(158). This is the only federal restriction upon the State as to its debts. The constitutions of most States, however, forbid the unlimited borrowing of money, although the restrictions do not extend to borrowing for purposes of public defense. To defend itself against invasion, or to suppress insurrections, the State may borrow to an unlimited extent, upon the principle that the public safety is above every other consideration. In most of the States a deficit can be met by borrowing, but the constitutions usually specify how large a deficit may be met in this way. In some of the States the amount that may be borrowed to cover a deficit must not exceed $50,000, in others it may be as large as $1,000,000. In the constitutions of a number of the States it is provided that money cannot be borrowed unless the law authorizing the loan is first submitted to the people and their assent to it secured.

Generally speaking, the finances of the State governments in respect to debt are in a healthy condition. In no State is the debt very large; in some States it is so small as to be inappreciable; in Illinois, Iowa, Michigan, Ohio, Nebraska, South Dakota, Oregon and West Virginia, there is no debt at all. This praiseworthy condition of affairs is due in part to constitutional provisions, in part to the great resources of the State governments, in part to the wisdom and self-restraint of the State legislatures.

The Debts of Local Governments. Restrictions upon local governments in reference to borrowing are found in almost every State. If the restrictions do not appear in the constitution, they appear in the laws of the legislature or in the municipal charters. Most of the State constitutions fix the rate of indebtedness which the local government may incur. Frequently this rate is five per cent. of the total valuation of the property within the civil division which borrows the money. Sometimes before money can be borrowed by a local government the question must be referred to the people.

Notwithstanding the restrictions placed upon the borrowing power of local governments, they are everywhere throughout the United States heavily in debt. Especially is this true of municipalities. The combined municipal debt is three times as large as the combined debt of the States. The debt of New York city alone is much larger than the total debt of the forty-six States, and the debts of many other cities are proportionally as large as that of the metropolis.

The debts of cities have been incurred for the building of water-works, city halls, school-houses, and for the paving of streets and the construction of sewers. These improvements have necessitated the outlay of large sums in a short period of time, and it has not been possible to collect sufficient money by taxation to pay for them as they have been made. The rapid growth of American cities has sometimes caused the expenditures to increase at an alarming rate. In some instances sewers and water-works have been constructed on a scale suitable for a city of a hundred thousand people, and, behold, the population has increased to four times that number! This increase has rendered the old improvements worthless and made necessary the construction of new ones at an enormous expense. Besides, it is generally confessed that the management of the finances of cities has been bad the country over. In the awarding of contracts for public works larger sums of money have been paid to contractors than the work has been worth. Franchises have been granted to corporations for a song, when they ought to have realized large sums. Temporary or floating debts caused by deficits have not been paid promptly by means of taxation, but have been added to the bonded debt.

The management of the finances of cities has called forth various schemes of reform. One of these is the plan of taking away from the city council some of its financial powers and lodging them with the board of estimate (p. 220). Another remedy proposed is to prescribe a prop

erty qualification for voters, when financial questions are involved. This plan is both impracticable and unwise: impracticable, because voters will not consent to it; unwise, because it would be an unnecessary assault upon the principle of democracy. The corrupt bargains which are made in the management of the finances of a city are made by those who possess property, not by those who have no property. A property qualification would not exclude the corruptionists from taking a part in city affairs, but it would exclude many honest men from taking part, and it is to honest men, after all, that we must look for genuine reform. The possession or non-possession of property has really very little to do with the matter. Good municipal government is purely and simply a question of honesty.

How Public Debts are Paid. Public debts of course must be paid by taxation. Indeed, they are often called anticipatory taxes, from the fact that government, in borrowing a sum of money, anticipates a certain revenue which it expects to receive by taxation. A State cannot be compelled by federal authority to pay a debt to a citizen, for, without the consent of the State a citizen cannot bring his suit into a federal court (145) and establish his claim. The United States cannot be compelled to pay a debt, for you cannot compel a sovereign power to do anything against its will.

It is customary in the United States for a government, national, State and local, to prepare for the payment of a debt at the time it is incurred, according to the doctrine of Hamilton, who held that the "creation of a debt ought to be accompanied with means of its extinguishment." This preparation usually consists in the creation of a sinking fund. Under the sinking fund plan the law which provides for the borrowing of money also provides for the raising by taxation of a certain sum annually which shall be set aside for the "sinking" or the paying of the bonds when they shall become due. The sum raised for the sink

ing fund is inviolate and can be used for no other purpose, unless for public defense.

The United States may borrow money without creating at the same time a sinking fund for its payment, but the constitutions of many States provide that all debts, whether State or municipal, shall be accompanied by means of extinguishment, and the means adopted is usually the sinking fund arrangement.

QUESTIONS ON THE TEXT

1. How does the necessity of public debt originate?

2. Under what circumstances is the government justified in borrowing?

3. Describe a government bond. Upon what does the value of a government bond depend?

4. In what way may governments sometimes make a forced loan?

5. What are the provisions of the Constitution in respect to borrowing? What was Hamilton's doctrine concerning a public debt? What was Jefferson's policy in respect to the public debt?

6. Sketch the history of the debt of the United States.

7. What restriction upon the borrowing power of a State is in the federal Constitution? What restriction upon borrowing is usually found in a State constitution?

8. What can be said of the condition of the finances of State governments?

9. What restrictions are placed upon the borrowing power of municipalities? For what purposes have the debts of municipalities been Incurred? Why have thèse debts become so large?

10. What remedies have been proposed for the betterment of city government?

11. Why cannot the United States be compelled to pay its debt? Why cannot a State be compelled to pay its debt?

12. Explain the sinking fund arrangement.

SUGGESTIVE QUESTIONS AND EXERCISES

1

1. Compare graphically the per capita debt of the United States with that of each of the following countries: England, Germany, France, Italy, Russia, Austria.

1 For example, let the per capita debt of the United States be represented by a square inch of surface and the per capita debts of the other countries by squares proportionally large.

2. If the term for which a bond is issued is long, how will that fact affect the price paid for it?

3. Is it right for this generation to contract public debts which must be paid by the next generation? Give reasons for your answer.

4. "Public debt is a public blessing." "Public debt is a public curse. "Point out the truth and falsity which are contained in both the preceding statements.

5. How much per voter does the United States government owe? 6. What sum does this State owe? this county? this municipality? State the purposes for which these debts were contracted.

7. What provisions does the constitution of this State make in reference to the debt of the State? to the debt of counties? to the debt of cities? What are the advantages and disadvantages of these provisions?

8. Did you ever see a bond that was issued by a government? If possible, bring a government bond to the class to be examined and studied.

9. Do rents in cities rise and fall with the tax rate? Ask a dealer in real estate about this.

10. Show how the tax rate may be kept low for a while by borrowing. What is the final result of such a system of financiering?

11. Is a large public debt necessary to make a government strong in the hour of its need. Answer this from our own history.

Topics for Special Work.-Forms of Public Debt: 19, 293-310. Funding our National Indebtedness: 22, 331-356. Municipal Finance: 30, 452-456.