Much has been said and written concerning the economic and political feasibility of public borrowing. Opinions have varied from the utmost condemnation to the heartiest approval. The earlier writers were usually extremists in whichever view they took, while modern opinions have been tempered by experience. No longer are a nation's debts looked upon as gold mines, or the creators of an equal amount of capital, or as an institution necessarily destructive of national life. Certain results do appear, however which are worthy of notice,

Competitor for Capital. - The first obvious effect of public borrowing is that the government enters the money market as a competitor against individuals for capital. This increase in the demand for capital naturally tends to increase interest rates. The state has the advantage over individual competitors that, since it is not dependent upon the productivity of the borrowed capital to meet the interest or principal charge, it may bid for the capital by offering high or excessive rates of interest. It has the further advantage that, in offering the normal or a lower rate of interest, it can often appeal to patriotism, or make special concessions to its creditors. The real industrial effects of public borrowing will depend upon the method used in securing the loans, and the purpose to which the capital is applied.

If the government enters the money market, and offers the normal rate of interest with no special concessions, the effects upon industry will be scarcely noticeable. If funds are secured, they will come from a supply of free capital, for industry will not readjust itself to supply this demand. Industrial effects would result, however, when public loans are sought through offering a high rate of interest. In the first place, this will bring forth more savers, and a greater amount of saving from the previous class of savers. Money that has been spent for the products of industry will now be turned over to the government. The lessened demand decreases the profitableness of industry, until it is probable that investments of capital which are bringing a smaller return than that offered by the government, when readjustments become possible, will seek government securities rather than a continuation in industry. Under such conditions production under individual management will decrease, accompanied by a decrease in the demand for labor.

Use of Borrowed Funds. - The use to which a state puts borrowed funds is an important factor in determining the ultimate effects of public borrowing. If debts are contracted for the purpose of carrying on some industrial enterprise, such as constructing and operating canals, railroads, or other similar enterprises, the effects of borrowing may be negligible. It may simply mean that the state is supplying a commodity by using capital and employing labor that would be demanded otherwise by individuals. Assuming the degree of efficiency to be the same in either case, borrowing by the government would have no effect on the social income or upon the prices paid in the money or labor market.

The ability of the state to undertake industrial enterprises of such long duration and of such gigantic proportions that they would not appeal to individuals, may often enable the state to increase the social income by increasing the opportunities for the use of capital by individuals, as well as by increasing the effectiveness of capital already in use. Borrowing by the United States government for constructing the Panama Canal, or for its numerous reclamation projects, are examples of this sort.

Not all the returns from borrowing, however, are spent in fostering productive enterprise. In fact, a large part has been used in the destruction of productive capacity, for a large percentage of borrowed funds has been used in the prosecution of war. In such cases a derangement of the industrial system occurs. Individual enterprises change the nature of their production in order to supply the materials of war, which the government is demanding. These materials are largely for immediate consumption, and with their consumption a large amount of capital and labor is destroyed. The result is that, for a time at least, after the emergency is past, the amount of commodities which can be produced is less than what is desired. This results in higher prices. It is not meant to infer that these effects are inherent in the institution of credit - they merely arise from the use which the state makes of its funds. Borrowing simply increases the ease of securing funds.

Social and Political Effects. - Public indebtedness, if carried to extremes, may also influence social and political institutions. The fear has often been expressed that the public securities will, to a great extent, fall into the hands of a wealthy few, and thus help to create an idle leisure class. It is also quite possible that this class of security holders may secure enough political power to influence legislatures in prolonging a state's indebtedness longer than the economic situation might justify. The situation exists, of course, that a part of the citizenship is taxed to pay the other part. Too frequently the holders of public securities bear little of the burden of taxes to meet interest or principal charges.

Experience has shown that these fears have not been entirely unfounded. Fortunes have been swelled through the manipulations of the public security market. The

Civil War furnishes a number of examples of this. That the securities tend to fall into the hands of a few is illustrated by the fact that before the Great War the entire amount of United States bonds was held by less than one thousand individuals and six hundred corporations. At present about one fifth of the holders of United States bonds live in one state, and these hold nearly one third of the total issue.

Another danger of public borrowing is that since the burden of present expenditures is not realized, legislators may undertake ventures, the wisdom of which would be seriously questioned if the funds had to be secured from taxes. In other words, where public borrowing can be resorted to with little difficulty, the citizenship will feel less obligation to guard closely the public purse strings than if expenditures had to be met through the channels of taxation. This danger was recognized in the formation of most of the constitutions of the American commonwealths. These generally contain strict limitations upon the power of the legislatures to issue bonds. Similar restrictions are generally placed upon the governing bodies of municipalities.

International Complications. - The holding of the securities of one country by another may become the source of political difficulties. Numerous examples have arisen where smaller nations have become involved with larger ones because of debt obligations. International law has established the principle that any unsatisfied debts of one nation held by another are sufficient grounds for diplomatic intervention. This intervention has often taken the form of armed force. Egypt became a British protectorate, among other reasons, because she abused the credit which England had extended to her. The same influence was potent in the French domination of Tunis. The Monroe Doctrine has been called into use to prevent the forcible seizure of property to settle debt claims among some of our southern neighbors, especially Mexico,

It is entirely possible for bonds issued by some commonwealths to be held by a foreign power. The political entanglements with the Federal government, which a forced collection of such an obligation would entail, can be easily imagined. As public credit becomes more firmly established, and as nations less frequently repudiate either principal or interest, these difficulties automatically disappear.