I. Introductory Remarks on the Nature of Public Finance

Definition of Public Finance. Public finance is the science, or the branch of economics, which deals with the revenues and expenditures of government, and with the administration of such revenues and expenditures. The name must be carefully distinguished from private finance, which deals with the revenues and expenditures of an individual or a private business, and from corporation finance, which deals with the revenues and expenditures of private corporations. The student is also cautioned against referring the word, as is often mistakenly done, to the subjects of money and banking, which belong to another part of economics.

Early treatises in English economics usually had no special part devoted to public finance, but included some observations on taxation in the treatment of other general topics. It is true that the difficulty of saying anything satisfactory about a subject so vast, within the scope of a few pages, is a serious one; yet it does not seem scientifically satisfactory to pass over one of the most important economic topics, even in an elementary treatise. We shall therefore attempt to give some impression as to the nature and scope of public finance, while reminding the student that later and more careful study of the subject should be carried on with the help of some regular text-book entirely devoted to it.

The Magnitude and Influence of Public Business. Government business is the largest single business in every great nation. In the United States to-day, a few men have fortunes of upwards of $100,000,000, and we rightly regard these fortunes as colossal; yet the annual revenues of the various governments in the United States Federal, state, and local are about four times the probable upper limit of such fortunes, being about twelve hundred millions.

So vast and so permeating is government business that it affects vitally all other businesses. If our government should have a large surplus every year, and should keep it out of circulation, we should shortly have a stringency in the money market that would result in a terrible panic. This is one of the reasons why a surplus Federal revenue presents so difficult a problem. The United States alone among nations locks up any considerable part of the public revenue. Under our independent treasury or "sub-treasury" system, a large part of the Federal revenues flowing into our subtreasuries can regularly get out only in payment of claims against the United States, whereas other governments bank all or nearly all their revenues in regular banking institutions, and hence do not take the money out of circulation.

Still another feature of government business has an important bearing on all private business. Government to-day is the largest single employer of labor, and hence profoundly influences the conditions of employment elsewhere. It is largely for this reason that labor organizations have worked to secure the passage of many laws regulating the hours and other conditions of employment in government work.

Different Views of the Economic Functions of Government. It is clear that the dominant idea of the true function of government will determine the character and extent of government business. In an anarchist society if there could be society in anarchythere would be no public finance. In a State limited to the functions allotted to it by the extreme individualist, public finance would be relatively insignificant. In a socialist State, public finance would so overshadow private business and private finance that economics and public finance would almost become names for the same thing. The character and scope of government business in the modern State will appear in the following pages.