This section is from the "The Subvention In The State Finances Of Pennsylvania" book, by Frederic B. Garver.
The financial arrangements which characterized this period of the state's history were so unusual and had such important effects upon the subventions for the next half century that it is necessary to set them forth in considerable detail. In 1826 was begun the construction of the "state works." Previous to this time the state had subscribed freely to the stock of companies engaged in building roads and canals, but no important projects had been directly undertaken. About 1826, however, as the result of a popular demand for more adequate transportation lines, the state began the construction of a widespread system of canals. *1
State construction and operation having been decided upon, the next question that came up for settlement was the method of financing the new ventures. Since it was confidently expected that the public works would prove exceedingly profitable in the near future, it was decided to borrow the funds for their construction on the credit of the state. As has been pointed out *2 the state had already borrowed large sums to invest in the stock of private corporations engaged in similar operations. *3 Borrowing for the construction of state works was not, therefore, regarded as an innovation. And assuming that the opinion commonly held as to the profitableness of the works was a sound one, the policy of borrowing was also sound. Practically none of the money that went into the building of the canals came from taxation. Worthington has shown that until the state received the bonus for rechartering the defunct Bank of The United States as a state corporation and the deposit of the surplus revenue in 1837, the annual expenditures for the public works practically coincided with the annual amounts of the loans. *4 From 1839 to 1843 large loans were again the order of the day and the debt of the state increased from $25,229,003, in 1839, to $40,491,708, in 1843. *5
1 For a detailed account of the popular movement for direct state action in providing transportation facilities, see Bishop, The State Works of Pennsylvania, Ch.II,pp. 167-188.
2 Supra, p. 23.
3 See Pennsylvania Archives, IV Ser. V, pp. 553 ff.
4 See diagrams at the end of his monograph.
The interest charge upon this rapidly increasing debt constituted, throughout the entire period (1826 to 1844), the largest single item in the current expenses of the state government. Had the canals proved as successful as the public expected, a large part of the annual interest charge would have been defrayed out of the profits from operation. But the expectation of the public was not realized, for the entire available receipts from the works amounted to only $9,287,000 for the years 1826 to 1843, while the interest charge for those years amounted to $16,231,000. *6 It was necessary, therefore, to secure funds for the payment of interest from other sources.
The act of 1826, which authorized the first large loan for the construction of the canals, provided that the state treasurer should, in 1826, pay the commissioners of the internal improvement fund an amount sufficient to defray the interest charges on loans incurred during that year. This payment was to be made from the proceeds of the duties on auctions. After 1826 $30,000 of the proceeds of the auction duties, the dividends on canal, turn-pike and bridge stock, canal tolls, and the net proceeds of escheats were to be turned over to the commissioners for the payment of the interest and for the redemption of the principal of the loans. The commissioners were also authorized to receive all appropriations by the state legislature, and donations and grants by Congress, by individuals and corporations for internal improvements and to apply them to the purposes for which they were granted. *7 The defects of the provisions for the payment of interest are so obvious and have been criticized so often that it remains only to point out that, with the exception of the duty on auctions, the revenues assigned to the commissioners were all of uncertain yield, and not the type of income that a careful financier would select for meeting a fixed charge.
It is not surprising, then, to find that difficulty was soon experienced in paying interest. This was principally due to the fact that the revenues were not adequate. That they were not certain, as it happened, was of minor importance.
5 Tenth Census, VII, Valuation, Taxation and Public Indebtedness, pp. 541-545. The figures include relief notes, interest certificates, domestic certificates, and the funded debt. They do not include the amount of the surplus revenue deposited by the U. S. Treasury.
6 Bishop, p. 222.
7 Act 1 April, 1826, P.L. pp. 166-167.
As early as 1829 short-time loans were required for making interest payments. *8 In 1831 in an effort to remedy the situation a tax was imposed upon all real estate and upon certain specified kinds of personal property. *9 The yield of this tax in 1835 was approximately $209,000. *10 The debt at that time amounted to about twenty-four and one-half millions, *11 and the interest charge at 5 per cent was something in excess of six times the yield of the tax that had been levied to aid in its pay-bishop, p. 210.
9 Eastman, Taxation for State Purposes, p. xi.
10 The yield of the various sources of state revenue for certain years is given is the following table.