In the early existence of governments, borrowing was looked upon as an extraordinary means of securing revenue. This method was to be employed when all others failed, or when the need was occasioned by an emergency, such as war or pestilence, and the ordinary sources of revenue were inadequate to meet such sudden demands. In some of the earlier states, moreover, there was no need, even in cases of emergency, for the use of public credit. As need arose, the state simply demanded more services from its citizenship, or extended its power to confiscate any commodities of which it might be in need. As the state evolved from this condition of direct appropriation of materials and services, and as constitutional government gradually took on more definite form, the institution of public credit gradually became more prominent.
The present widespread use of public borrowing was reached only after a long and slow development. Its history would not be the same in all states. In most of the older states it developed with the growth and remodeling of fiscal systems, while some of the newer states, in imitation of the already established governments, have used their credit as a source of revenue from the start. Whatever the development, the institution of borrowing has assumed a place of such importance in modern fiscal systems, that few governmental units can be found which do not practice the policy of deficit financiering. This condition not only applies to national units of both monarchical and democratic types, but to the minor political units, such as the commonwealth, county, and municipality.
Money Market Necessary. - Before public borrowing can be successfully carried out, a money market must be in existence, and public credit must be established. It is evident that before a government can borrow money, the people of that government, or some other, must have money to loan - that is, there must be a money market in existence. Since a money market is characteristic of a people of somewhat intense commercial life, it naturally follows that public borrowing can develop only in countries whose citizenship is of the commercial type.
It already has been indicated that, among early states, a new prince or ruler frequently repudiated the debts of his predecessor. Under such conditions the institution of public credit was indeed weak, while the loans of the individuals were frequently of an involuntary nature. It was only with the development of constitutional government, wherein the citizenship gained control over the affairs of the government, that guarantees began to be made against repudiation. With these guarantees public credit grew stronger and public debts grew apace.
The Republic of Venice is usually credited with having inaugurated successfully the policy of public borrowing. England did not use it until the time of William III. At present, however, a political unit which is free from debt is very exceptional. Many of the debts, indeed, are of such magnitude that the meeting of the interest charge entails such an enormous burden upon the citizenship that any effort to pay off the principal seems out of the question.
Failure of a Reserve Fund. - The policy of public borrowing has not always received the sanction of students of fiscal problems. In the earlier stages of political development the maintenance of a reserve fund, or "war chest," as it was called, was looked upon as the most feasible method for meeting an emergency. This was gradually abandoned until, in recent years, Germany has been the only important state which still followed this policy.
The maintenance of a reserve fund by the state received the sanction of early fiscal authorities because it appeared that this was the only way to relieve the state from financial embarrassment in time of emergency. Subsequent developments, however, have led to the almost total abandonment of the policy. One reason for its failure has been the inability of a state to acquire and main-tain a reserve of sufficient size to meet the need which modern emergencies impose. The insignificance of Germany's war chest of $30,000,000 is apparent when the total of her war expenditures are calculated. To secure and maintain a fund sufficient to meet such an emergency expenditure as the Great War entailed upon its participants, would require sacrifices which no citizenship would be willing to endure.
The time and occasion for the use of the reserve fund, moreover, are uncertain, and individuals discount the future to such an extent that they are unwilling to make any great sacrifice in the present to meet a remote and uncertain need. The subtracting of a large amount of gold from the monetary supply of the country, if the reserve be kept in this form, must curtail commercial and industrial development, and thus lessen the patrimony of the state. If the state keep its reserve in the form of securities, it constantly faces the danger of having to dispose of them in a poor market, while an element of instability is introduced in the market for securities because of the possibility of the state unloading its holdings at any time.
The modern state, in order to meet not only extraordinary expenditures, but frequently ordinary ones, enters the money market alongside individuals, and bids for the use of capital. National, state, and municipal bonds are so extensively used in modern fiscal systems that they are accepted, without question, as an ordinary occurrence. One needs but to glance over the list of securities which leading banking and brokerage houses offer, to see the importance of the role which the various forms of public evidences of indebtedness play in our modern security markets.