends, freight, etc., is about $500,000,000
and that in years of normal trade activity it is about
$600,000,000.
XVII.—EFFECT UPON UNITED STATES TRADE BALANCE
OF IMPORTS AND EXPORTS OF CAPITAL.
I have already shown that European countries, especially Great Britain, make large investments in the
United States. The inflow of this capital is more or less
spasmodic. At times the amount invested in a single
year reaches to large figures, at others there is practically
no investment of new capital, while on rare occasions the
United States pays back a portion of the capital pre-
192
Trade
Balance
of United
States
viously borrowed. These movements of capital into and
out of the country powerfully affect either the imports or
the exports. In periods of capital inflow the imports of
goods are swollen, while exports are relatively light.
Capital can only be imported by one country from another
by the remittance of goods, hence the effect upon imports
or upon exports of the import or repayment of capital.
Nevertheless, it is necessary to recollect that the obligations of the borrowing countries to the lending countries
is, after a period of years, much greater than is indicated by
the amount of capital actually received by that country.
Not infrequently the undertakings in which foreign capital
is invested use a large portion of their profits for betterments and for capital purposes, and do not distribute it in
dividends. The retention of this profit for capital expenditure increases the indebtedness of the borrowing countries, although no actual remittance of capital from one
country to the other has taken place. Undivided profits
of one year become capital in the next. This practice of
using profits for capital purposes is responsible for no
inconsiderable portion of the capital invested by other
countries in the United States. Thus, if it were possible to
ascertain the actual amount of capital that was remitted
from other countries to the United States, the total would
not nearly reach the amount of capital now belonging to
other nations and employed by the United States. The
method of raising capital for railway companies in the past
has largely contributed to securing for the United States a
larger amount of capital than that which was directly
borrowed. A great number of the railways of the country
193
National
Monetary
Commission
raised their capital by selling bonds to Europe, and to
place the bonds they issued a considerable amount of
common stock for which no additional payment was
required. By accumulating profits instead of by dividing
them in dividends, and by using those profits for capital
purposes, the stock which was originally issued as an
inducement to investors to subscribe for bonds has been
gradually paid up, and at the present time the railway
companies possess actual assets to an extent equal to if not
exceeding the nominal amount of their bonds and stock.
This latter method of borrowing capital does not appreciably affect either exports or imports. If anything, it
tends to check both the exports and the imports, as it
means that the borrowing country has to remit a smaller
amount to other lands for interest and has to receive a
smaller amount of foreign produce for capital investment.
On the whole, however, the investment of capital through
the accumulation of profits has very little immediate
effect either upon imports or upon the exports. Ultimately, of course, by increasing the productive power of
the country and increasing its ability to exchange produce
for the goods of other countries, it tends to increase both
the exports and the imports. Further, the payment of
interest upon capital accumulated in this manner to its
owners in other lands increases the exports of produce but
not the imports.
The inflow of capital from other countries is sometimes
nearly $250,000,000 in a year and, on the other hand, the
repayments have reached to about $150,000,000 in a
year. The normal course of events, however, is for capital
194
Trade
Balance
of United
States
to flow into the United States year after year and for
repayments to be made b u t very seldom.
All through the earlier years of the last century u p to
t h e later seventies capital was sent into the United States
in considerable amounts, and this explains the reason for
t h e large excess of imports over t h e exports in this period
notwithstanding the increasing annual payments of interest t o other lands and t h e considerable annual sums
t h a t even then were expended for tourist outlays, remittances to friends, and ocean freights.
In the later seventies a wave of distrust passed over
Europe and for t h e moment investments of capital by
Europe in t h e United States came to an end. This explains t h e reason for excesses of exports over imports of
$262,000,000 in 1878 and of $270,000,000 in 1879 in place
of an excess of imports over exports of $116,000,000 in
1872. These figures include the combined balances of
. merchandise and the precious metals.
I n t h e eighties capital was invested very freely in t h e
United States b y Europe, and notwithstanding the very
large a m o u n t of t h e annual interest and dividend obligations, expenditures b y tourists, and remittances to friends,
the imports into t h e United States again exceeded t h e
exports in 1888 b y a sum of $40,000,000, a figure which
reflected t h e very large inflow of capital in t h a t year.
The financial crisis which took place in July, 1893,
again checked t h e imports of capital into t h e country
and t h e exports once more began to exceed t h e imports
b y large sums annually. The obligations of t h e United
States to Europe were curtailed at this time by default
195
National
Monetary
Commission
of interest and absence of dividends upon large amounts
of railway stocks and bonds. Further, the severe depression greatly diminished American tourist expenditures in
other lands and severely contracted the remittances to
friends. With the recovery in trade that took place in
1897 and 1898 interest payments were largely resumed
and expenditures became freer. Nevertheless the economy
of the American people was so great that the excess of
exports over imports rose to figures which enabled a
considerable amount of the capital previously invested
in the States to be repaid. This is the explanation for
an excess of $534,000,000 of exports over imports—merchandise, gold, and silver—in 1898, of an excess of
$504,000,000 of exports over imports in 1898-99, of
$570,000,000 in 1899-1900, and of $680,000,000 in 19001901. In these four years not only did the United States
borrow no fresh capital from abroad, but it repaid considerable sums beyond meeting its interest obligations,
tourist expenditures, and making remittances to friends.
The great prosperity of the country since 1901 has
enabled the American people to resume their normal
rate of expenditure, and in this period they have again
imported large amounts of capital from abroad. I calculate that in the past year to June, 1909, European
countries invested about $184,000,000 in the country.
In this period the excess of merchandise exports over
imports has been $351,000,000, the excess of gold exports over imports has been $48,000,000, the excess of
silver exports over imports has been $12,000,000, and
the total excess of exports over imports has been
196
Trade
Balance
of United
States
$411,000,000, whereas the sum needed to cover interest payments, tourist outlays, remittances to friends,
and freight charges has been about $595,000,000. The
difference between the two sums has been met by investments of capital by Europe in the United States.
Perhaps the situation will be more clearly realized if I
set it out in tabular form:
Foreign trade of the United States, 1908-9.
Merchandise:
Exports—
Domestic
Foreign
$1,638,000,000
25,000,000
Total
Imports
$ i , 663, 000, 000
1,312, 000, 000
Excess of merchandise exports over imports
$351, 000,000
Gold:
Exports
$92, 000, 000
Imports
44. 000, 000
Excess of gold exports over imports
Silver:
Exports
Imports
$56, 000, 000
44, 000, 000
Excess of silver exports over imports
12, 000, 000
Total excess of merchandise, gold, and silver exports over imports. $411,000, 000
Remittances for interest, etc.:
Interest
;
$250, 000, 000
Tourist expenditures
170, 000, 000
Remittances to friends
150, 000, 000
Freight,.
25, 000, 000
Total remittances
595. °oo, 000
Excess of sum remitted for interest, tourists, to friends, and for
freights over trade balance
184, 000, 000
This balance of $184,000,000 has been liquidated by
permanent or temporary investments of capital by other
countries in the United States.
XVIII.—IMPORTS AND EXPORTS.
In the foregoing I have referred to the fluctuations in
the balance of imports over exports. I now set out the
value of the merchandise imported into and exported
197
National
Monetary
Commission
from the United States in each year since 1790, with the
balance of imports over exports or of exports over imports:
Merchandise exports and imports, 1790 to 1 pop.
Excess of—
Fiscal years. a
Imports.
Exports.
$23,000, 0 0 0
29,200, 0 0 0
31,500, 0 0 0
31, ioo, 0 0 0
34, 600, 0 0 0
69,756, 268
81,436, 164
75,379, 406
68,551, 700
79,o69, 148
9 1 , 2 5 2 , 768
1 1 1 , 3 6 3 , 5H
76,333, 333
64,666, 666
$20,205,156
19,012,041
20,753,098
26,109,572
33,043.725
47,989,872
58,574.625
51, 294, 710
61,327,411
78,665,522
7o,971,780
93,020,513
71,957, 144
55,800,033
77,699,074
95,566,021
101,536,963
108,343,150
22,430,960
52,203,233
66,757,970
61, 316, 832
38,527,236
27,856,017
6,927,441
52,557,753
81,920,052
87,671,569
93,281,133
70,142,521
69,691,669
54,596,323
61,350,101
68,326, 043
68,972, 105
90,738,333
72,890,789
85,000,000
120,600,000
129,410,000
138,500,000
56,990,000
59,400,000
85,400,000
53,400,000
77, 030, 000
22,005,000
12,965,000
113,041,274
147,103,000
99, 250, 000
121,750,000
87,125,000
74,450,000
Imports over
exports.
Exports over
imports.
$2, 794,844
ro, 187,959
10,746,902
4,990,428
1,556,275
21, 766, 396
22,861,539
24,084,696
7,224,289
403,626
20,280,988
18,342,998
4,376, 189
8,866,633
7,300,926
25,033,979
27,873,037
30, 156,850
34,559,040
7, 196,767
18,642,030
38,502,764
6,037,559
60,483,521
65,182,948
n,578,43l
28,468,867
16,982,479
4,758,331
54,520,834
18,521,594
79,871,695
4,155,328
72,481,371
3, 197,067
72,169,172
90,189,310
5,202,722
78,093.5H
a Fiscal year ended September 30 prior to 1843 ; since that date ended June 30.
198
Trade
Balance
of United
Merchandise exports and imports, 1790 to
States
1909—Continued.
E x c e s s of—
Imports.
Exports.
$71, 332,938
8i, 020,083
67. 0 8 8 , 9 1 5
62, 7 2 0 , 9 5 6
95, 8 8 5 , 1 7 9
95, 1 2 1 , 7 6 2
101, 0 4 7 , 9 4 3
108, 6 0 9 , 7 0 0
136, 7 6 4 , 2 9 5
176, 5 7 9 . 154
130, 4 7 2 , 8 0 3
95, 9 7 0 , 2 8 8
156 4 9 6 , 9 5 6
98 2 5 8 , 7 0 6
122, 9 5 7 , 5 4 4
96 0 7 5 . 0 7 1
42 4 3 3 . 4 6 4
102 6 0 4 , 6 0 6
113 1 8 4 , 3 2 2
117 9 1 4 . 0 6 5
122 4 2 4 , 3 4 9
148 6 3 8 , 6 4 4
141 2 0 6 , 1 9 9
509,526
173
210 7 7 1 , 4 2 9
207 4 4 0 , 3 9 8
263 7 7 7 , 2 6 5
297 8 0 3 , 7 9 4
$74, 3 0 9 , 9 4 7
64. 0 2 1 , 2 1 0
67. 434,651
7i, 670,735
72, 2 9 5 . 6 5 2
81, 520,603
87, 5 2 8 , 7 3 2
102, 2 6 0 , 2 1 5
115. 2 1 5 , 8 0 2
124, 3 3 8 , 7 0 4
i n , 443,127
104, 9 7 8 , 5 7 0
112, 2 5 1 . 6 7 3
123, 6 6 8 , 9 3 2
i n , 8i7,47i
99, 877,995
82, 8 2 5 , 6 8 9
105, 7 4 5 , 8 3 2
106, 040, i n
109, 5 8 3 , 2 4 8
156, 7 4 1 , 5 9 8
138, 1 9 0 , 5 1 5
140, 3 5 i . 172
144, 3 7 5 . 7 2 6
188, 9 i 5 . 2 5 9
166, 9 8 4 , 2 3 1
203, 4 8 9 , 2 8 2
237, 0 4 3 , 7 6 4
218, 9 0 9 , 5 0 3
281, 219,423
293. 823,760
272, o n , 274
292, 902, 051
333, 5 7 6 , 0 5 7
219, 5 5 3 , 8 3 3
190, 6 7 0 , 5 0 1
203, 9 6 4 , 4 4 7
158, 8 3 7 , 9 8 8
166, 0 2 9 , 3 0 3
348, 859,522
294, 5 0 6 , 1 4 1
281, 952,899
286, 1 1 7 . 6 9 7
257 , 8 0 8 , 7 0 8
310 4 3 2 , 3 1 0
348 4 2 8 , 3 4 2
263 3 3 8 , 6 5 4
33i 333.341
353 616, 119
289 3 1 0 , 5 4 2
189 , 3 5 6 , 6 7 7
243 3 3 5 . 8 1 5
316 4 4 7 . 2 8 3
238 7 4 5 . 5 8 o
434 8 1 2 , 0 6 6
395 7 6 1 , 096
357 4 3 6 , 4 4 0
417 5 0 6 , 3 7 9
I m p o r t s over
exports.
199
$16,998,873
519,527
601,159
519,211
349,485
548,493
240,450
029,676
44 245 283
11 140
o73
7,144 211
8 33o 817
448,129
855,027
133,800
856,170
456,167
287,983
760,030
899,205
212,887
604,582
38, 431, 290
040,062
69 756,709
39, 3 7 L 3 6 8
157. 6 0 9 , 2 9 5
72, 7 1 6 , 2 7 7
85, 952,544
101, 2 5 4 , 9 5 5
75. 4 8 3 , 5 4 1
131. 3 8 8 , 6 8 2
National
Monetary
Commission
Merchandise exports and imports, 1790 to
1909—Continued.
Excess of—
Imports.
>435, 9 5 8 , 4 0 8
520, 2 2 3 , 6 8 4
626, 5 9 5 , 0 7 7
642, 1 3 6 , 2 1 0
567. 4 0 6 , 3 4 2
533. 0 0 5 , 4 3 6
460, 7 4 1 , 1 9 0
45i. 323,126
437, 0 5 1 , 5 3 2
445. 7 7 7 . 7 7 5
667, 9 5 4 . 7 4 6
642, 6 6 4 , 6 2 8
724. 6 3 9 , 5 7 4
723, 1 8 0 , 9 1 4
667, 6 9 7 , 6 9 3
577, 5 2 7 , 3 2 9
635, 436, 136
692, 3 1 9 . 7 6 8
723, 9 5 7 , 1 1 4
745. 1 3 1 , 6 5 2
789, 3 1 0 , 4 0 9
844. 9 1 6 , 1 9 6
827, 4 0 2 , 4 6 2
866, 4 0 0 , 9 2 2
654, 9 9 4 , 6 2 2
73i. 969,965
779. 7 2 4 , 6 7 4
764, 7 3 0 , 4 1 2
616, 0 4 9 , 6 5 4
697. 1 4 8 , 4 8 9
849. 9 4 1 , 1 8 4
823, 172,165
903. 320,948
1,025, 719,237
99i. 087,371
1. 117, 5 1 3 . 0 7 1
1,226, 562,446
1,434, 421,425
1,194, 3 4 L 7 9 2
1,3x1 9 2 0 , 2 2 4
Exports.
$ 3 9 2 , 771, 768
442, 8 2 0 , 178
444, 177, 586
522, 479, 922
586, 283, 040
513, 442, 711
540, 3 8 4 , 671
6 0 2 , 475, 220
694, 865, 766
710, 439, 4 4 i
835, 638, 658
9 0 2 , 377, 346
750, 5 4 2 , 257
8 2 3 , 839, 402
740, 513, 609
742,. 189, 755
830
679, 524,
7 i 6 , 183, 211
507
695, 9 5 4 ,
742, 4 0 1 , 375
857, 828, 684
884, 480, 810
1 , 0 3 0 , 278, 148
847, 665, 194
892, 140, 572
807, 538, 165
882, 606, 938
1 , 0 5 0 , 9 9 3 , 556
1, 231, 482, 330
1, 227, 0 2 3 , 302
1 , 3 9 4 , 4 8 3 , 082
1 , 4 8 7 , 764, 991
1 , 3 8 1 , 719, 401
I, 420, 141, 679
271
1 , 4 6 0 , 827,
666
i , 5 i 8 , 56i,
864, 500
1, 743
078
1,880 851,
773, 346
1,860
o n , 104
1,663
200
Imports over
exports.
$43, 186,640
77,403,506
182,417,491
119,656,288
1 9 , 5 6 2 , 725
28,002,607
2, 7 5 0 , 2 7 7
18,735,728
Trade
Balance
of United
States
The imports and exports of gold and the gold balance
since 1821 are set out below:
Gold imports and exports, 1821 to igog.
Excess ofYear ended June 3 0 -
Bxports.
$10,478,059
10, 810,180
6,372, 987
7,014,552
315,672
1,056,088
1,872, 489
1,635,084
1,573,258
1,422,664
2,979,529
2, 049,406
889,505
690,180
1,355, 280
647,455
3,2i3,735
1,2i3,204
4,800,668
3, 7o3,373
3,589,869
2,304, 756
407,687
1,365,521
3,053,425
2,053, 199
1, o37, 921
11,071,197
1, 972, 233
4, 560,627
22, 829, 913
40,073,979
25,442,858
40,470,260
55, 109,215
45,000,977
65, 232,653
Imports.
$8,064,890
3,369,846
5,097,896
8,378,970
529,277
678,740
1, n o , 448
808,220
816,666
821,146
932,029
716,686
611,852
3,766,172
2, 325, 196
7, 231,862
2, 431, 814
11,674,883
1, 164, 580
3,085,157
1,269,449
757,294
17,066,437
1, 6i3, 3o4
818,850
910,4i3
2i,574,93i
3,4o8,755
4, 068, 647
1,776,706
3,569,090
3,658,059
2, 427,356
3, o3i, 964
1,092,802
99o,3o5
6,654,636
Bxports over
imports.
$2, 4 i 3 , 169
7 , 4 4 0 , 334
1 , 2 7 5 , 091
377 348
762 041
826 864
756 592
601 5i8
2 047 500
1 332 720
277 6s3
78i 921
3 636 088
618 216
2 320 420
1 547 462
2 234 575
1 142 786
7 662 442
2,783,921
19, 260, 823
36,415,920
23,015,502
3 7 , 4 3 8 , 296
54,016,4i3
44,010,672
58,578,017
a Gold and silver can not be separately stated prior to 1 J25 b u t it is probable t h a t the
greater portion of the exports were gold.
201
National
Monetary
Commission
Gold imports and exports, 1821 to
1909—Continued.
Excess of—
Year ended June 30—
Exports.
Imports.
Exports over
imports
$50, 002,804
$11,566, 068
61, i o 8 , o s 3
2,125, 3 9 7
58,982,656
58, 446, o 3 9
2,508, 786
55,937,253
27, 4 2 3 , 9 7 3
4 2 , 2 9 1 , 93 o
35, 439,9o3
i3,907, o n
62, 162,838
5,53o, 5 3 8
IOO, 6 6 1 , 6 3 4
$38,436,736
21, 5 3 2 , 8 9 2
56, 6 3 2 , 3 o o
1 1 , 1 7 6 , 769
89,484,865
381,033
6,498, 2 2 8
51,882,805
71, I 9 7 . 3 0 9
8, 196,261
63,001,048
39, 0 2 6 , 6 2 7
17,024, 866
2 2 , 0 0 1 , 761
72, 3 9 6 , 3 4 4
63,658,901
36, 0 0 3 , 4 9 8
8,737. 443
14,132, 568
33,
66,
686,208
12, 0 5 6 , 9 5 o
6,883, 56i
49, 5 4 8 , 7 6 0
8,717, 4 5 8
40,831,302
44, 856,715
8,682, 447
36,174,268
34, 042,420
1 9 , 5 0 3 . 137
14,539,283
66, 9 8 0 , 9 7 7
1 3 , 6 9 6 , 793
53,284,184
58,
635.962
21,870,930
21,579,012
59,802,647
177,050
7,992, 709
23, 184,341
26, 5 9 0 , 3 7 4
26, 246, 2 3 4
344,140
9, 2 0 4 , 4 5 5
4, 5 8 7 , 6 1 4
i3,33o, 215
5,624, 948
3, 6 3 9 , 0 2 5
5 6 5 , 132
100, 0 3 1 , 259
587,880
34,377, o54
3i,
80,758, 396
600,888
17, 734, 149
4 1 , 00881 , 9 5 7
22, 8 3 1 ,3 1 7
477,892
26, 6 9 1 , 696
42, 952,191
20,743. 349
9, 7 0 1 , 1 8 7
18, 3 7 6 , 2 3 4
42,910, 601
18 250 640
22 208 842
43,934, 317
858
49 667 427
59, 9 5 2 , 2 8 5
17, 2 7 4 , 4 9 1
10,284,
12,943, 342
4 331 149
86, 3 6 2 , 6 5 4
So, 1 9 5 , 3 2 7
18, 2 3 2 , 567
68 130 087
49,699. 454
21,174, 381
87 506 463
7 2 , 4 4 9 , 119
36,384, 760
3 3 . 5 2 5 , 065
4 528 942
30 083 721
78,884 882
108,
680,844
76, 9 7 8 , 0 6 1
66, 4 6 8 , 4 8 1
112,
40,
15,
37,
409,947
361,580
85,014, 780
406,391
120,391, 674
603
88,954,
522,086
202
495 873
Trade
Balance
of United
Gold imports and exports, 1821 to
States
1909—Continued.
E x c e s s of—
Year ended June 3 0—
1901. _
Exports.
Exports over
imports.
$48,266,759
53,185,177
48,568,950
47,090,595
81,459.986
92, 594, 024
38,573,591
5 1 . 3 9 9 , 176
72,432,924
91,531,818
_ __
1903
Imports.
$ 4 4 , 5 7 3 , 184
66, 0 5 1 , 187
5 2 , 0 2 1 , 254
44, 982, 027
99,o55,368
53,648,961
96,221,730
1 1 4 , 5 1 0 , 249
148,337.321
55, 6 8 2 , 7 9 2
Imports over
exports.
$3,693,575
$12,866,010
3,452,304
2,108,568
17,595.382
38,945.063
57,648,139
6 3 , i n , 073
75.904.397
35,849.026
The values of the exports of silver in each year since
1825 are presented herewith:
Silver exports and imports, 1825 to 1909.
E x c e s s of—
Year ended June 30—
Exports.
Imports.
E x p o r t s over
imports.
1825.
1826
1827
1828
_
__ _
i83o__
_ _ __
i83i___
_ __
i832 _
1833
1834 _ _
1835 ___ __ _ ___
i836
.
.__
1837 _ __ ___
i838
i83g
1840
1841
_
__
$8,48i,383
3,648,475
6, 142, 3 9 1
6, 608, 392
3,350,762
756, 109
6, 0 3 5 , 402
3 , 606, 934
1, 722, 196
1,386,578
5, 1 2 2 , 4 9 5
3,676,881
2, 762, 514
2, 294, 842
3,976,075
4, 7 1 3 , 6 4 1
_ . _ ___
1842 _
1843 __
1844
__
6, 444, 463
2,508,783
1, n 3 , 104
4, 0 8 7 , 693
$5,621,488
6, 202, 226
7, 040, 682
6 , 6 8 1 , 521
6, 586, 946
7,334,818
6, 3 7 3 , 916
5,190,818
6 , 4 5 8 , 516
14,145,460
10,806,251
6, 169, 019
8, 084, 600
6 , 0 7 2 , 233
4, 43o, 596
5,797,656
3,719,184
3,329,722
5,253,898
4, 217, 125
203
Imports over
exports.
$2,859,895
$2,553,75i
898,291
73,129
3 , 236, 184
6 , 5 7 8 , 709
3 3 8 , 514
1,583,884
4, 7 3 6 , 3 2 0
12,758,882
5,683,756
2, 492, i 3 8
5, 3 2 2 , 086
3,777,391
454,521
1, 084, 015
2,725,279
820, 939
4, 1 4 0 , 7 9 4
129, 432
National
Monetary
Silver exports and imports, 182$ to
Commission
ipog—Continued.
Excess of—
Year ended J u n e 30—
Exports.
Imports.
E x p o r t s over
imports.
$S.55i,o7o
1, 8 5 2 , 0 6 9
$3, 251,392
$2,299,678
2,867,319
869,io3
2,546,358
4, 7 7 0 , 4 1 9
2,951,529
890
3, 4 3 2 , 415
2,582,593
849: 922
2, 9 6 2 , 3 6 7
2,852,086
n o , 281
6,635,839
i,884,4i3
,75i, 426
2,600,156
1,846,985
753, 171
2, 0 4 4 , 0 1 7
1, 774, 0 2 6
269, 991
727,040
1, i38, 128
744,5o8
3,904,269
3, 7 2 6 , 6 2 3
2, 5 6 7 , 0 1 0
3, 2 1 7 , 3 2 7
5,807,163
2, 6 3 o , 3 4 3
7,708,428
2,779,358
5,309,392
8,100,200
6, 041,349
2,367, 1 0 7
4,047,681
1,447,737
2, 508, 041
1,993,773
4,053,567
2,058,851
4, 7 3 4 , 9 0 7
1,938,843
796, 0 6 4
9, 262,193
3,3n,844
95o, 3 4 9
342, 9 3 1
14, 846, 762
2, 503, 83i
21,841, 745
5,045,609
796, i36
21,387,758
5,45o,925
936, 833
21, i34, 882
5,675,3o8
459, 5 7 4
24,519, 704
14,362, 229
3 i , 755,78o
14,386,463
157, 475
369, 3 i 7
3o,328, 774
5, 026, 23i
302, 543
39,751,859
12,798,490
953, 3 6 9
32,587,985
8,951,769
636, 216
25,151,165
7, 2 0 3 , 9 2 4
947, 241
25,329,252
7,943,972
385, 2 8 0
29,571,863
14, 5 2 9 , 1 8 0
043, 683
24,535,<57o
16, 4 9 1 , 0 9 9
044, 5 7 1 .
20,409,827
14,671,052
738, 775
i3,5o3,894
12,275,914
227, 9 8 0
16,841, 715
10, 5 4 4 , 2 3 8
297, 4 7 7
16,829,599
8,095,336
734, 2 63
20, 219, 445
10,755, 242
464, 2o3
456, 481
26,051,426
14,594,945
33,753,633
16,550,627
2o3, , 0 0 6
29,511, 219
17,850,307
66o, 9 x 2
26,296,504
17,260,191
,o36 ,3i3
204
Trade
Balance
of United
Silver exports and imports, 1825 to
States
1909—Continued.
E x c e s s of—
Year ended June 30—
Exports.
Imports.
E x p o r t s over
imports.
1888 ___ __
___
J
1889 _
1891-1892.
_ _
1893
1894 0 _ __
1895 »
_ _
_
_
1896 «__
1897 °_ _
_ __
1898 a
1899 °
1903
_
_ __
_
«_____
1904 °__
1906
_
_
a
1908 °_
1909 o_
_
_
_ __ __
$28,037,949
3 6 , 6 8 9 , 248
34,873,929
22,590,988
3 2 , 810, 559
40, 737, 3 i 9
50, 4 5 1 , 2 6 5
47,295,286
60, 5 4 1 , 670
6 1 , 946, 638
55,105,239
56,319,055
56, 712, 275
64,285,180
49, 7 3 2 , 3 9 0
44, 2 5 0 , 2 5 9
4 9 , 4 7 2 , 702
48,848,812
65,869,063
56, 7 3 9 , 0 7 3
57, 9 2 1 , 202
5 5 , 6 8 2 , 792
$15,403,669
18,678,215
2 1 , o32, 984
28, 3 2 2 , 254
$ 1 2 , 6 3 4 , 280
18, o n , o33
13,840,945
4 , 5 6 4 , 108
12,855,473
17,544,067
3 7 , 164, 7 i 3
27, 084, 107
3 i , 764, 484
3i,413,411
24, 1 7 7 , 4 5 8
25,643,999
21,455,973
27,898,659
2 1 , 410, i 3 6
24, i 6 3 , 491
27,768,814
27,484,865
44, 4 4 2 , 5 4 0
42, 9 4 6 , 624
44,658,097
43,954,810
20, 086, 768
21, 7o3,888
2 i , 3 6 3 , 947
2 1 , 426, 523
i3,792,449
i 3 , 263, 105
11,727,982
18,206,880
19,955,086
23,193,252
13,286,552
20, 2 1 1 , 179
28,777,186
3 o , 5 3 3 , 227
3 o , 9 2 7 , 781
30,675,056
35, 256,302
36,386,521
o Includes silver in ore.
823000—10——14
205
I m p o r t s over
exports.
BALANCES
OF MERCHANDISE,
GOLD AND
SILVER
IMPORTS
AND
EXPORTS,
1800 TO 1909.
[ E x p r e s s e d in m i l l i o n s of d o l l a r s . ]
Gold.
Merchandise.
Y e a r t o J u n e ;•
E x c e s s of
imports
over
exports.
E x c e s s of
exports
over
imports.
E x c e s s of
imports
over
exports.
Silver.
E x c e s s of
exports
over
imports.
E x c e s s of
imports
over
exports.
Merchandise.
Total.
E x c e s s of
exports
over
imports.
E x c e s s of
imports
over
exports.
$20
18
4
9
7
25
28
9
7
25
28
30
35
30
35
7
19
7
19
6
60
65
12
28
17
5
a7
a 1
a$L
E x c e s s of
exports
over
imports.
Year to June 30
E x c e s s of
imports
over
exports.
1855i8S6_
1857.
$39
1859i86o_
38
55
IS6I_
i862_
186318641865.
i866_
18671868.
1869i87o_
1871.
1872.
1873187418751876.
18771878.
1879-
!
3
7
8
60
60
(To follow page 205.
$1
E x c e s s of
exports
over
imports.
E x c e s s of
imports
over
exports.
3
$2
3
6
12
17
16
15
10
17
25
27
24
18
17
15
75
131
43
77
182
120
190319041905i9o6_
1907-
a G o l d a n d silver c a n n o t b e s e p a r a t e l y s t a t e d for t h e s e y e a r s .
82300°—10.
£54
44
59
38
59
56
101
I902_
3
19
36
23
37
E x c e s s of
imports
over
exports.
39
157
73
86
i8go_
18911892.
189318941895i896_
18971898.
18991900.
1901.
4
40
E x c e s s of
exports
over
imports.
*i5
1882.
1883 _
1884.
i88 5 _
i886_
n
E x c e s s of
imports
over
exports.
29
$3
„
E x c e s s of
exports
over
imports.
Total
vSilver.
Gold.
151
258
264
168
260
26
101
73
165
44
24
77
97
9
13
18
14
5
13
18
37
27
32
3i
24
25
33
26
69
39
203
237
76
103
286
615
530
545
665
478
395
47o
401
5i7
446
667
35i
105
5i
48
65
15
11
62
116
57
E x c e s s of
exports
over
imports.
Trade
Balance
of United
States
X I X . — T H E IMPORT AND EXPORT OF GOLD.
Experience clearly demonstrates the ability of every
country to obtain the precious metals it needs for currency and for banking, provided its credit is good, its
currency laws are sound, and its banking institutions are
conservatively and wisely administered. The United
States suspended specie payments during the civil war in
consequence of the issue of a vast amount of notes for war
purposes, the notes being of the nature of a forced loan.
The issue of these notes drove gold from circulation, and
the export of gold both during and subsequent to the civil
war reached very large figures. As soon as the currency
requirements of the country reached the level of the note
circulation and specie payments were resumed gold began
to flow in. In the ten years from 1878 to 1888 the
United States not only retained at home the whole of
the gold it produced in the country, but it imported
large additional sums, and the stock of gold in the
country showed great increase. At the end of the eighties
and in the early nineties the currency was again inflated
by the creation of a large quantity of silver certificates
and Treasury notes, and this inflation again drove gold
out of the country. The exports of gold in the five
years to 1896 reached a very large sum. The repeal
of the Sherman silver act, the renewal of confidence
in the maintenance of the gold standard, and the expansion of trade caused a renewed demand for currency and brought about large imports of gold. From
1896 to 1907 a vast amount of gold was imported. The
207
National
Monetary
Commission
banking crisis of 1907 again disturbed confidence, and
considerable shipments of gold have taken place in the
calendar years 1908 and 1909. The alteration of the law
relating to trust companies, whose operations are closely
akin to banking institutions, the restoration of confidence,
and the improvement in trade that has recently taken
place are likely to stop the outflow of gold and to bring
about renewed importations. I have no doubt that with
sound currency and banking laws and with the restoration of confidence both at home and abroad in the
stability and progress of the United States, America
will have no difficulty in obtaining all the gold she will
need.
The experience of other countries has paralleled that
.of the United States. At one time Russia issued a vast
quantity of notes, and the redundancy of its note circulation prevented gold imports. As soon as steps were
taken to remove the redundancy and to place this currency on a sound basis, Russia imported very large
sums of gold, and in a few years accumulated so large
a stock that it was able to resume specie payments.
The experiences of Argentina and of Brazil have been
similar. The revolutionary war in Argentina caused a
great quantity of notes to be created, and gold was forced
out of circulation. The steps that were subsequently
taken to place the currency upon a sounder basis and to
restrict the note circulation have been followed by the
import of large amounts of gold into Argentina, and a
substantial gold reserve has been accumulated.
In Brazil events have followed a similar course. Russia, Argentina, and Brazil are all debtor countries and
208
Trade
Balance
of United
States
have to make large payments each year for interest, but
as long as their credit is good and their currency enjoys
the confidence both of their own citizens and of those of
other countries they have no difficulty in obtaining the
gold they need.
The amount of gold in circulation in the United States
is a matter of estimate, but the amount of gold certificates
in circulation against which gold is actually held in the
Treasury is not a matter of estimate. The fluctuations
in the amount of the gold certificates in circulation at the
end of June in each year since 1899 shows conclusively
the great increase in the amount of gold available for
circulation in periods of confidence. The great decline
in the gold certificates that took place in the early nineties when confidence was severely shaken by the Sherman
silver act and the vast increase that has taken place since
confidence in the currency was restored will be apparent
from the following statement:
Gold in the United
States
Treasury
and
in circulation
July
i , 1885 to
1909.
Gold.
Coin and bullion.
July 1—
1885
i886___
1887
1888
1889
1890
1891
__
1892
In Treasury.
Coin in
circulation.
$120,298,895
156,510,513:
186,754,217
193,610,172
186,451,708
190,473.247
119,200,620
114,612,892
$341,668,411
358,219.575
376,540,681
391, 114.033
376,481,568
374.258,923
407,319.163
408,568,824
a
Certificates
in circulation fl
Total.
$126,729,730
$588,697,036
76,044.375
91.225,437
121,094,650
117,130,229
130,830,859
120,063,069
141,093,619
590,774.461
654.520,335
705,818,855
680,063,505
695.563.029
646, 582, 852
664,275,335
Gold coin became available for circulation January i, 1879, as a result of the resumption act of January 14, 1875.
209
National
Monetary
Commission
Gold in the United States Treasury and in circulation July i, 1885 to ioop—
Continued.
Gold.
July 1 —
1893.
1894
1895
1896
1897
1898
1899
1900
1901
1902
1903
1904
1905,
1906
1907
1908
Coin and bullion.
In Treasury.
Coin in
circulation.
$96,519,833
64,976,622
108,236,753
102,494,781
141,363,989
167,752,728
251, 104,415
222,844,953
247,811,938
253,-801, 291
254,162,230
216,183,723
221,381,650
290,489,841
304,619,431
221,912,063
223,184,405
$408,535,663
495.976,730
479.637,961
454.905.064
517.589.688
657.950,463
679, 738,050
610,806,472
629,790,765
632,394.289
617,260,739
645,817.576
651,063,589
668,655,075
b 56i,697,37i
613,244,810
601,433.854
Certificates
in circulation.
$92,642, 189
66,339,849
48,381,309
42,198,119
37.285,339
35,811,589
32,655,919
200,733.019
Total.
$597,697,685
627,293,201
636, 256,023
599.597.964
696,239,016
861,514,780
963,498,384
1,034,384,444
247.036,359
306,399,009
1,124,639,062
377.258,559
1,248,681,528
1.327.656,398
1,357.655,988
1,475,706,765
a 1,466,389,101
1,618, 133, 492
1, 642, 447, 468
465.655,099
485,210,749
516,561,849
600,072,299
782,976,619
817,829,209
1,192,594,589
a As the result of special investigation by the Director of the Mint, a reduction of
$135,000,000 was made in the estimate of gold coin in circulation on July 1, 1907, as
compared with the basis of previous years.
X X . — T H E TRADE BALANCE AND GOLD IMPORTS.
In the foregoing chapter I have indicated that any
country in good credit can obtain the gold it needs.
Nevertheless it is essential to recollect that the supply
of gold at any given moment is limited and that a country
needing gold must satisfy its needs at the time that supplies of gold are available in the market. Practically
the only banking institution in the world which keeps a
surplus stock of gold is the Bank of England, and its surplus stock rarely exceeds $50,000,000. Therefore those
desiring to purchase gold must acquire it when it arrives
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Trade
Balance
of United
States
from the mining countries in order that it may not be
absorbed by other purchasers. Probably the demand for
no commodity is as elastic as the demand for gold. Certainly it rarely happens that gold is a drug on the market.
In these circumstances the countries rapidly increasing
in prosperity, trade, and population, and which can profitably use an increasing amount of gold, should take steps
to obtain the metal during that period of the year in
which the supply is abundant.
Not infrequently it happens that the United States
discover they require gold to supplement their banking
reserves and to provide the necessary currency for circulation just at the moment that the demand for gold for
other countries is also urgent. The demand for gold by
the United States at these times creates so great a competition for the metal that the rate of interest for loans—
which is governed mainly by the supply of gold—is forced
up in nearly every country in the world, to the serious
dislocation of business everywhere. If there is not enough
gold to meet the demand at any given moment the
would-be purchasers have to wait in order to obtain the
amounts they need until a future date, just as purchasers
of other commodities have to do when the demand
for these commodities exceeds the supply. Therefore,
although there is no doubt that the United States can
from year to year obtain all the gold they need, it is
very desirable that measures should be taken for the purpose of enabling the country to obtain the gold it requires
at periods of the year when the demand from other
countries is not urgent and when no difficulty would be
211
National
Monetary
Commission
experienced in obtaining the sums required or at any
rate a large part of them.
In Great Britain the special duty of the Bank of England is to look ahead and, with an open market for gold,
to endeavor to obtain the gold needed as reserve for
the banking deposits and currency of the United Kingdom and by other countries which look to London to
supply the gold they require for harvesting and marketing their produce.
The success of the Bank of England's action in maintaining a free market for gold in London, in protecting
the banking reserves of the United Kingdom, in supplying the country with currency, and in taking care of the
gold requirements of those countries which look to
England for assistance shows conclusively that the
United States would be materially assisted in obtaining
the gold it needs for currency and banking purposes at
the time the gold is wanted, if they possessed an institution of this character. Again and again it has happened
that trade throughout the world has received a shock in
consequence of the urgent demands for gold for the
United States arising from the undue delay in endeavoring to obtain supplies of the metal, whereas no shock
whatever would have been given if the measures needed
to obtain the gold had been taken a few weeks earlier.
Not infrequently the supply of banking money in the
United States seems to be so abundant and rates of
interest are so low that loans of money are made to
other countries—loans which cause shipments of gold
from the United States to be made, although the signs
212
Trade
Balance
of United
States
clearly point to an early shortage of money and of gold.
When the shortage comes it is intensified by the loss of
the gold that has been shipped. A central institution
of the nature of the Bank of England charged with the
special duty of assisting the country to obtain the currency it needs for spring and fall requirements would
take measures to prevent the export of gold and to
secure additional supplies of the metal against the time
it would be needed, and would thus prevent or diminish
the monetary stringency that would otherwise occur.
In brief, there can be no question as to the ability of
the United States to obtain all the gold they need from
other countries, notwithstanding the extent of their
obligations for interest, tourist expenditures, etc. But
it is of the highest importance that measures should be
taken which will enable the country to obtain the gold
it requires with greater ease and with less disturbance to
its own trade and commerce and to the trade and commerce of other countries than is possible under the existing system.
*
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@FedFRASER