While public borrowing in general partakes of the nature of private indebtedness, yet in some respects differences may occur. In both cases some form of credit must be established, and a source of loanable funds must be in existence. One important difference, however, is the sovereignty of the state. Because of this sovereignty the state cannot be compelled to fulfill any contract it has made. In the United States, for example, no commonwealth can be sued by an individual without its consent. Hence, if a state should wish to repudiate a debt, as has been frequently done, the creditor has no redress.

In the case of states, then, there is no political or legal method of enforcing the fulfillment of contract. As a matter of fact, however, there does exist a strong economic force which acts as a compelling motive to the keeping of obligations. The fear of the inability to place future contracts in a satisfactory manner compels the state to be cautious about violating present contracts. The old adage that "the truth itself is not believed from one who often has deceived," has a public as well as an individual significance. The fact that states were slow to recognize this accounts, in large part, for the slow development of public credit.

Payment of Public Debts. - Public borrowing differs from private, also, in the purposes for which it may be undertaken, and in the basis for the payment of the interest and principal. In modern private borrowing the great majority is for commercial enterprises of a productive nature. As long as borrowing was for consumptive purposes, ecclesiastical as well as political authorities forbade the exaction of interest on the ground that the borrowed capital did not create any ability to meet an interest charge. The devices which were used to evade these restrictive measures when capital came to be demanded for productive purposes soon led to the legalizing of interest payments. A large part of borrowed capital, then, because of the productive uses to which it is put, has in itself the ability to meet the interest charge, and perhaps in time even to provide for the repayment of the principal. There is a mutual gain - the creditor gets interest while the debtor gets productive capacity.

These conditions of private borrowing may be true in the case when the state is the debtor, but frequently are not. The important difference in the two kinds of debts is that the state does not have to depend upon the productivity of its borrowed funds to meet the payment of the interest or principal. The payment of interest sometimes represents the charge for a public sacrifice, rather than for a public benefit. The funds may have been squandered in some worthless industrial venture or expended on a war in which defeat was the outcome. And defeat usually comes to one of the contending belligerents.

In private enterprise the squandering of funds, or failure of the undertaking, frequently means the inability to meet liabilities. In the case of the state, however, liabilities can be met from the general taxing power. As long as taxes can be secured, the interest and the principal of debts can be paid. The ability of an individual to meet a liability depends upon the success of his particular industry, while the ability of the state to meet liabilities depends upon the success of industry in general. It is because of this broad patrimony that the state is often able to secure funds on better terms than individuals.

Purpose of Debts. - The power of a state to meet its indebtedness charges from general revenues has led to much discussion of what constitutes the legitimate purposes for public borrowing. Some have held that a state should borrow only in those cases where the use of the funds will provide the means of paying the interest and principal. No modern state restricts its borrowing to such narrow limits. No definite rule can be given as to when a state should borrow, and the best measure of justification can be found in comparing the benefits derived from the debt, with the sacrifices involved because of it. Difficulty creeps in here because many important public services, such as protection, education, and parks, are of such an immaterial nature that no money standard can be placed upon them.

It has generally been conceded to be bad fiscal policy for a state to expect to meet continually its regularly recurring expenditures from borrowing. No one would justify such a method of procedure on the part of individuals. It often happens, however, with both states and individuals, that revenues are less than were anticipated, or that expenditures are greater. It may be necessary to borrow to tide over until new revenues are available from the ordinary sources, or from new ones. When states borrow under these conditions it is only for a short period, and the intention is not to create permanent indebtedness.

Modern public borrowing, with no difficulty in justifying it, goes much farther than this. It is the pride of the American people to improve and extend public property. Large municipal bond issues are continually being floated for the purpose of improving streets and parks, for bettering educational facilities, or for undertaking some public enterprise, such as the waterworks or the electric plant. The national government, as a rule, has made its ordinary improvements, such as the improvement of rivers and harbors, with funds which regularly flow into the treasury each year. When some gigantic project is undertaken, such as building the Panama Canal, borrowing has been used to supplement the other sources of revenue.

In such capitalistic enterprises as some that have been suggested, where the returns are expected to be more than enough to make them self-supporting, there is little question about the feasibility of borrowing the funds to establish them. The justification of borrowing for giving in-tangible benefits will depend upon the ideas which are held as to the function of the state, and since these are so diverse, no generally accepted opinion can be given. The tendency, however, is for borrowing to occupy a more important place among the sources of public revenues.