Not all public debts are of the same nature, and may differ materially in a number of ways. One of the first distinctions to be drawn was between funded and unfunded debts. As the terms indicate, a funded debt was one against which some particular fund or collateral was placed to insure payment, while an unfunded one was simply a debt contracted on general credit. These terms are still in common usage, yet their significance has lost much of the definiteness of the earlier years. Not infrequently the terms bonded and floating debts are used as almost synonymous with the two older expressions. In general, the important distinction between a funded or bonded debt, and an unfunded or floating one, is the time element. The old idea of security has disappeared to a large extent, and in many cases has been reversed. Modern long-term obligations, as a rule, are issued upon the general public credit, while short-term obligations frequently have specific revenues pledged for their redemption. Public borrowings for short periods, such as to meet a deficiency of revenue, or a small unexpected call upon the treasury, which can soon be taken care of from general revenues, take the form of floating debts. A good example of borrowing of this nature was the large amount of treasury certificates issued by the Federal government during the Great War in anticipation of revenue from the Liberty Loans and taxes. The Liberty Loans, of course, would be classed as bonded or funded debt.

The use of the expressions "short time" and "long time," in the above distinction, is far from definite. It is, however, the best that can be made. There is no uniformity among writers or fiscal authorities in the various political units as to what constitutes a short-term or a long-term obligation. With some, a short-term loan may extend over a period of years, while with others it may not be considered proper to extend over as many weeks. It is to be hoped that some more definite distinction will gradually be adopted. It might not be disadvantageous if the commercial distinction between short and long term obligations would convey similar ideas when applied to fiscal transactions.

Methods of Originating Debts. - A second distinction in public securities may be based upon the difference in the way in which the obligation originates. The sovereign power of the state gives it the advantage over the individual borrower, in that it can force loans from its citizenship. These forced loans frequently take the form of short-term obligations, such as the treasury certificates which have frequently been issued in payment for goods or services at times when funds were scarce. These certificates are usually interest-bearing, and made payable as soon as sufficient revenue is expected to accrue. Cities frequently make use of similar forms of obligations to tide over a shortage of funds. The action of the state in issuing fiat money is somewhat similar to a forced loan, yet in the strict sense it cannot be called a credit transaction. The importance of forced loans, in the modern state, is comparatively insignificant.

The class of public loans which is by far the most important comprises those obligations in which a voluntary agreement has been entered into between the state as debtor, and the individual as creditor. There may be many terms about which the agreement must be made, and it is on the basis of these terms that voluntary loans, or, as some call them, contract loans, may be classified.1

The debtor-creditor relation with the state often arises through comparatively simple transactions, in which the fact that the state becomes a debtor is often not consid1 For an excellent classification of contractural debts, see Introduction to Public Finance, by Plehn, third ed., p. 389.

ered. In these cases the redemption of the debt does not depend wholly, or even in part, upon the credit of the state, but upon additional assurances. When an individual purchases a postal money order, he becomes the creditor of the state, yet he feels, in no sense, that the credit of the state is involved. The numerous cases in which some form of collateral is required before business transactions are permitted, are other examples. Insurance companies are often required to deposit bonds before engaging in business, while national banks must deposit bonds with the Federal treasury before circulating notes may be issued. In all these cases the amount received by the government is kept for redeeming the obligation, so that its credit is an insignificant factor. Much the same situation exists between the government and the holders of its representative paper money. The holder of gold and silver certificates is protected by a 100 per cent deposit of specie.

In the more purely credit transactions, differences in the contract frequently exist. The state may agree to pay no more than interest. This is true when a government issues a perpetual bond, which is frequently done by some European countries, and was formerly attempted in the United States. It may be true that the government agrees to pay no more than the principal. This situation is approximated when a state uses redeemable paper money. The most ordinary contract is one in which the state agrees to make payment of both principal and interest, the details of which will depend upon the time for which the capital will be needed, the general condition of the money market, and the pressure of the state's need. Loans have been negotiated frequently on some annuity plan of payment, in which the creditor is to receive a fixed payment for a definite number of years or for life. In all these cases the creditor has been a voluntary partner to the contract, and expects the state to comply to the terms agreed upon.