HI i- ■' BOUGHT WITH THE INCOME FROM THE SAGE ENDOWMENT FUND THE GIFT OF Henrg HI. Ba^n 1891 A1M.Q0.5. .IiI(jIj CORNELL UNIVERSITY LIBRARY 3 1924 100 528 615 Cornell University Library The original of this book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/cletails/cu31924100528615 Hmerican Science Series Physics. By Georgb F. Barker, Chemistry. By Ika Remsen, President of the Johns Hopkins University. Astronomy. By Simon Nkwcomb and Edwakd S. Holden. Geology. By Thomas C. Chambhrlin and Rollin D. Salisbury, Professors in the University of Chicago. Physiography. By RoLLiN D. Salisbury, Professor in the University of Chicago. General Biology. By William T. Sedgwick, Professor in the Mass. Institute, and Edmund B. Wilson, Professor in Columbia University. Botany. By Charles E. Bessev, Professor in the University of Nebraska. Zoology. By A. S. f*ACKARD, Professor in Brown University. The Human Body. By H. Newell Martin. Psychology. Ky William James, Professor in Harvard University. Ethics. By John Dewry, Professor in Columbia University, and James H. Tufts, Professor in the University of Chicago. Political Economy. By Francis A. Walker. Finance. By Henry C. Adams, Professor in the University of Michigan, For full descriptions of the Advanced, Briefer, and Elemen- tary Courses published under each topic, see the publishers' Educational Catalog. HENRY HOLT & CO. eMS.WahasliAve^cWago AMERICAN SCIENCE SERIES— ADVANCED COURSE THE SCIENCE OF FINANCE AN INVESTIGATION OF PUBLIC EXPENDITURES AND PUBLIC REVENUES HENRY CARTER ADAMS, PhD., LL.D. F^ofessor of Political Economy and Finance at the Uyiiversity of Michigan. NEW YORK HENRY HOLT AND COMPANY 1913 r tr Copyright, 1898, BY HENRY HOLT & CO. PREFACE. The need of a text-book upon the Science of Finance for the use of colleges and universities is, I believe, generally recognised, and it has been my first purpose in preparing the present treatise to write a book that shall supply this need. A second purpose for which the work was undertaken, and one which perhaps exerted greater influence upon the choice of topics and' the manner of their discussion, was the desire to contribute something to the development of a financial system that shall' satisfy the peculiar requirements of Federal and local government in the United States. The initial step in this direction consists undoubtedly in a clear presentation of fundamental principles and in a true classification of the means to be employed; but this treatise does not content it- self with analysis and theory. In all important cases it ap- plies the administrative test to theoretical conclusions, and insists that every constructive proposal should be judged by its adaptation to existing conditions. It seems proper to make mention of this fact because those suggestions which give character to the programme of financial reform here submitted cannot be appreciated except the reader recognise the em- phasis placed upon administrative considerations. Should it prove that this book is too extended for use in institutions of Hmited elections, it is suggested that Book I, Part I, and Chapters I and II of Book I, Part II, may be omitted without seriously impairing the logical presentation of the subject. I cannot permit this opportunity to pass without express- ing my obligation to Professor F. M. Taylor of the University of Michigan for his many pertinent suggestions and criticisms. I desire also to acknowledge my gratitude to Professor Frank H. Dixon of Dartmouth College, who did me the favour of reading the final proof. It was necessary to consent to pub- lication during my absence from the country, a statement which makes evident the extent of my indebtedness to Dr. Dixon. H. C. A. Twin Oaks, August, 1898. TABLE OF CONTENTS. INTRODUCTORY CHAPTER. GENERAL CONSIDERATIONS RESPECTING THE SCIENCE OF FINANCE. rAGB 1. Definition of the Science of Finance 7 2. The Three Fiscal Axioms 3 1. Patrimony of the Stale must Not be Impaired 3 2. Political Restraints must be Established. 6 3. Political Organization must be Recognised 8 3. The Nature of Public Wants 14 1. Public Wants are Reducible to a Demand for Money 14 2. Consideration of Gratuitous Service 16 3. Consideration of Coerced Service i3 4. General Divisions of the Science of Finance , 21 PART I. PUBLIC EXPENDITURES. BOOK I. THE THEORY OF PUBLIC EXPENDITURES. CHAPTER I. CONCERNING THE NATURE OF PUBLIC EXPENDITURES. J. The Point of View from which Public Expenditures should be Re- garded 26 X. The Individual Point of View 27 3. The Collective Point of View 30 6. The Appropriate Method of Investigation 33 ¥ T/tBLE OF CONTENTS. CHAPTER II. REtATION OF PUBLIC EXPENDITURES TO INDUSTRIAL, POLITICAI., AND SOCIAL CONDITIONS. PACK 7. Public Expenditures and Industrial Development 37 8. Public Expenditures and Political Conditions 40 1. Expenditures and Political Environment 40 2. Expenditures and Political Organization 42 9. Public Expenditures and Social Organization 46 10. Two Rules of Public Expenditures 49 1. The English Conception of Expenditure 49 2. The German Conception of Expenditure 52 3. Conclusion 53 CHAPTER III. RELATION OF PUBLIC EXPENDITURES TO THE CLASSIFICATION OF GOVERNMENTAL FUNCTIONS. 11. The Protective Functions of Government 55 1. Military Expenditures 56 2. Police and Court Expenditures 57 3. Expenditures for Protection against Social Disease 59 18. The Commercial Functions of Government 5i 1. Characterization of Commercial Functions 61 2. Tendency of Expenditures for Commercial Functions 65 13. The Developmental Functions of the Government 68 1. Expenditures for Education 70 2. Expenditures for Public Recreation 73 3. Expenditures for Maintaining Equitable Conditions for the Prosecution of Private Business 73 4. Expenditure! for Public Investigation 76 5. Expenditures for the Development of the Physical Basis of the State 75 14. Conclusion jg CHAPTER IV. SOME FACTS RESPECTING PUBLIC EXPENDITURES. 15. Character of Public Expenditures Prior to the Nineteenth Century. 83 16. Public Expenditures Since 1830 85 17. Public Expenditures and Wealth 92 18. Growth of Local Expenditures. gg 19. Analysis of Aggregate of Public Expenditures In the United States. 99 Tj4BLE of contents. vii BOOK II. BUDGETS AND BUDGETARY LEGISLATION CHAPTER I. GENERAL CONCEPTIONS RESPECTING BUDGETS. PAGE 20. Concerning the Meaning of the Word Budget 104 21. Concerning the Relation of Budgets to Constitutional Government.. 106 1. General Considerations 106 2. Basis of Budget Right in England 109 3. Basis of Budget Right in France no 4. Basis of Budget Right in Germany no 5. Basis of Budget Right in the United States 113 CHAPTER II. CONCERNING THE PREPARATION OF THE BUDGET. 22. By Whom should the Budget be Prepared ? 117 I. General Considerations 118 ■ 2. Practice in England iig 3. Practice in Germany 120 4. Practice in the United States I2i 5. Criticisms on the American Practice 129 23. What should be the Date of the Fiscal Year? 132 24. Respecting the Rules for Malting Estimates 136 1. Practice in the United States 137 2. Practice in France 139 25. What should be the Form of the Budget ? 141 CHAPTER III. ON THE PASSAGE OF THE BUDGET TO ITS VOTE. 26. Organization of the Legislature for Study of the Budget 146 1. Practice in England 146 2. Practice in France 148 3. Practice in the United States 150 27. Shall All Moneys be Voted Annually? 153 1. General Considerations 153 2. Practice in England 156 3. Practice in France 156 4. Practice in the United States 157 5. Practice in Germany 160 6. Conclusion 161 viii TABLE OF CONTENTS. PAGB 28. In what Form should the Budget be Voted ? 162 2g. Reform of the American Budgetary System , 166 1. Enumeration of the Defects 167 2. Consideration of Remedies i63 CHAPTER IV. RESPECTING DISCREPANCIES BETWEEN THE EXECUTED AND THE ESTIMATED BUDGET. 30. The Three Interests Involved 180 31. The Supplemental Budget iSi 32. Deficiency Bills or Supplementary Credits 183 33. Administrative Appropriations 185 1. Extension of Grants 186 2. Transfer of Credits 189 3. Indefinite Appropriations 190 CHAPTER V. FINANCIAL ORGANIZATION AND ADMINISTRATION. 34. Organization of the Treasury Department 193 35. Concerning the Theory of Public Accounts 201 1. Comparison of the French and English Methods 202 2. Is Public Accounting on the Basis of Accruals Practicable 7. . . 207 36. HofT shall Public Moneys be Kept? 211 1. Practice in England, France, and Germany 2X2 2. Practice in the United States 214 PART II. PUBLIC REVENUE. PRELIMINARY CHAPTER. 37. Classification of Public Revenue , jjg 1. Main Divisions 219 2. Comparison of Direct and Derivative Revenue 22 1 3. Bequests and Indemnities... 223 4. Fees and Assessments j25 5. Revenue from Expropriation 228 6. The Lawyer's Classification 228 38. Comparison of Public and Private Industry 229 39. Marks of a Good Revenue System 232 TABLE OF CONTENTS. ix BOOK I. PUBLIC DOMAINS AND PUBLIC INDUSTRIES. CHAPTER I. REVENUE FROM PUBLIC DOMAINS. PAGE 40. Mineral Deposits and the Fiscal Policy 237 41. Surface Lands and the Fiscal Policy 239 1. Shall Government Cultivate Its Own Domain ? 240 2. Shall Government Lease Its Domain for Cultivation ? 247 3. Shall Government Dispose of Its Domain by Sale ? 254 42. Land Policy of the United States 255 1. The Original Idea Respecting Land 255 2. Use of Land for National Development 256 3. Use of Land for Educational and Railway Grants 257 CHAPTER II. REVENUE FROM PUBLIC INDUSTRIES. 43. Choice of Industries for Public Administration 261 44. Special Consideration of Public Industries 268 1. Industries Undertaken Primarily for Revenue 268 2. Industries in which Revenue is Incidental 273 3. Industries Undertaken Primarily for Service 276 45. Theory of Charges for Public Industries 277 1. Rule for Revenue-bearing Industries 278 2. Rule for Industries Bearing an Incidental Revenue 278 a. The Post-office 279 b. Territorial Railways 280 i. Municipal Railways 282 3. Rule for Industries Undertaken for Service 282 BOOK II. TAX A TION. CHAPTER L GENERAL CONSIDERATIONS RESPECTING TAXES. 46. Concerning the Method of Treatment 286 47. Concerning the General Nature of a Tax.. 289 48. Definition of a Tax from the Lawyer's Point of View 293 I. Must be for a Public Purpose 293 X TABLE OF CONTENTS. rAGB 3. Must be Levied in a Spirit of Equity 294 3. Must Conform to Established Rules 295 49. Definition of a Tax from the Theorist's Point of View 297 1. The Purchase Theory of a Tax 298 2. The Benefit Theory of a Tax 299 3. The Contributory Theory of a Tax 301 50. Analysis of the Taxing Power 302 1. Character of the Power 303 2. Grants Bestowing the Power 304 3. Limitations upon the Power 306 51. Concerning the Duty to Pay Taxes 310 1. Difficulties of Administration due to Foreign Residence 312 2. Difficulties of Administration due to Differences of Business Interests 314 52. Principles of Tax Exemption 316 CHAPTER IL CONCERNING THE PRINCIPLES OF APPORTIONMENT. 53. Special Reasons for Equitable Taxation 321 54. Analysis of the Rules of Apportionment 323 1. Apportionment and the Cost Theory of Taxation 324 2. Apportionment and the Benefit Theory of Taxation 327 3. Apportionment and the Contributory Theory of Taxation. . . . 328 55. Respecting the Fund from which Taxes are Paid 332 1. Characterization of Net Income 332 2. Relation of Property to Income 335 56. Characterization of Proportional and Progressive Taxation 337 57. Argument for and against Progressive Taxation 341 1. The So-called Socialistic Argument 341 2. Progressive Taxation and Equality of Sacrifice 345 3. Progressive Taxation and Industrial Development 348 4. Conclusion 352 CHAPTER IIL CLASSIFICATION AND CHARACTERIZATION OF TAXES. 58. Selection of a Principle of Classification 354 59. Taxes on Income 356 1. Income from Service 357 2. Income from Property 358 , 3. Income of Property 360 60. Taxes on Property or the Sources of Income 361 I. Theory of Property Tax 361 TABLE OF CONTENTS. xi PAGS 2. Property Classified on the Basis of Income 366 ". Property in Person 366 b. Property in Land 368 c. Property in Capital 369 a. Theory of the Personal-property Tax 369 fi. Three Reasons why the Personal-property Tax is Untenable 371 d. Property in Wealth Assigned for Use 376 61. Taxes on Business as a Means of Securing an Income .j 377 1. License Taxes 378 2. Franchise Taxes 379 3. Corporation Taxes 381 4. Excise and Customs Taxes 383 62. Conclusion 385 CHAPTER IV. CONCERNING THE MANNER IN WHICH TAXES WORK. 63. The Shifting and Incidence of Taxes 388 1. The Use of Terms 388 2. Incidence and the Laws of Price 389 a. Goods Produced at Uniform Cost 390 6. Goods Produced at Expanding Cost 391 c. Goods Produced under Conditions of Monopoly 393 3. The Income Tax 398 64. The Industrial Results of Taxes 398 1. General Results Working through Consumption 399 2. Three Special Cases 401 a. Taxes may Increase Income 401 i. Taxes may Cheapen Production 402 c. Taxes may Reduce the Level of Profit 404 3. Taxation and Valuation 406 65. Relation of Taxation to Occupation and Investment 407 66. Taxes as a Means of Artificial Selection 411 1. Taxation and the Moral Reformer 411 2. Taxation and the Social Reformer 412 3. Taxation and Protection 414 CHAPTER V. ADMINISTRATIVE CONSIDERATIONS OF TAXES. 67. Shall All Revenue be Secured by a Single Tax ? 421 1. The Single Income or Property Tax 422 2. The Single Excise Tax 423 3. The Single Land Tax 423 xii TABLE OF CONTENTS. PACE 68. How may the Tax Rate be Determined ? 429 1. The Rate for Direct Taxes 429 2. The Rale for Indirect Taxes 429 a. The Financial Interest 430 i. The Sociologic Interest. . . .'. 432 c. The Administrative Interest 432 6g. Administrative Questions Respecting the General Property Tax..., 434 I. Inequalities between Persons 436 z. Inequalities between Real and Personal Property 438 3. Inequalities between the Several Grades of Government 445 70. Administrative Questions Respecting the Corporation Tax 449 1. Selection of Industries to be Taxed 449 2. The Proper Basis of Assessment 454 a. Property (he Basis of Assessment 454 i. Volume of Business the Basis of Assessment 457 c. Earnings the Basis of Assessment 4S8 d. Special Cases of Corporation Assessment 463 3. The Rate of Corporate Taxation 464 71. Administrative Questions Respecting Customs and Excise Duties... 467 1. Choice of Articles for Import Duties 467 2. Choice of Articles for Excise Duties 473 72. Administrative Questions Respecting the Income Tax 476 CHAPTER VI. SUGGESTIONS FOR A REVENUE SYSTEM. 73. Some General Considerations 490 74. Assignment of Revenue to the Federal Government 493 1. Foreign Commerce and Federal Taxation 493 2. Inland Commerce and Federal Taxation 494 3. Excise Duties as a Federal Tax 496 4. Other Possible Sources of Federal Revenue 49S 75. Assignment of Sources of Revenue to State and Local Governments 500 1. Sources of State Revenue 500 2. Sources of Local Revenue 502 3. Assignment of Tax on Inheritances and Professional Incomes. 504 76. Administrative Questions Suggested by this System 506 I. Separation of State and Interstate Commerce 506 a. On the Basis of Gross Earnings 509 i. On the Basis of Net Earnings 510 a. Organization for Administering State and Local Taxes. 510 a. Interstate Organization 511 i. Organization within the Slate 512 c. Organization ivithln (he Municipalities 514 T/IBLE OF CONTENTS xiii BOOK III. PUBLIC CREDIT, CHAPTER I. NATURE OF PUBLIC CREDIT, PAGE 77. Government Bond Considered as Commercial Paper 518 78. Industrial Effects of Public Borrowing 520 1. Loans Placed at Normal Rates of Interest 521 2. Loans Placed at High Rates of Interest 522 3. Loans Placed at Abnormally High Rates 524 7g. When may Public Credit be Employed ? 526 1. Loans may be Used to Cover Casual Deficits 527 2. Loans may be Used to Meet a Fiscal Emergency 529 3. Loans may be Used to Procure Funds for Public Investment. 532 CHAPTER IL EMPLOYMENT OF PUBLIC CREDIT. 80. Emergency Financiering 534 81. Investment Loans 542 CHAPTER in. THE ADMINISTRATION OF A PUBLIC DEBT. 82. The Issue of a Public Debt 547 1. To what Motive should the Financier Appeal ? 547 2. What should bf. the Terms of a Public Debt ? 550 83. The Conversion of a Public Debt 553 84. The Payment of a Public Debt 555 1. Why should a Public Debt be' Paid ? 556 2. How should a Public Debt be Paid ? 560 THE SCIENCE OF FINANCE. INTRODUCTORY CHAPTER. GENERAL CONSIDERATIONS RESPECTING THE SCIENCE OF FINANCE. Definition of the Science of Finance. The Three Fiscal Axioms. (i) The Patrimony of the State must not be Impaired. (2) Political Restraints must be Established. (3) The Political Organization must be Recognised. The Nature of Public W.4.nts. (i) They Are Reducible to a Demand for Money. (2) Consideration of Gratuitous Service. (3) Consideration of Coerced Service. General Divisions of the Science of Finance. 1. Definition of the Science of Finance. — The Science of Finance treats of public expenditures and public income and includes in its investigations all those varied relations neces- sarily implied when considering such expenditures and in- come. In its restricted sense, it pertains to the technic of treasury administration and deals with those practical ques- tions that arise in connection with the management of the public purse. Regarded from the pedagogical point of view, it forms a part of that comprehensive study, the Science of Economics, and through economics it is related to the en- tire group of political and social sciences. Speaking defi- nitely, and with a view of grouping the problems which if in- cludes, the Science of Finance undertakes an analysis of the wants of the State and of the means by which those wants may be supplied. All problems which find proper place within the domain of this study may be considered in connection with one of the two following questions : s a GENERAL CONSIDER/ITIONS. First. What are the legitimate and necessary wants of a State ? Second. How may these wants be the most economically and advantageously supplied ? A number of problems in public economy commonly re- garded as forming a part of the Science of Finance must be excluded if the view just expressed respecting the nature of that science be accepted as correct. Such, for example, are the problems of money, currency, and banking. These have tp do with the mechanism by which all financial operations - arf carried on, and not with the operations themselves. A sound monetary system, a safe, currency, and an efficient banking organization are important for private as well as public transactions. They form a part of the conditions necessary for the transfer of values, whether such transfers be between two or more citizens or between the subjects and the State. They pertain primarily to the machinery of com- merce and are properly treated as chapters in Political Econ- omy, a study which may be adequately defined as the science of industrial association. It is necessary that the distinction here brought to light should be firmly grasped in order to guard at the outset against misapprehension respecting the scope and purpose of the Science of Finance. It is true that under certain condi- tions questions of money, currency, and banking may play an important part in the financial policy of the Government. Suppose, for example, some great fiscal exigency to arise, like the advent of a war, and that the Government lack the instruments and agencies with which to make headway against fiscal wants. It is quite possible that an administration may feel obliged, as a preliminary step for collecting adequate revenue, to undertake the creation of a new system of cur- rency or banking. Such was the case in the United States in 1861. It is also conceivable, though the admission is full of danger, that a government may, on account of failure of all other means of filling a depleted treasury, be forced to issue legal-tender notes which shall serve as money in commercial transactions. Under such circumstances a law which aims to create a banking system, or to provide a new medium of cir- culation, becomes, for the time being, a part of the financial policy of the administration. From this, however, it does not THREE FISC/IL AXIOMS. 3 follow that a discussion of banking principles' or of the prin- ciples of monetary science forms a legitimate part of the Science of -Finance. The conclusions arrived at from such a discussion find their support in Politicaf Economy, and must be accepted by the financier as part of the equipment with which he approaches the solution of any particular financial question. Another mistaken idea respecting the Science of Finance arises from failure to ^distinguish between public and private financiering. The former holds in mind the service to be ren- dered, the latter the profit to be derived from the service-. This distinction, the recognition of which is essential to the proper understanding of the Science of Finance, will be more fully explained in connection with the discussion of certain fiscal axioms which follows. The Science of Finance has tq do with public and not with private financiering. > 2. The Three Fiscal Axioms. — Since the Science of Fi- nance treats of the wants of the State and the means of their supply, it seems proper at the outset to inquire respecting the nature of a State. The scope of such an inquiry must be - limited by its purpose, and its purpose is to discover if the^ State possess any universal or permanent characteristics which may be accepted as final in the formulation of financial principles, or in passing judgment upon specific financial questions. This inquiry need not be undertaken by the stu- dent of finance as an original investigation, for the teachings of political philosophy furnish all the necessary information for the unfolding of his peculiar science. Current teachings respecting the nature and function of the State point to three fundamental and universally true principles, which we venture to term fiscal axioms, each of which rests upon a fundamental and universally recognised characteristic of the State. (i) The Patrimony of the State must not he Impaired. — This axiom rests upon the fact that the life of the State' is conceived to be eternal. As a matter of history, states do come to an end, — they are born, they grow, they decay, they die, — but no statesman would for a moment think it possible to present a policy adjusted to this fact, nor would the publicist in discussing a current question accept the decay of the State as a controlling consideration. Even 4 CENER/tL CONSIDERATIONS. historians when they describe the rise and fall of empires do so for the purpose of pointing out the cause of decay, in order that living states may avoid the errors of the past. This is the first of the many instances which will pre- sent themselves as our study proceeds, in which the public and the private point of view are brought strongly into con- trast. An individual is obliged to recognise the fact of death and to adjust his affairs accordingly. To take an extreme case for illus'tration, (and one of more frequent occurrence in Europe than in this country), a man who has no one depend- ing upon him may convert his property into a life-annuity; that is to say, he may purchase with the total of his property a promise from the State, or from some responsible corpora- tion, of an annual payment during life. He has no interest in the disposal of his property after death, and exchanges it for an assured living while he may live. This as a business transaction is controlled by the thought that the period in which one's patrimony may be enjoyed is limited, and, judged from the private point of view, is not necessarily bad financier- ing. Such considerations, however, cannot be entertained by the public financier. He is called upon to manage the prop- erty of the people whose interests endure in perpetuit}-. He must reason from the point of view of the State whose exist- ence knows no limit; he is not, therefore, at liberty to com- mute the patrimony of the State into extraordinary income for a few years, nor in any manner to dissipate public property. It is a fundamental principle of constitutional law that each legislature shall hand down to its successor all the rights and powers and jurisdictions which it received from its predeces- sor ; so in matters of public finance it is incumbent that each succeeding administration shall find as broad a field from which to supply its needs and. as fruitful a source of supply as the administration which preceded it. This statement is so reasonable and springs so naturally from the conception that the State is a personality of perpetual life, that its mere statement must secure for it universal recognition. It pro- vides the Science of Finance with the first of its fundanient-1 or axiomatic truths, namely : A sound financial policy zvill not impair the patrimony of the State. But what, it may be asked, is the patrimony of the State ^ This depends upon the stage of development at which a peo- THREE FISCAL MXIOMg: 5 pie have arrived and upon the relation which at any time exists between political and industrial life. In feudal times the patrimony of a State consisted primarily in the royal demesne, and the fiscal axiorp under consideration led to me formulation of many -rule? respecting the industries oi agriculture, forestry, fisheries, and the like, designed tb maintain the extractive industries in a flourishing coil- dition. These rules properly collated and classified, what; ever the name by which they may be known, formed the substance of the Science of Finance for the time to which they pertain. In Germany thfey took the name of Kameral- wissenschaft and were in fact the historical forerunner of the later science. In modern times, and among peoples who practise the lat*^ of private property and the theory of individual rights, the patrimony of the State consists in a flourishing condition p{ private industries. Public revenue is not secured to ahy great extent from the ownership and direct management of productive property-, but from taxes levied upon industries the property of citizens. The more flourishing these in?^ dustries, the larger is the fund to which the State may appeal for /public revenue, and on this account it should be the prime^ consideration of the financier that nothing be done which will in any way tend to impair the efficiency of private industry. A sound policy of public finance must rest upon a thorough knowledge of political economy. To illustrate yet farther what is meant by the patrimony of the State, it may be remarked that there appears to be at the present time a tendency toward the substitution of public for private ownership in certain industries. In so far as this tendency is realized by modern governments it appears that the patrimony of the State consists in the productiveness of the industries in question. Suppose, for example, the railway, express, and telegraph industries to have been assumed by the Federal Government; or the service of supplying gas, electricity, water, and rapid transit to have been assumed by the municipalities. The source of revenue in these cases would be the profit secured by the operation of such indus- tries, and these industries would then become a part of the patrimony of the State. It' seems, then, that this word patri- mony, wWch the first fiscal axiom asserts will not be im- 6 GENERAL CONSlDER/tTlONS. paired by the financial policy, is not a thing that is fixed, but that it changes with the ideas of political and industrial rights entertained by the people. The axiom, however, remains al- w;ays the same, and by it the financier is precluded from enter- ing upon any line of policy which shall permanently impajr the sources of public revenue. -^ (2) Political Restraints must be Established. — A second per- manent characteristic of the State is that the State does not exist in and of itself, but for the purpose of perform- ing certain delegated functions. It has a legal rather than a physical or a psychological existence. The important conclusion which follows from this statement is that public administration is not confined to the ordinary motives which give direction to business transactions. The State stands by itself, and, there being no possibility of comparison, it cares nothing for riches as such. The desire for profit which con- trols all private transactions is foreign to its nature, and, con- sequently, in all that the State does it is superior to the rules of ordinary capitalistic industry. The principle of competi- tion which guarantees a just price for most commodities has no play in public affairs. All State enterprises are, or at least they may be, strict monopolies, and there is on this ac- count no guarantee in the nature of the conditions under which the services are rendered that the subjects of a State _will be treated in a spirit of fairness. That which the indi- I vidual desires in the expenditure of his income (and this desire is regarded as a fundamental right among commercial peo- * pies) is, that he shall pay no more for a service than its legiti- mate and necessary cost, no matter whether it be rendered 'by the Government or by a private person. Any charge in -excess of cost is conceived to be extortionate. Now, the •peculiar fact to which the above-mentioned characteristic of iihe State points is, that there can be no commercial guarantee •of fair treatment in the relations which exist between the State ;and the- citizen. It is essential, therefore, that other means i)e devised for, the control of those who are intrusted with the exerdse of -public powers. The two principles known to civilized society by which the actions of men are controlled, so facias these actions pertain to the rendering of services, are the competitive pfinciple and the political principle. Besides these two, there are no other means of controlling the actions THREE FISCAL /IXIOMS. 7 of men; and if conditions are such that the competitive principle, cannot produce the desired results, reliance must be placed upon the political principle. The fundamental or axiomatic truth to which these considerations lead lies wholly upon the surface, and may be accepted as the second of the fiscal axioms which find their root in the permanent charac- teristics of the State. It is as follows : A sound fiscal system will establish political restraints in order to insure that all services rendered by the State shall be rendered at the least possible cost. , The importance of this truth in directing the development of the Science of Finance will be more clearly recognised when it is observed that the State is the sole residence of co-_ ercive power.* It alone of all organizations or associations » of men has the moml and legal right to use force in the attain-^ ment of its ends^^It is of course essential for the welfare of society that the right of coercion should be lodged some- where, and that certain persons should be intrusted with its exercise ; but there is great danger incident to the mere exist; ence and recognition of this rightj/_The tyrannies which his-""' lorians describe have commonly arisen from the fact that the grant of coercive power, which from its very nature inheres in government, is used by governors for personal ends. The ioxm of this ttrannv changes with the successive fashions of society, but its character is always the same, namely, the em- ployment of a public power in a personal manner. Now the Science of Finance assumes no priority as guardian of the liberties of the people ; but so far as these liberties are en- dangered by the constant encroachment of personal interest into public service, there is no domain of administration in which provision may be made against such encroachments as easily or as effectively as in that which has to do with the collection and the expenditure of public moneys. This entire subject will be more fully considered in connection with Budgetary Legislation. Sufficient has been said here to show that, because the State is naturally monopolistic and exclusive in all that it undertakes, and because it is the sole residence of coercive power, the principle of public financiering, which asserts that public service must be rendered at cost, and the axiom that political restraints must be established in * Bastable, Public Finance, p. 41. 8 GENERAL CONSIDERATIONS. order to realize this principle, are truths which lie at the basis of the Science of Finance. (3) The Political Organization must he Recognised. — ^A third jjharacteristic of the State is that the State is an historical product, and as such takes upon itself various and peculiar forms. Government is a permanent fact in human society, but the working theory which underlies government is subject to constant change. It is not the same for dif- ferent peoples at the same time nor for the same peoples at different times ; yet at any stated period it reflects the social aspirations of the people, and conforms to the conception of individual rights and duties entertained, as also to the stage of development and condition of intelligence at . which the people have arrived. It is the recognition of this fact which leads one to appreciate the rliird of the fiscal axioms disclosed by an analysis of the characteristics of the State, which is as follows: \A successful financial system will conform to the political ideas which for the time being control^ society, and adjust itself to the political structtire of the particular society to which it applies. J a. This fundamental truth, it will be observed, is presented in two separate statements, and it may be well in proceeding to its illustration to treat the statements in the order of their presentation. It is asserted, in the first place, that a financial system must conform to the political ideas which for the time being control society. Reference is here had to those broad, comprehensive views of individual and public rights which underlie social relations. Even a superficial study of history shows that the Roman State, for example, was actuated b\- po- litical ideas essentially different from those of the Swiss Fede- ration; that the fundamental conception of class relations, of public duties, of individual privileges, and the like, were not the same for the two peoples ; and that the government of the former must have been upon an entirely different pat- tern from that of the latter. Every society has what may be termed its legal framework, which conditions all forms of ac- tivity, both public and private. This framework is found in the laws, or in customs more enduring than laws, by which the admitted rights of all persons, classes, or associations are definitely stated. Now it is a truism to say that financial regulations, the aim of which is to secure revenue for the THREE FISCAL AXIOMS. 9 support of the State, should conform to the political ideas ex- pressed in the constitution of society, for the financial system is in reality the fiscal expression of the social and political aspirations of the governing class. This may be clearly com- prehended if some of the more salient points of two or three finbncial systems which history discloses are passed in review. 'Most of the ancient states were founded on conquest, and the most conspicuous feature of their society was its military organization. The theory of rights and of duties which in modern times is conceded to apply in the same manner to all men was commonly in ancient societies restricted to the re- lation of freemen to freemen. No rights, social, industrial, or fiscal, were conceived to exist for a vanquished people as against the State. Revenue was largely in the form of tribute or arose from confiscation or booty. During the latter days of the Roman Empire, it will be remembered, one half of the booty went to the army, the other half to the civil govern- ment. In Athens during the days of her power three-fifths of the public revenue arose from tribute.* In the military organization of society the fiscal system will inevitably be military in character. Following the fall of the ancient states a new principle of association made its appearance, and society took upon itself the form of feudalism. It will be futile to attempt to charac- terize the political ideas of the Middle Ages by a single phrase; but the fact of importance for the purpose of our present illustration is that government was proprietary rather than military in its organization. In theory all landed pro- perty, (and landed property constituted the bulk of all property known to the industries of the times), belonged to the king, who assigned it to his dependents in return for military ser- vice, who in their turn assigned it to their dependents in re- turn for labour. The king retained for royal use an amount necessary to meet the needs of himself and household, and the feudal lords did the same in their respective manors. They and their households represented the de facto govern- ment, and performed all military and juridical service without making any regularly recurring demands upon the people. The State was chiefly supported out of the earnings of the • SchSnberg's Handbuch der politischen Otkonomie, B. III. p. 14, lo GENERAL CONSIDERATIONS. property of those who represented the State, contributions from the earnings of individuals being at first of the nature of special assessments to meet special emergencies. It was a source of income which the feudal principle assigned to the State, and not the right to demand a portion of the income of citizens. One is not at liberty to assume that under such conditions no system of finance could have been developed. Both analysis and history would deny such an assumption. It is, however, correct to say that a feudal system of finance must conform to the requirements of a proprietary govern- ment, and that these requirements are essentially diflferent in their form, and in their tests of success, from those which pertain to a military society on the one hand or to a demo- cratic people on the other. The principle of association which in the course of history followed the decay of proprietary government is what may be termed the political principle. Its development goes along with philosophic democracy, constitutional government, and private property. The conception of the rights of individuals and of the place of government in society is wholly changed from that which asserted itself in feudal times. Government is now conceived to be an agency to which certain definitely prescribed functions are assigned, and, like any agency, right- fully demands support adequate to the satisfactory perform- ance of its assigned functions. The chief personage in this adjustment is the citizen, in whom ultimately all rights rest, and for whom all privileges exist and all services are rendered. Private property is an essential part of this scheme of association, and it is to utter the most apparent truism to say that the financial system of a people whose ambition it is to realize the principles of political association must adjust itself to the requirements of constitu- tional government and to the demands of private industry. The financier is not at liberty to idealize his historical en- vironment, for by so doing he will fail to realize a workable system. In this fact the Science of Finance finds a canon of judgment by which the propositions and plans of financiers or social reformers are to be tested. The first requisite of a financial system is to secure adequate funds for government, and to secure them in such a manner as to be least burden- some to the people. In order to do this the demands made THREE FISC/iL AXIOMS. ii by a financial system upon the citizens of the State must fit into the accepted system of political, social, and industrial rights. h. The second part of the third financial axiom is that financial system must adjust itself to the political structure of the particular society to which it applies. For the elucidation of this truth attention may be confined to the various forms of constitutional government which at the present time exist. All of these governments are endeavouring to realize the same general idea of political and social rights; inasmuch, how- ever, as they have come to this by various paths, it is no occasion for surprise to discover marked differences in their constitutional structure. This being the case, it is the duty • of the financier in any particular country to acquaint himself with the facts peculiar to his own State, and while much may be learned from a comparative study of various financial sys- tems, he will do well to confine his definite proposals to meet the peculiar conditions of his own historic environment. In all discussions of financial rules and principles it is essential that this limitation of their application should be recognised. The most pertinent comparison to which reference may be made for the purpose of illustration is found in the marked contrast which exists between the fiscal systems of the Ger- man Empire and of the United States. Both of these peoples are endeavouring to realize constitutional principles. Both, also, so far as form is concerned, are Confederated Unions; yet so different is the history of these two peoples that little of a common character may be found in their respective financial systems. By referring to American history it will be remembered that prior to the Revolutionary War the thirteen colonies sustained no important political relations between themselves. Each colony was dependent upon the mother country, and it was not until a common menace arose that they came to recognise community of interests. This appreciation of a common danger was the beginning of a national life which succeeded eventually in expressing itself in a fairly strong centralized government. At the time the independence of the colonies was formally recognised, however, so great was the fear on the part of the new States lest their political impof- tance should be overshadowed by the central authority that 12 GENERAL CONSIDERATIONS. the government created to represent national interest was but a weak and halting affair. This was the government which rested upon the Articles of Confederation, and, as is familiar to every student, it was not granted adequate authority to protect the interests of the newly established nation. The particular difficulty encountered arose on account of the re- served right of the States to withhold financial aid. Accord- ing to the theory adopted, the finances of the Confederation rested entirely on requisitions upon the States ; the central government being, in consequence, deprived of any inde- pendent source of revenue. A government without revenue can, of course, show neither independence nor strength ; and in the readjustment which took place on the occasion of the adoption of the present Constitution this weakness was over- come by granting to the central authority the exclusive use of customs duties as a source of revenue. With this exception, however, the States were left in undisturbed possession of all the sources of income which they had previously enjoyed. In this way it came about that the finances of the several States are not only entirely independent of each other, but are likewise independent of the Federal Government. The political theory to which the Constitution was adjusted recog- nised the States as the original sovereignties, and as still re- taining all sovereign powers which were not expressly granted to the Federal Government when it was established. There is, consequently, no opportunity for any credit and debit ac- count between the central government and the States, nor is it possible, except by means of agreement, to attain any har- mony in the financial legislation of the States themselves. It is thus observed that, on account of the peculiar history of the American people, the financial systems of their several govern- ments cannot easily become a uniform and harmonious whole ; they are rather an aggregation of financial systems of separate and independent sovereigns. In Germany, on the other hand, different historical condi- tions have produced essentially different results. Here, as in the United States, the Imperial Government was created out of a union of independent States whose rights and duties as part of the Empire are definitely stated in a written Con- stitution. Under the peculiar historical conditions, however, at the time this union was effected, the jealousy existing be- THREE FISCAL AXIOMS^ 13 tween the States did not pertain to questions of revenue, and, consequently, the financial adjustments were such as com- mended themselves to judgment rather than to prejudices and jealousies. Moreover, the preponderance of Prussia in the Confederation, whose king was declared to be the hereditary head of the Empire, rendered it safe for the Imperial Govern- ment to allow to the respective States certain financial rights which could not have been allowed had the States making up the Empire been equal in population and area. When, there- fore, it is learned that the financial system of the German Empire is one which incorporates the theory of requisitions, which maintains a debit and credit account between the Im- perial Government and the States, and in which the officers who collect the Imperial revenue are State officers, one can easily appreciate how this adjustment is natural in view of the historic conditions under which the Constitution was formed. It is considerations of this sort which lead to the assertion that a financial system must be judged in the light of its relation to the past of the nation to which it applies. A question of financial adjustment is always at last analysis a constitutional question. As another illustration of the same thought, reference may be made to the ratio of local and central expenditure in the various governments of the world. In the United States, for instance, sixty per cent of all public expenditures are local or non-Federal expenditures, while the local expendi- tures of France are less than thirty per cent of the aggregate. No fact could more clearly indicate that the administrative structure of the former is essentially different from that of the latter. Differences of this sort are familiar to the student of comparative finances, and the more extensive his investiga- tions the more pronounced will be the impression that the first duty of a financier is to know his own people. The po- litical and social ideas of the time are for him given factors ; they are elements in the problem he undertakes to solve. It will not do for the financier to fail in his appreciation of his- toric perspective, or to ignore the very narrow and limited margin of choice which at any particular time is presented to him. It is such considerations as these which lead one to assert that the third of the fiscal axioms which have been pre- sented cannot be safely disregarded : A financial system must X4 GENERAL CONSIDERATIONS. conform to the political ideas which for the time being control so- ciety, and adjust itself to the political structure of the particular society to which it applies. 3. The Nature of Public Wants. — A consideration of the ^ature of the State has led to certain fundamental truths which financiers cannot disregard. The second step in the unfold- ing of our study is to inquire respecting the nature of the wants of the State, to supply which is the aim of a financial system. It is not necessary in discussing the wants of the <^State to enter upon any abstruse or metaphysical analysis. The meaning of the phrase lies wholly upon the surface, and suggests itself at once when it is recognised that the State must always be represented on its formal side by a govern- ment, and that government stands forth in the person of the L individuals who represent it. Indeed, no error can arise should the Science of Finance conceive of the State as a cor- poration intrusted with the performance of certain delegated functions. It comes then to be a legal personality, the same in. kind, though not in the nature of its powers nor in the motives which control its conduct, as any other corporation, and its wants are of quite the same sort as those of an ordinary business concern. By conforming to such an idea our sub- ject takes upon itself that simplicity and clearness essential ^ for just conclusions. Much of the profundity of thought \which many profess to discover in this science is in reality loggy thinking, and arises from the proneness of publicists to dally with metaphysical conceptions. (i) Public Wants Are Reducible to a Demand for Money. — The wants of the State vary from time to time, but, confining our analysis to peoples familiar with constitutional government and with the institution of private property, they are, as al- ready remarked, the same in kind as those of a corporation intrusted with the management and development of an ex- tensive business. That is to say, the State needs to own a certain quantity of land and to control a certain quantity of labour or service. Since the principle of feudalism gave place to the principle of representative government, the amount of land which must be placed at the disposal of the State has greatly decreased. It is only necessary that the State should own, or directly control, a sufficient amount of land to serve as standing NATURE OF PUBLIC IV ANTS. iS ground ior the performance of its delegated functions. The land owned by modern governments is used chiefly for such purposes as building sites, forts, navy-yards, public parks, and the like; wherever an exception to this rule appears, it may be regarded as evidence that some of the old feudal forms are yet maintained, or that society is adjusting itself to the ideal of socialism. Either of these conditions is out of har- mony with what has been characterized as the political prin- ciple of association. Not only is the amount of land required by the modern State limited to what it can directly use for governmental purposes, but in securing this land the government resorts to no unusual method of procedure. It buys its land in open market, in the same manner as a private person. It is true that in the theory of English law the title of all land is held from the State, and that the State can exercise in its own interest the right of eminent domain; but an industrial corporation also may secure for itself the exercise of that right if it can show that the land is to be used for a public pur- pose. It thus appears that the demand for land is reducible to a demand for money. Land itself has ceased to be a dis- tinctive element in the financial policy of the State, a fact which will be more clearly seen when, in a subsequent part of this study, the policies of modern governments respecting public domain are considered. The second requirement of the State is control over labour or service. The State stands forth in the person of public officers or employes who, giving their time to the public ser- vice, must be supported at the public charge. Here, as in the case of land, political government is in bold contrast with proprietary government. In the feudal system public services were rendered by the governing classes without specific pay- ment for definite service. The theory seemed to be that a definite amount of property was set aside for the use of those rendering governmental or social service. At present, how- ever, the greater portion of productive property having been assigned as the property of individuals, and being used as the source of personal profit, the State is obliged to pay for the labour of those who render public service in the same manner as a private corporation. This means that the second great want of the State, namely, the want of service and 1 6 GENERAL CONSlDER/iTIONS. labour, is for the most part reducible to a demand for money. (2) Consideration of Gratuitous Service. — While it is true that money payment for public service is the general practice among modern governments, the exceptions to this rule are sufficiently numerous and important to deserve special con- sideration. The relative merits of gratuitous and coerced services on the one hand and of paid service on the other may yet be regarded as an open question, so far as a few classes of public duties are concerned. As an illustration of gratui- tous service mention may be made of the custom, so common among the smaller cities of the United States, of attaching no salary to the office of mayor. Regents of State univer- sities, trustees of asylums, boards of visitors of public insti- tutions, and in general all who render public services of an analogous nature, place their time and skill at the disposal of the State without pecuniary compensation. Sometimes this so-called gratuitous service is in reality a coerced service, as for example in those cantons of Switzerland where citizens are obliged by law to accept office, for at least one term, if elected thereto. Yet another illustration of gratuitous service is found in the English custom of withholding salary from mem- bers of Parliament. The motives which induce men to serve the public withoat pay are various. In some cases it is the honour or social dis- tinction attached to the office, or the satisfaction of one's ethical instincts. It is possible also that incidental benefits accrue to the holder of office, such as the expectation of po- litical preferment or the control of government machinery for personal or class ends. But whatever the motive may be, provided an exception be made for boards of management of semi-philanthropic institutions, it is believed that gratuitous service is inconsistent with either efficient government or the most equable administration of public affairs. The reasons for this opinion are four, and as follows : First. The motives which impel men to render gratuitous service are not constant and persistent, and consequently re- liance cannot be placed upon them for the most efficient pub- lic service. Patriotism, under the impulse of strong excite- ment, is capable of effecting prodigious results, but it is apt to die away with the occasion which brought it forth* While, N/ITURE OF PUBLIC IVANTS. 17 therefore, it may be wise in times of exigency to appeal to this motive for securing service, it cannot be accepted as a basis for rendering continued service. A sense of honour and a desire for social recognition are more reliable as main- springs of conduct than patriotism, but even these are not able to endure a long-continued strain. They generally come to men late in life, and their force weakens with the posses- sion of the honours sought. Honour and social distinction, like patriotism, are limited to a comparatively narrow range of services. It may be conceded that ambition is more per- sistent than the desire for social distinction, but a considera- tion of the manner in which it works shows that it exercises greater power in the securing of an office than in the per- formance of the duties of the office when secured. For this reason it cannot be accepted as an adequate basis of govern- mental service. The only constant and persistent motive, the only motive which works all the days of the week and is of about the same strength throughout the years, is the purely economic motive; that is to say, the desire for income. An analysis of motives surely warrants the conclusion that the demand of the State for service may, with few exceptions, be reduced to a money demand. Second. It is essential in a good scheme of government that a public officer should be held to strict responsibility for the manner in which he performs the function of his office, and this it is impossible to do if he renders gratuitous service to the public. He will not feel that there is anything person- ally at stake in the manner in which he performs pubUc duties, nor will the public be very stringent and exacting in its de- mands upon him. If, however, an officer be paid for his ser- vice so that he relies upon it for an income, the work which he performs appeals to him in the same manner as that of the physician, the merchant, or the mechanic ; and the public also regards itself at liberty to hold the incumbent of an office to a high grade of efficiency. This second argument against gratuitous service may be summed up in the adage: The more business and less courtesy in public affairs, the better the government. Third. A third consideration against gratuitous service is found in the fact that such service can never be a trained service. In so far as public service is rendered without pay. l8 GENERAL CONSIDER/ITIONS. it must be rendered by men who have already secured a com- petency. This means that the majority of public servants must be men of advanced years, and men who have spent the period of life commonly devoted to education in making preparation for work entirely different from that denanded by the State. Gratuitous service, therefore, means that the government must educate its officers after it has taken them into its employ, which is not only expensive in itself, but must lead to an inferior grade of service. From this it appears that the so-called gratuitous service may in the end prove to be a very expensive service. In applying this argument, how- ever, one should hold in mind the administrative rather than the legislative functions of government. Fourth. The final thought against gratuitous service per- tains primarily to legislative functions, and springs from the fact that, by excluding from the service of the State all who have not acquired a competency, the danger is incurred of placing the machinery of government at the disposal of the wealthy classes. This suggests the principal argument for the payment of members of Parliament in England. It is claimed that failure to make pecuniary compensation for the services of legislators excludes the labour interest from any representation in the law-making body, since they Who clearly understand that interest cannot afiford to give their time to legislative functions. Speaking generally, though there are of course many exceptions to this rule, one who fs anxious to serve the public gratuitously in any important place of honour and trust comes justly under the suspicion of desiring the office for personal ends. From all these considerations it might easily come about that gratuitous service would be gratuitous in name only. The rule that public service sHould be a paid service admits of few exceptions. (3) Consideration of Coerted Service. — So far as coerced service is concerned, there is a pretty well-defined practice among modern peoples. The existence of the State is con- ceived to be of more worth than any of the personal rights of citizens, and, provided political necessities warrant extreme measures, the State is at liberty to exercise its power of co- ercion, even to the extent of demanding that a subject place his life in jeopardy for the life of the State; and it depends entirely upon the military policy whether reliance is NATURE OF PUBLIC IVANTS. 19 placed upon a volunteer service with the reserved right of draft in case of emergency, or whether a labour tax is im- posed upon a people for the support of a permanent standing army. In either case, however, no invidious discrimination is allowed as between citizens. The coercion of military service must be according to some general law. Germany presents a good illustration of a military or- ganization based upon the exercise of coercive power. All male citizens, with some few exceptions which need not here be mentioned, are obliged to serve three years in the standing army and to remain for twelve years longer as a part of the army reserve. That is to say, Germany imposes a special labour tax for the purpose of procuring military service, and consequently is exempt from the necessity of imposing as large a money tax for the support of the army as would otherwise be the case. The merit of this system, regarded from a financial point of view, depends very largely upon the relative burdens of a labour tax on the one hand and a money tax on the other, as well as upon the incidental benefits which accrue from the two plans of military organization. The other system of procuring military service is through money payments to volunteers. This system is followed notably by England and the United States. In ordinary times those who enter the army do so because they find here a profession or calling which is suitable to their tastes. In the United States, where the volunteer system is applied most extremely, a military emergency is met through an appeal to patriotism or by the use of the draft. It is true that all en- listed men are placed upon the pay-rolls of the army, but, with the exception of those who are induced to enlist in times of peace, this pay cannot be regarded as a fair compensation for the service rendered. Those who enlist through patriotism are rendering a partially gratuitous service to the State, while the service of drafted men is a coerced service. It seems, then, so far as military organization is concerned, that the State is obliged to rely more or less upon its sovereign power of coercion. From an economic point of view there is little question that the labour tax, as practised by Germany, rests more heavily upon the industries of the people than a cor- responding money tax. It is equally certain that the con- siderations of military efficiency would lead to an acceptance ao GENERAL CONSIDERATIONS. of the German system. The extent, therefore, to which it is wise for a people to rely upon an exercise of coercive power in the maintenance of its military system depends upon the relative importance of industrial and military excellence, and this in its turn is very largely a matter of geographical situa- tion and political conditions. The conclusion to which this consideration leads is, that military service presents something of an exception to the rule that the demand for labour by the State is reducible to a money demand. Another illustration of coerced service is found in the prac- tice followed by many States of calling upon individuals to devote a certain number of days to work on the public high- ways. This is called the " road tax," and is, in form at least, a labour tax, although it may be commuted into a money payment. Experience shows this procedure to work badly in every way. No systematic improvements are possible under it, since each man insists on paying his tax to the public by working upon the roads adjacent to his own property, and, like all community work, it is rendered without care and with- out responsibility. For working out the tax those days are selected which cannot be used for any other purpose, and the uniformly bad condition of the country roads in many parts of the United States is an evidence of the inadequacy of coerced service in the maintenance of highways. A third illustration of coerced service is found in the jury system as practised in the United States. A small per-diem payment, it is true, is allowed to jurors, but the universal desire to escape this service shows the payment to be no in- ducement. From the nature of the case, however, it is essen- tial that courts should be granted the liberty of enforcing this service, since it would be impossible otherwise to carry on the jury system. In conclusion, it may be said that, with the few exceptions named, and others allied to these in principle, the demand of a State for labour or service is, Hke the demand for land, re- ducible to a money demand ; and our investigation may pro- ceed on the assumption that what the State wants for the satisfactory performance of its duties is control over an adequate money supply. GENER/tL DIVISIONS OF THE SCIENCE 21 4. General Divisions of the Science of Finance. — It re- mains for us to consider in this introductory chapter the nature and scope of the specific class of questions which claim the attention of the Science of Finance. As was remarked in connection with the definition of this science, all questions which find proper place in finance pertain either to the deter- mination of the legitimate and necessary fiscal wants of a State, or to the manner in which those wants may be the most economically and justly supplied. Our science divides itself into two parts, along the lines thus marked out. Part I concerns itself with Principles of Financial Legislation and Administration, and will be treated under the two heads of Public Expenditures, and Budgets and Financial Organiza- tion. Under Part II will be found an analysis of the Source of Public Revenue, which leads to a separate consideration of Public Property, Taxation, and Public Credit. A study of the source of public revenue comes naturally into the Science of Finance. Indeed, most English writers have contented themselves with a consideration of this part of the subject, and have commonly entitled their treatises Taxation,* Taxation and the Funding Systeni,-f and the like. It may be a little more difficult to perceive with clear- ness the steps by which the theories of expenditure, the con- siderations of budgets and budgetary legislation, and the rules and principles of financial organization are brought into the domain of this science; or, if the mind easily admits a con- sideration of these questions, the limit to which they may be properly carried is not so easily determined. For this reason it may be well to explain somewhat in detail these lines of in- vestigation and the manner in which they are introduced. A slight knowledge of public affairs makes it evident that a person or a party intrusted with the exercise of govern- mental power is subjected to certain peculiar temptations that present themselves in connection with financial administra- tion. There is, in the first place, great danger that the government will demand money for the purpose of perform- ing services which may be performed better and more cheaply by individuals. Such a demand would result in an unwar- » Peto. t McCulloch. 2 2 GENERAL CONSIDERS TIO!{ * This point of view is fairly well supported by Bastable, who says: " Without pressing the resemblance too far as is sometimes done, we may accept the evident fact that the State organization has certain points of view in analogy with the arrangements of the individual, and that in regard to economic action the comparison is particularly close." Public Finance, 2d ed., p. 37. 3° N/ITURE OF PUBLIC EXPENDITURES. the sociologic theory of the development of governmental functions. (2) The Collective Point of View. — One cannot proceed very far, however, in the study of the financial side of public administration without observing certain marked, differences between public and private financiering. Thus, in the first place, it may be noted that the individual or corporation whose primary aim is to reap a profit from an investment will be debarred from many lines of expenditure which a govern- — j;nent may properly enter upon. Two reasons may be men- tioned in explanation of this fact. \* First. It is necessary for an individual to consider an in- vestment as more or less temporary in character. His ex- pectation of life is readily calculated, and on this account he is debarred from contemplating investments that run in per- petuity. The State, on the other hand, as has already been pointed out, enjoys the expectation of perpetual existence, and consequently is at liberty to judge of an investment from this point of view. In the matter of education, for example, the State may with propriety consider the ultimate and final effect of expenditures, not confining itself to the immediate demands for instruction measured by what the people would be willing to pay for if education were a private affair. To say nothing of the necessity of general intelligence for the realization of popular government, or because of its bearing upon the character of society, it must be regarded as a sound investment for the State to undertake the maintenance of the most advanced education, even going so far as to provide sup- port for scientific research of all sorts and for art education ; for it is certain that every true discovery and every talent developed will sooner or later find their place in the economy of industry and react upon the life and aims of the people. Such a view is, from the nature of the case, foreign to the in- dividual who, conscious that life is fleeting, is constrained to judge of every investment on the basis of proximate rather than ultimate results. Second. An individual is under the necessity of providing for a quick return upon his investment in order that he may maintain the credit of the enterprise in which he is engaged ; while the State, whose credit does not rest entirely upon the fact that money appropriated comes to be the source of defi- THE POINT OF yiElV. 31 nite income, may be rightly influenced by considerations of ultimate rather than immediate gain. It cannot be expected, for example, that an individual will develop a system of forestry, since the investment must continue for at least thirty years before it begins to return a profit, and this is a longer period of waiting than an individual cares to contemplate. It is true that a certain amount of value would accrue each year on account of the growth of the forest, bpt since the sys- tem of bank discounts has not yet sufficiently developed to enable this increment to be transformed easily into an annual income, forestry is not attractive to the ordinary investor. The State, however, to whom thirty years is but a period in thought, would be justified in investing large sums in forestry, provided the growing of trees is itself of public advantage and the ultimate outcome of the investment reasonably sure. Its credit during the period in which the investment is unproduc- tive rests upon its power of securing revenue by taxes, and the government is, consequently, able to secure capital for the establishment of forestry at the lowest possible rate of interest.. Many other cases might be cited to make clear the differences which exist between public and private investments on ac- count of the fact that the State, unlike the individual, enjoys a perpetual lease of life. These two, however, education and , forestry, are adequate to make clear the principle laid down. It should be noted in the second place, as indicating a fuither difference between public and private expenditures, that a different interpretation is given to the phrase " profit- able investment " by the individual and by the State. In the judgment of the individual a profitable investment is one that gives rise to money profit. The income account must show a surplus. The stocks must secure dividends, the bonds bear interest, and both dividends and interest must arise from the earnings of the business created by the investment. The State, on the other hand, regards an expenditure as produc- tive which results in the creation of those social, political, or industrial conditions essential to the efficiency of private en- terprise. Although the profit arising from such an expendi- ture accrues directly to the individual, the expenditure is justi- fied if the industries of the country are thereby raised to a higher grade of technic, or if labour is rendered more pro- ductive in consequence. The State exists for its citizens, and 3* N/ITURE OF PUBLIC EXPENDITURES. its chief service is to provide conditions under which the activities of citizens may prosper. But the State receives also pecuniary advantages from such investments, for, al- though the increment of profit appears in the first instance upon the income account of private industries, the Govern- ment enjoys, as the result of its investment, a larger source of revenue through taxes than would otherwise be the case. There are many illustrations of expenditures which, while unproductive when regarded from the point of view of the in- dividual, come to be in the highest degree productive when the fact that the State represents the collective interests of society is held in mind. All general improvements, for ex- ample, like the dredging of streams for navigation, the build- ing of wharves, docks, and the like, the encouragement of great public works which would not otherwise be undertaken, may be for the State a most profitable investment of capital. All expenditures necessary to create and maintain a condition of safety for persons and for property are included under this head. Thus, Italy found it necessary, a few years ago, to make unusual expenditures in order to rid the country of law- lessness and violence; but this has been repaid many times to the government, and a hundredfold to the citizens of Italy, in the expansion of the new industries which the unusual security called into existence. ~" Our general conclusion, then, respecting the point of view from which expenditures are to be considered is the following : Since the State is the people organized in their collective capacity, and consequently the wants of the State are in reality the wants of the people whose servant the State is, a very "Y large number of the questions respecting public expenditures* are found to be, upon final analysis, questions which have to do V with the collective expenditures of individuals, and on this account should be judged in the same way •& an individual judges of his personal expenditures ; but, on the other hand, in view of the fact that the State is an organism of perpetual life, that it is imposed with responsibilities which extend be- yond the interests of individuals or classes, and, also, that it is clothed with unusual powers for carrying through the duties imposed upon it, there are, in addition to the considera- tions respecting expenditure which it holds in common with domestic economy, other considerations which arise on ac- THE jIPPROPRIATE METHOD OF INVESTIGATION. 33 count of its peculiar functions and public character. The point of view, therefore, from which public expenditures are to be regarded changes with the nature of the questions under consideration ; and one of the chief difficulties in the solution of fiscal problems of this class is found in the necessity of bear-.^ ing constantly in mind these two avenues of approach. ^' 6. The Appropriate Method of Investigation.: — Having decided upon the point of view from which public expendi- tures are* to be regarded, it seems proper to inquire next respecting the most appropriate method of investigation. Ordinarily one is willing to rest the approval of his method upon the success of his analysis, and this undoubtedly must be the final test. In the present instance, however, the conditions under which the investigation is undertaken, as well as the character of the problem, are somewhat peculiar, and an explanation of the method adopted will throw added light upon the nature of the question in hand. It is not designed, in our effort to arrive at the social law of public expenditures, to make any considerable use of statis- tics, either for argument or illustration. On the contrary, our chief reliance will be placed upon an analysis of social needs and upon an investigation into the order followed in the de- velopment of State functions. This may at first sight appear strange, and it is somewhat unusual. The larger number of writers who have seriously and intelligently considered the problem of public expenditures * proceed, after a cursory statement of pubHc functions, by means of statistical inquiry. They succeed, doubtless, in pointing out some of the current tendencies in public expenditures ; ' but they fail to place those tendencies in their proper setting or to deduce from the facts collated any satisfactory statement of the law of social de- velopment as reflected in public accounts. An investigation 'I which begins with figures is likely to end with figures. ' Speaking more definitely, there are two reasons why, in the present condition of fiscal science, an investigation into public expenditures must take upon itself the form of a theo- retical investigation. The first of these reasons is a very practical one. The statistics of public expenditures are un- * A running comment on the cost of governmental functions, accom- panied by academic advice to statesmen, is not acknowledged as a serious or an intelligent appreciation of the problem. 34 N/iTURE OF PUBLIC EXPENDITURES. satisfactory when regarded as material for synthetical analysis. This is not due to paucity of material, but to the fact that governments keep their accounts in different ways, and that the phrases employed in public accounting do not always cover the same items in expenditure. It is natural that this should be the case. Public accounts are necessarily organ- ized in conformity to the administrative systems of the various states ; and these in their turn are adjusted to the several theories of political organization, as also to the governmental policies which for the time being control administration. This marked divergence in the accounting systems of the several states places an estoppel upon anything like a com- parative study of public expenditures beyond the most rudi- mentary and broadly conceived classifications. Even a ser- vice of such long standing as the " military service " does not mean the same in all states when translated into the language of expenditures. Should one undertake a study of the com- parative cost of judiciary systems, he would find the problem complicated by the marked divergence in the matter of fees and by the different ways in which fees are accounted for. In some cases a fee is a net return ; in others it is a gross return. In some cases no account whatever is made of court fees to the public treasury. The true cost of the judiciary in the United States, for example, cannot be ascertained, to say nothing of comparing it with the corresponding costs in other states, or of discovering a tendency with respect to this item of expendi- ture by a study of judiciary accounts from year to year. The chief difficulty, however, in a comparative study of public expenditures is not found in the divergence of accounting systems followed by those governments which are imposed with national or sovereign functions. We might, perhaps, get along with the federal, or imperial, or ministerial accounts of the several states ; that is to say, with expenditures for national or sovereign purposes; a more serious embarrassment arises when to these accounts there are added the accounts of the subordinate or local govern- ments. What lesson, for example, can be learned from a comparative study of the expenditures of the French Repub- lic and the Republic of the United States when it is remem- bered that sixty per cent, of the aggregate of annual expendi- tures on the part of government in the latter case is through THE /IPPROPRIATE METHOD OF IhiyESTlGATION. 35 the medium of local governments as against thirty per cent in the case of the French Republic ? Duplications also must be guarded against by him who undertakes a comparative statis- tical study of public expenditures. In this country, for ex- ample, the accounts of each government are separate and distinct, but in Germany there is maintained a debit and credit account as between the Imperial administration and the several States that together make up the Empire. A portion of the expenditures charged to local government in France, also, goes, not uncommonly, to cover deficits in national expendi- tures. Not only must care be taken to avoid duplication in arriv- ing at Aggregate public expenditures, but errors are likely to arise by failure to recognise the incidental ways in which pay- ment is made for public service. What Hght, for example, can be thrown on pension payments by comparing the pen- sion accounts in Germany with the corresponding accounts in the United States ? The police! force in German cities is made up in part from the ranks of retired soldiers, pro- vision being made for their employment as a partial substi- tute for the pension. In France, also, the tobacco-shops are not uncommonly tended by public pensioners. In the United States, on the other hand, the pension is a cash transaction. Such are a few of the many illustrations that might be given of the difficulties encountered by one who approaches the question of expenditures through a comparative study of financial statements. A comparative study of the cost of the various branches of public service as recorded in the ac- counts of the leading nations is a most difficult task ; indeed, it is a task of such proportions that years of patient investiga- tion would be required for its successful accomplishment. To undertake a statistical investigation of this sort in an elemen- tary treatise upon the Science of Finance would distort the proper proportion between the several parts of the treatise. This is the first and practical reason why, in the present treatise, no extended use is made of facts and figures in in- vestigating public expenditures. The second reason why reliance' is placed upon analysis rather than upon the tabulation of statistical data is found in the present condition of the investigation itself. The service rendered by an adequate working hypothesis in the develop- 36 N/tTURE OF PUBLIC EXPENDITURES. ment of any science is familiar to all students, and the reason now urged for considering the theory of public expenditures in advance of the formal study of the statistics of expenditures is found in the fact that the former is essential for the success- ful prosecution of the latter. The sociologic significance of appropriations for the support of government presents a pro- blem that has never received adequate attention from econo- mists and financiers, and it is necessary, in view of the present condition of the Science of Finance upon this point, to formu- late an hypothesis respecting the movements in governmental expenditures before an intelligent investigation into public accounts can be undertaken; and the author ventures to express a hope that a consistent theory of public expenditures having been set forth as a general theory of social evolution, it will prove to be of sufficient interest to claim the attention of many students, and that at their hands it will be expanded and modified so as to become eventually an established generalization in the science of which it is a part. It is not intended to leave the impression, by this apology for theoretical rather than statistical analysis, that the general conclusions arrived at are of use only as a working hypothesis for statistical investigation. They have a value of their own, and claim confidence even before they are proven to be true in all their parts. The elements common to civilized nations • are those historic factors and forces that make modern life what it is. And it is these factors and forces, rather than the administrative form assumed by them and which secures for them a definite statistical expression, which determine public expenditures. A theory of public expenditures must conse- quently be built upon an intelligent appreciation of social forces and an adequate perception of social tendencies — an observation which justifies the procedure adopted by this treatise of building up a theory of public expenditures from those known and manifest features common to the social and political organization of all peoples whose government con- forms to the constitutional type. From this chapter we have learned the point of view from which public expenditure should be regarded and the method by which the investigation is to be undertaken. The chapter immediately following concerns itself with an analysis of those conditions and forces which determine the aggregate of the funds properly placed at the disposal of government. CHAPTER II. RELATION OF PUBLIC EXPENDITURES TO INDUSTRIAL, POLITICAL, AND SOCIAL CONDITIONS. Public Expenditures and Industrial Development. Public Expenditures and Political Conditions. (i) Expenditures and Political Environment. (2) Expenditures and Political Organization. Public Expenditures and Social Organization. Two Rules of Public Expenditure. (i) The English Conception of Expenditures. (2) The German Conception of Expenditures. (3) Conclusion. It is the purpose of this chapter to trace the influence of the industrial, the political, and the social "conditions of a peo- ple upon the aggregate of their public expenditures. Each of these elements of a civilization works in a manner peculiar to itself, and for that reason each may be made a topic for separate analysis. 7. Public Expenditures and Industrial Development. — The expenditures of a government may properly be regarded as the complement of private or non-governmental expenditures. Both are charged to the general social income, and for that reason the amount placed at the disposal of government for the purpose of carrying on the public service must be deter- mined in view of the industrial development of the nation which gives rise to that income. It is the percentage of pub- lic expenditures to the gross income of society that provides a basis for judging the fiscal claims of a government. It is the ratio of the amount consumed to the fund by which con- sumption is supported that measures the intensity of a given demand. This being the case, it is clear that a demand for a public service which could not be reasonably allowed when the fund by which it is to be supported is small might be readily sanctioned should the wealth at the disposal of society 37 38 PUBLIC EXPENDITURES AND GENER/tL CONDITIONS. be in any considerable degree increased. This is an applica- tion of a general truth familiar to the latest phase of economic theory, namely, that our estimate of the importance of a service increases as we approach the possibility of its realization, while our estimate of the burden occasioned by the cost of a service decreases as the amount of wealth placed at our disposal increases. It is easier, for example, for the United States to assign $380,000,000 to the support of the service of the Federal Government at the present time than it was to provide for the expenditure of $3,000,000 in 1787 — a result due not so much to the increase in population as to a rise in the productive capacity of the people. This thought, which is a familiar one to writers upon finance, is usually ex- pressed by saying that the burden of a tax depends rather upon f the ability of the citizen to pay than upon the amount paid, ; and that this in turn depends upon the average wealth of the citizen. The claim that the aggregate of governmental expendi- tures is largely determined by industrial development finds support, also, in the general theory of social evolution. It is a fundamental law of social development that human wants are capable of indefinite expansion, but that their expansion will conform to the order of their relative importance. The conscious ability to satisfy a want which previously lay dor- mant gives to it a vitality that raises it from the rank of a simple desire to the rank of a vital principle capable of giving direction to social activity. As expressed by Bentham, " De- sires extend themselves with the means of satisfaction ; the horizon is enlarged in proportion as one advances, and each new want equally accompanied by its pleasure and its pain becomes a new principle of action." Now it is evident that, for the orderly development of society, new collective wants as well as new individual wants must emerge as development proceeds, from which it follows that industrial growth opens up to society ever-expanding possibilities, which, in part, will be reflected in a corresponding expansion of those functions which government alone can perform. A part, at least, of the increment of social income will be claimed for increased public expenditures. From the point of view of social investment, also, does it appear that the expenditures of a State are dependent upon PUBLIC EXPENDITURES AND INDUSTRIAL DEVELOPMENT. 39 the stage of industrial development attained. In the analysis of the foregoing chapter it was suggested that a profitable investment for a State is one which results in raising the grade of industry to a higher level of eiBciency. This is a suggestion of considerable importance when one is in search of an explanation of increasing public expenditures among industrially progressive peoples. Should it be generally recognised that the increment of product resulting from the industrial development of the past, by means of which society finds itself in possession of a growing surplus, is in any degree traceable to the action of the State, it is but reasonable that men should willingly give support to a project calling- for further investments along the same line. This is the way in which the business mind works in ordinary affairs, and it will undoubtedly follow the same line of reasoning when called upon to judge of public expenditures. The only thought against this conclusion is found in the claim that the neces- sity for government decreases as intelligence and a habit of voluntary association increase. The pertinency of this claim can only be determined by an investigation of the facts. But when it is recognised that growth in numbers, differentiation in the industrial process, and expansion of commerce and trade bring society face to face with new perplexities and new dangers at every step, it is not easy to see how the activities of a State can ever be less than they are at the present time. On the contrary, it seems reasonable to assume that with each increment in the social product the people will conceive it to be to their advantage to invest added sums in the machinery of government. From the point of view of investment, there- fore, as well as from a consideration of the satisfaction to be secured from the activities of the State, may we conclude that the fiscal demands of governrrient will increase along with, if not in proportion to, the general social income. The above analysis is pertineilt beyond that of strengthen- ing the impression that the considerations which determine the aggregate of public expenditures root themselves in the industrial order. It suggests, also, the appropriate classifica- tion of states,* should one undertake a comparative investiga- tion into public expenditures. If it be true that the amount of normal expenditure rests fundamentally upon the efficiency of * For a classification of states from this point of view see § l6. 40 PUBLIC EXPENDITURES /IND GENERAL CONDITIONS. capital and labour within the country, the amount appropri- ated for the support of the State has no very definite mean- ing until referred to some particular stage in the order of material development, and through this to the rank or grade of the nation in question judged from the point of view of modern civilization. A cursory review of history shows that what for one nation is an indigenous growth is for another the result of imitation; what to one people springs easily and naturally out of their industrial conditions imposes upon another a conscious and possibly a severe strain. A com- prehensive study of the growth of public expenditures, there- fore, would call for a separation of those peoples with whom material development is the forerunner of fiscal expansion from those which, by the pressure of poHtical competition, find it necessary, or think they find it necessary, to impose an extended fiscal system upon an inadequate industrial economy. 8. Public Expenditures and Political Conditions. — The political conditions by which public expenditures are in- fluenced pertain to external relations, or what may be termed the political environment of a people, and to internal rela- tions or political organization. Our analysis will grant each of these relations separate consideration. (i) Expenditures and Political Environment. — It must be observed, in the second place, that the aggregate of public expenditures is closely related to the political environment of states. The most obvious illustration of this is found in the increase of military expenditures incurred by the leading na- tions of Europe ; and, now that the spirit of Western rivalrv has invaded the Orient, we may expect similar results to make their appearance in the budgets of China and Japan. The growth of expenditures in Europe in recent years, trace- able to the necessity of living in constant preparation for war, has been very marked. The aggregate of military and naval expenditures for selected years since 1868 for England, France, Germany, Austria, Russia, and Italy is as follows : * o^ Amount. I008 $521,250,000 1873 622,250,000 '882 732,300,000 1888 goi,ooo,ooo '895 030,600,000 * First four amounts quoted from Bastable, p. 69. PUBLIC EXPENDITURES AND POLITICAL CONDITIONS. 41 No one would care to deny that these enormous payments for the support of army and navy are the results, possibly under existing conditions the inevitable result, of the spirit of nationality by which the foreign policy of modern nations is controlled. It would be incorrect, however, to say that the spirit of nationality is an adequate explanation of this expen- diture; it is rather the contiguity of a warlike neighbour, powerful in resources, and equally strenuous in the assertion of its nationality, that imposes upon a people the necessity of a military budget. It is no part of finance to moralize on the nature of this expenditure. All that can be said is that the spirit of nationality is perhaps the most potent factor in the political life of modern peoples, and until it has spent its force, or until, through the development of international law, the necessity of appeal to the arbitrament of arms becomes less frequent, provision must be made in national budgets for military expenditur.es. That the spirit of nationality in itself is not an adequate explanation of the growth of military expenditures is evi- denced by the fact that it does not necessarily manifest itself in this form. Whenever a nation is so fortunate as to be separated by a natural barrier from neighbours who are foreigners by blood, enemies by virtue of their history, or irritants because they acknowledge a different social ideal, the fact is unmistakably reflected by the form of the ordinary budget. Many illustrations of this might be cited. Victoria, for example, out of a total annual expenditure of between $40,000,000 and $50,000,000 appropriates but $2,000,000 or $3,000,000 for defences. Her budget shows no separate chap- ter for army and for navy. The United States spends about $42,000,000 on army and navy out of a total expenditure of $380,000,000. In the former case the country is quite sepa- rate from any foreign power; in the latter, the contiguous countries are decidedly inferior in population, wealth, and na- tional strength, and, what is perhaps of equal importance, the United States has no violent or deep-rooted historical preju- dice, while her commercial and social interests are, in the main, common to those of neighbouring countries. While it is undoubtedly true that contiguity of territory occupied by strong and self-assertive peoples is the most im- portant of the surface facts in explaining the increase of mili- 4» PUBLIC EXPENDITURES AND GENERAL CONDITIONS. t'ary expenditures among modern peoples, it by no means suggests a complete statement of what is meant by the phrase " political environment." The final t hing in the analysis of national character is the conception of rights and duties, pub- lic as well as private, m^^r-national as well as infra-national, which a people entertains. This is equivalent to saying that the conception of law is the groundwork of social life. Now it is evident that government is limited in its application of law for the peaceable settleihent of disputes to those ques- tions respecting which there is a general consensus of opinion with regard to the rights and the duties that are involved. Beyond this point force of some sort must be employed, and provision for the exercise of force will be considered essential. This being the case, it is futile to urge disarmament, and the consequent extinction of the military budget, so long as there continues to be a conflict of legal ideas. The fundamental principles of the systems of jurisprudence, that phrase being used in its broad and comprehensive meaning, must be ren- dered harmonious before juridical procedure can supersede the employment of force. It is no accident that the first ap- proach to a successful tribunal for the arbitration of inter- national disputes should rest upon negotiations for a treaty between England and the United States, for these peoples practise the same system of jurisprudence. Their theory of rights, and the method by which they aim to enforce those rights, are the same. A standing international tribunal rest- ing on agreement between England and Russia, however, or between the United States and China, is beyond the range of reasonable expectation at the present time ; for it is only upon the basis of a common system of jurisprudence that a system of international law can be developed which shall render the preparation for war unnecessary. It thus appears that the controlling element in the political environment of nations by which military expenditures are determined is the similarity or dissimilarity of the systems of jurisprudence which the re- spective nations have adopted. (2) Expenditures and Political Organisation. — Public expen- ditures are open to another influence incident to the political conditions of nations besides the one bound up in the spirit of nationality. Their organization, so far as the relative impor- tance of local and central administration is concerned, affects PUBLIC EXPENDITURES AND POLITICAL CONDITIONS. 43 not alone the distribution of expenditures between these two agencies of the State, but it affects the aggregate of expendi- tures as well. Confidence in this generalization must rest rather on a priori considerations than on statistical evidence, since there are no two nations whose political, industrial, and social conditions, exclusive of organization for local adminis- tration, are sufficiently alike to warant statistical comparison. The considerations in support of this generalization, however, are simple and convincing. Wherever local administration is well developed, especially if it proceed so far as to attain to the dignity of local self- government, a spirit favourable to collective service will be likely to show itself. Indeed, if the industrial growth take the form of an intense commercial or manufacturing life, the in- evitable tendency toward congested population will force the necessity of cooperative action into the foreground; and whether this necessity be met by extending the direct ser- vices of the municipal government, or by granting liberal franchises to corporations (a policy which must in time ne- cessitate adequate provision for holding them to public ac- count), public expenditures will in either case be increased. The readiness with which expenditures for public undertak- ings will be incurred depends, other things being equal, upon the conviction among the people of their ability to manage their own aflfairs. It is sometimes remarked as a strange re- versal of an accepted policy that Manchester in England, which was once the centre of the most intense form of prac- tical laissez-faire should have adopted so readily the policy of municipal ownership of quasi-^\xh\\c works ; but a cursory analysis of the situation shows this to have been natural in a country where local government has learned to be efficient, and where control over great commercial enterprises through cor- porations is a familiar idea to the people. What the manufactu- rers of Manchester objected to in their advocacy of free trade was that the protective policy of England did not enable them to control the conditions under which their industry was prosecuted. The restrictions imposed by government were an obstacle to their business success. The situation is the same at the present time with regard to private control of in- dustries necessary to the industrial supremacy of the city of Manchester. The form of argument is changed, but the 44 PUBLIC EXPENDITURES AND GENERAL CONDITIONS. spirit upon which it rests is the same, namely, a desire to control public policy so as to make it contribute to private advantage. If these considerations are sound, and there are others which look in the same direction, it follows that among those peoples whose political organization imposes heavy responsibilities upon local government, the aggregate of nor- mal expenditure naturally tends to increase as the commercial life of the community becomes more and more intense. There is, however, another phase of this question. The same spirit which tends to an increase of local expenditure — that is to say, the spirit of industrial independence on the part of the citizen — will act as a check upon the expansion of Fede- ral or Imperial services, and consequently tends to curtail national expenditures. Wherever the spirit of local inde- pendence prevails one may always observe a quiet jealousy of central authority, which in many ways tends to limit the functions of the national government to such services as are beyond the possibility of doubt collective in character and common to all classes and sections of the country. Thus, although a people strong for local government choose to ex- pand local expenditures, they naturally will endeavour to con- fine national expenditures within narrower limits than might otherwise be the case. The aggregate of expenditures, therefore, both grades of government being taken into the account, will be influenced in a decided manner by the relative strength of the two sentiments favouring nationalism or localism in political affairs. This argument would amount to nothing, however, so far as the influence of local government upon the agg^re- gate of public expenditures is concerned, if the question in hand pertained simply to the division of a given range of pub- lic functions between national and local governments. Were this the case the amount spent by each government would de- pend upon the relative economy of the two centres of admi- nistration. But it is probable, in view of the way in which human nature works, that the check on national expenditure will be relatively less effective than the stimulus to local ex- penditure; and consequently we are warranted in the con- clusion that the spirit of localism among democratic peoples tends to increase the aggregate of public expenditures. This, in one of its phases, is but another way of saying what von Hock asserts with such emphasis, that ease of raising revenue PUBLIC EXPENDITURES AND POLITIC/tL CONDITIONS. 45 is in direct proportion to the extent to which popular govern- ment is realized. The influence of the relative importance of central and local governments in the structure of the State may, then, be accepted as one of the permanent considerations which de- termine the aggregate of public expenditures, although its normal tendencies may at any particular time be set aside by some passing phase of political or industrial life. The western world at the present time, for example, is passing through a peculiar phase of industrial history, due to the development of cheap and rapid transit for goods and persons. This means a destruction of local markets and a consequent readjustment of the territorial distribution of industries. Moreover, a world's market is in process of creation, and the questions forced upon public attention by the fact that local trading centres are being crystallized into a world's market are, from the nature of the case, national in character, if, indeed, they are not international. The result of this is that, while society is adjusting itself to the new industrial conditions to which railways have introduced the business world, it is the national government rather than the local government to which people must look for the formulation of new legal conditions, and for protection against such evils as are bound up in this period of transition, no matter how strong may be the sentiment among the people at large against the concentration of political power. But these conditions are temporary. The readjust- ment will sooner or later be effected. Population will at no distant day settle itself in harmony with the new conditions. The new lands will be taken up, and manufacturing and com- mercial centres will be definitely and finally settled. Then, and not till then, the occasion for the constant appeal to cen- tral authority having passed away, will the spirit of local in- dependence again assert itself and impose its check upon the expansion of Imperial functions. The student of finance must not be misled by the great increase in national expenditures since 1840, and he will not be misled if he keep clearly in mind the nature of the forces which determine political develop- ment, and recognise the exceptional character, so far as na- tional expenditures are concerned, of the present industrial epoch. It should also be remarked — if among political conditions 46 PUBLIC EXPENDITURES AND GENERAL CONDITIONS. political corruption is to be counted — that the presence of political corruption, such as shows itself in so many of the municipal governments of the United States, will work against the normal influence of a strong sentiment in favour of local self-government. That is to say, it will tend to a curtailment of local functions, and ultimately of local expendi- tures. Many who recognise the evils of corporate control over quasi-'^uhWc works, and who appreciate the importance of that wide range of social services which if rendered at all must be rendered through the agency of municipal govern- ment, are deterred from advocating an extension of muni- cipal functions on account of the glaring evils of political corruption. It would be improper, however, to accept the prevalence of political corruption as a permanent factor. While it may properly influence a policy in the presence of given conditions, it must always enter into the theory of public expenditures as an exception to the rules laid down. Our general conclusion, then, is as follows: (i) A strong sentiment in favour of local government, as indicated by the relative confidence in Federal or local centres of administra- tion, will tend to reduce national expenditures below what they otherwise would be. (2) The same spirit, however, will tend to expand local expenditures, and, assuming the same line or class of services, it is likely that the aggregate of ex- penditures will permanently be greater when services are un- dertaken by local rather than by central control. (3) As modifying the above conclusion it should be added that the aggregate of expenditures may at any particular time be re- duced below what it otherwise would be on account of the fact that local governments, however strong in theory, are in reality weak wherever political corruption prevails in local affairs. 9. Public Expenditures and Social Organization. — The aggregate of public expenditures depends, in the third place, upon the theory of social relations which a people has adopted, and the degree of strictness with which that theory is followed in practice. This theory may be looked for in the accepted philosophy of the respective rights and duties of government and individuals, or, what amounts to the same thing, in the attitude of mind which the public instinctively assumes when certain social or industrial problems are under consideration. PUBLIC EXPENDITURES AND SOCIAL ORGANIZATION. 47 The problems of the class referred to are such as rely for their solution upon the extension, in some of its various forms, of the principle of cooperation ; but a great deal depends, so far as public expenditures are concerned, upon the character of that cooperation. Is the collective activity demanded govern- mental or is it private ? Is the cooperation desired to be secured by coercion or through voluntary association ? One cannot emphasize too strongly the contrast between these two forms of social activity in their influence upon the ratio of public to private expenditures, or, as we are now discussing the subject, upon the aggregate of public expenditures. It is exceedingly difficult in a few words to express the characteristic features of the social theories which, under various forms and with many and constant modifications, give colour to the social and political fabric of various states. These differences may, however, be suggested by observing that the one theory is a modification of the view of the State assumed by Roman law, and exemplified in a general way by most of the Continental peoples ; while the other is a develop- ment of the Teutonic and Saxon ideas of personal liberty, and shows its most natural unfolding among peoples of English his- torical descent. The former makes the State the centre of all col- lective life, and defines the rights of individuals in terms of na- tional importance ; the latter places the individual at the cen- tre of thought, and conceives of the State as one of several means to individual attainment and development. Under the influence of that philosophy which subordinates the individual to the State it is natural for those intrusted with the adminis- tration of government to regard all questions as properly ad- justed when the interests of the State are conserved. Es- pecially will this be true if to such a theory of society there be added the influence of the monarchical form of administra- tion. It is logical, for example, that they who represent mo- narchical governments should accept the necessities of the State as the true measure of legitimate expenditures, without having very much regard to the concurrent needs of indi- viduals; and in view of this trait of character, which leads men to unduly magnify whatever service they for the time being render, or whatever office they happen to occupy, it is not strange that the claim of government upon the social in- come should be strong for all those lines of service which 48 PUBLIC EXPENDITURES AND GENERAL CONDITIONS. foster national pride and increase bureaucratic importance. It is easy, also, under such a social theory, for the spirit of paternalism to show itself in many of the items of a budget, and for the thought that the State is an industrial corporation as well as a political organization to swell the proportion of public expenditures. The view of social relations which underlies English com- mon law, on the other hand, works upon national expendi- ture in quite another manner, at least so far as those appro- priations are concerned which minister to pride and foster bureaucracy, or which are related to the exercise of paternal functions. According to this theory a condition of liberty is conceived to be the heritage of the individual. The State is not regarded as an organism in the sense that it possesses soul, conscience, and sensibilities of its own; it is rather a form of association, and differs mainly from ordinary associa- tions in the character of the service it has to perform, and in the fact that these services are of such a sort as require the State to be the depository of coercive power. Public conces- sions are judged from the point of view of the interest of the individual, and are approved or disapproved according as they bear upon his prospects. The result of this philosophy of social relations among peoples who practise self-government is to insist that the government prove its case beyond the possibility of a doubt whenever it demands increased expendi- tures for approved services or the approval of expenditures for an unusual service, Greater reliance is placed upon volun- tary association for the attainment of collective interests than upon coercive association. And this results inevitably in charging the cost of many lines of service to the income ac- count of private corporations rather than to that of the State. In this manner, therefore, public expenditures are curtailed by virtue of individualistic philosophy applied to governmental affairs. It must not be overlooked in this connection that, al- though the restrictive theory of governmental action may limit expenditures by curtailing the field of activity, it is likely, at least in the peculiar form in which it presents itself among commercial peoples, to induce lavish expenditures in those few cases in which industrial functions are imposed upon the State. Wherever, for example, a legislative body created by TIVO RULES OF PUBLIC EXPENDITURE. 49 popular vote undertakes, let us say, a system of public improve- ments at the expense of the general treasury, the project is sure to be undertaken upon a scale of too great magnitude. This is true because no member of the legislature, holding in mind the fact that he accounts to his constituency for his vote, will consent to any project which does not contribute directly to the prosperity of his constituents. It is a fact be- yond question that investments of capital are unnecessarily lavish when made through the agency of popular legislative bodies ; and it is on this account a wise coriservatism for de- mocratic peoples to hesitate before accepting the experience of governments highly centralized for administrative purposes as a proof that they could attain equally advantageous results in securing public improvements through governmental agency. So far, therefore, as the bearing of the individualistic theory of social relations upon the aggregate of national ex- penditures * is concerned we may say that it is in the main opposed to such expenditures; but should public improve- ments, or any service, indeed, which results in localized in- vestments of capital, be undertaken by a popular legislative body, a lavish expenditure of public funds must be counted upon as an inevitable result of such a decision. 10. Two Rules of Public Expenditure. — It may perhaps add something to the definiteness of these considerations if the rules of public expenditure, so far as they may be said to exist, formulated by the adherence of the two social theories mentioned, be passed in review. (i) The English Conception of Public Expenditure. — The rule, commonly regarded as adequate by those who hold the re- strictive theory of government, is simple, so far as statement is concerned. No one has ever expressed this view more tersely than Sir Henry Parnell, who in 1830 published his remarkable tract On Financial Reform. The date of this * A distinction is here made between national and local expenditures (Cf. pp. 11-13), the line of distinction being that the territory con- trolled by a local government is so limited as to allow any scheme of public works to be comprehensive without endangering the success of the scheme. The political and industrial results, also, of public im- provements differ according as they are undertaken by the national or by the local governments. so PUBLIC EXPENDITURES AND GENERAL CONDITIONS. tract is significant. It appeared when the old individualism was at the height of its influence. The tract itself is impor- tant as having been influential in bringing about the finan- cial reforms which place England in the fore rank of na- tions so far as taxation and regulations for international commerce are concerned. The following quotation is from the tract referred to : " With respect to the principles on which retrenchment should be conducted it is of the greatest importance that they should be well considered, and, when decided upon, most severely adhered to. No person can have his mind in a per- , fectly fit state to form a judgment on any question of retrench- ment without having acquired the habit, by previous study, of referring to what the uses and object of government are, and the grounds on which taxes are paid. The great errcw which is commonly committed is taking the utility of an ex- penditure as a sufficient justification of it ; whereas, however useful it may be, if it cannot be shown to be absolutely neces- sary for securing some public object that could not be had by any other means as economic and as convenient, it is super- fluous and ought to be discontinued. It is not an uncommon opinion among those persons who are in situations to have considerable influence in matters of finance that we ought first to secure all the revenue we can, and then regulate the expenditure according to it. Others allow themselves to be guided by their feelings and their passions, and, not having any fixed principles to go by, are continually favouring ex- pense and resisting economy, when cases of apparent indi- vidual hardship come before them, not recollecting what those persons suffer who pay the taxes for providing for the effects of their mistaken compassion and unjustifiable liberality with the public money. If right principles were referred to they would suggest that taxation is the price we pay for govern- ment ; and that every particle of expense that is incurred be- yond what necessity absolutely requires for the preservation of social order and for protection against foreign attack is waste, and an unjust and oppressive imposition upon the pub- lic. Every minister and every member of Parliament who has the power to spend or to save the public money should do all in his power to prevent the wants of the State from depriving the people of the means of providing for their wants ; and, TIVO RULES OF PUBLIC EXPENDITURE. 5^ therefore, economy and frugality, which are virtues in a pri- vate station, from their vast influence upon national happi- ness in a public station, become the most pressing of duties." * The three points in the above statement which may be ac- cepted as formulating the theory of public expenditures ad-, vocated by Sir Henry Parnell are, first, that there should be no expenditure except " for securing some public object that could not be had by any other means " ; second, that expense ■' incurred beyond what necessity absolutely requires for the preservation of social order and for protection against foreign) attack is waste " ; and third, that the State should never de-; mand sums which would result in " depriving the people ofj the means of providing for their wants." This is the doctrine of laissez-faire in its most extreme form, expressed in the language of finance. The third point above referred to has been expanded by other writers until it has come to be ac- cepted by many English economists as the doctrine that taxes should always be levied upon what a man can save. Rogers, for example, says, in effect, that to tax what a man cannot save is robbery, which, if it means anything, means that the expenditure of the individual for support of government is not to be classed among necessary expenditures. That these views are not in full accord with the attitude assumed in this treatise must be recognized from what has al- ready been said respecting the nature of pubHc expenditures. The financier is not at liberty to place the individual over against the State, or to ignore the fact that in some particulars' public expenditure is different in character, and consequently, subject to different rules, from private expenditure. To fol- low the rule submitted by Parnell would result in depriving the public of some of its most important governmental func- tions in the development of civilization, for it would cut off all expenditures which rely for their justification upon the ultimate rather than the immediate advantage to citizens. Nor can the student, whose aim should be to emancipate himself from the superstition of phrases, admit that any pre- sumption lies against collective expenditures as such. All decisions must rest upon analysis, and not upon presumptions^ It is not claimed as against Parnell that the State is justified in making use of the people's money when the people could * On Financial Rr form, by Sir Henry Parnell. Bart., M.P. (1830), p. 118. 52 PUBLIC EXPENDITURES AND GENER/IL CONDITIONS. secure greater advantage by expending it through private agencies, but that the considerations which determine public and private expenditures in many classes of appropriations proceed along planes far removed from each other, and that a comparison between them is, to say the least, a very difficult matter. The rule, therefore, is of little advantage except for declamatory purposes. (2) The German Conception of Public Expenditures. — The theory of public expenditures entertained by many German writers, on the other hand, when pressed so far as to claim a presumption in favour of government whenever a new social function makes its appearance, is as erroneous as the one just considered. We may say with Stein that parsimony is not economy, and that " the saving proper for the statesman to consider is not that which always decides for the smallest amount, but that which knows how to measure the amount of expenditure to the worth of the object." * We may even go so far as to allow some truth to the simile of Gefifcken, who ^ys : " The administration of finances should be conducted according to the rule prescribed by nature, which everywhere [abstracts moisture from the earth and the plants to give it (^ck again in nourishing dews and rains." f We may, I say, depart so far as this from the old conception of the relation of government to industry, and still deny that the State has the first claim on the products of current industry. We can- not agree with Kaufmann when he implies that the funda- mental principle underlying the taxing system of civilized states places justice to the citizen when compared with the needs of the State as a matter of secondary importance ; % nor with Nasse when he asserts that " it is not justice to the individual, but the realization of the means destined to assure the onward march of the State and the accomplishment of its designs, which is the first object of taxation." § It is possible, of course, to interpret expressions like the above in such a way that due regard may be had to the interest of the indi- * Lehrbuck der Finanzwissenschaft, by Lorenz von Stein, p. 137. f Cf. SchBnberg's Handbuch der politischen Oekonomie, Vol. Ill, p. 28. Article by Geffcken on " GrundsStze fUr die Staatsausgaben." \ Cf. Kaufmann, Les Finances de la France, p. 37. I have the French and not the German edition. g Quoted from Kaufmann. TH^O RULES OF PUBLIC EXPENDITURE. 53 vidua! citizen, but in view of German national history and of German political philosophy it is doubtful if such an interpre- tation is possible to a German economist. Austrian finan- ciers are not committed to so extreme an assertion of the im- portance of the State. A student imbued with the spirit of English jurisprudence, and who on this account must regard the State as an organ of society, cannot well understand how the claims of the State can thus be set over against the claims of the individual. (3) Conclusion. — The situation seems to be that the older English writers did not need a theory of expenditures be- cause the theory of government which they held implied a fixed limit to governmental functions ; while the earlier Ger- man economists * could not work out a satisfactory theory respecting the public use of money because their theory of government presented too strong a presumption in favour of the State. As is so frequently the case, the truth respecting^ public expenditures lies between these extremes, and can only! be discovered by the concurrent study of public and of privatej functions. As already suggested, a theory of pubHc expendi-'« tures must be a theory of the evolution of the collective wants '; of individuals, and its further development necessitates an i analysis of the governmental functions, not alone as they now are, but as they have developed. In no other way can they be classified so as to enable the financier to determine the propor- tion of the social income properly assigned at any time to the support of government, or to measure the relative intensity of the various claims made upon the public treasury. We are thus for a third time brought back to the thought that a classification of public functions is necessary to the un- folding of the theory of public expenditures, although in each case the suggestion was approached from a different point of view. The first occasion for this remark arose out of the comparison of public and private expenditures, when it was suggested that the theory of expenditures for the State was akin to the theory of consumption for the individual; and * It is not possible to use the phrase "German Economists" as standing for a compact body of thought. The criticism in the text is addressed to what perhaps may be called the second generation of Historical Economists, whose political bent was given them by sym- pathy with the growth of German power. 54 PUBLIC EXPENDITURES AND GENERAL CONDITIONS. that as the latter rests on the law of the development of human wants, so the former rests on the law of the development of governmental functions. The thought was a second time brought to notice by the statement that the theory of public expenditures is a theory of adjustments and apportionments — meaning by adjustment the assignment of a certain portion of the social income to expenditures through the agency of the State, and by appor- tionment the assignment of the amount thus set aside between the various lines of public service. It was stated that before a budget can be framed the various functions of the State for which the several chapters in the budget respectively stand must be classified in order to learn the relative importance of these functions for the life of the people. The necessity of the analysis and classification of public functions was for the third time brought into notice by the inadequacy of current rules respecting public expenditures. It was found that these rules were either too narrow to apply to the complicated conditions of modern society, or they were too comprehensive to allow of just discrimination respecting the relative claims of coercive and voluntary association. Some clear idea respecting the concurrent growth of public and private activity must be arrived at, and the manner in which each reacts upon the other must be duly appreciated, before specific appropriations for definite ends can come to have an explicit meaning. The claim of a definite appropriation is relative, and it is not until the function which it is intended to serve is fitted into the general scheme of social activities that the strength of this claim can be measured. In view, there- fore, of the persistence with which the question of govern- mental functions asserts itself, one is justified in the conclu- sion that it holds the key to the theory of public expendi- tures.* * It is perhaps unnecessary to repeat that the Science of Finance has no opinion respecting the question of the proper limit of public duties. The form of government is for it a given condition. It is equally true that the judgment of the financier respecting the wisdom of extending the sphere of the State in any particular direction, even though his views be expressed in the form of a discussion of appropria- tions, does not attain the dignity of a theory of expenditures which can properly find place in the Science of Finance. CHAPTER III. RELATION OF PUBLIC EXPENDITURES TO THE CLASSIFI- CATION OF GOVERNMENTAL FUNCTIONS. The Protective Functions of Government. (i) Military Expenditures. (2) Police and Court Expenditures. (3) Expenditures for Protection against Social Disease. The Commercial Functions of Government. (i) Characterization of Commercial Functions. (2) Tendencies in Expenditures for Commercial Functions. The Developmental Functions of Government. (i) Expenditures for Education. (2) Expenditures for Public Recreation. (3) Expenditures for maintaining Equitable Conditions for the Prosecution of Private Business. (4) Expenditures for Public Investigation. (5) Expenditures for the Development of the Physical Basis of the State. Conclusion. The important question which the theory of expenditure asks regarding the several lines of public service pertains to the influence of a developing civilization upon the grants de- manded for the support of each service, and the discussion which follows will be with a view to some conclusion upon this point. 11. The Protective Functions of Government. — The public function which deserves first place in the classifi- cation of the services of the State, both by virtue of its importance and because it is historically the first to define it- self with clearness, is the function of protection. The grant- ing of protection was originally a very simple affair — so far, at least, as the idea is concerned ; but with the passing of the centuries and the process of social evolution the protection which the State grants has taken upon itself several distinct 5 6 PUBLIC EXPENDITURES AND GOVERNMENTAL FUNCTIONS. phases. At present a classification of governmental func- tions must recognise three sorts of protection which citizens receive from the State. These are as follows : First. Protection against invasion from without. Second. Protection of life, property, reputation, etc., or, to speak comprehensively, of all those rights which pertain to man by nature, or are granted the citizen by common or by statutory law. Third. Protection against the spread of disease, either physical or social. (i) Military Expenditures. — Expenditures for protection against foreign invasion or encroachments from without may be properly designated as national military expenditures, and in early times this form of protection was the occasion of the larger portion of grants, whether of money, energy, or labour. Indeed, so vital is this function to the existence of society that other governmental functions were originally regarded as in- cidental to military service, and were on this account per- formed by the military leader. With the advance of civiliza- tion, however, the relative amount of this expenditure, as well as the relative importance of the military chieftain, tends to decrease. In some cases this decrease is an absolute decrease in the amount assigned to the military service ; but in a large number of cases, when compared with the claims of other ser- vices upon the expenditures of the nation or with the aggre- gate amount which the nation has to spend (that is to say, the social income), the effect of time is to lighten the social burden of the military service. It may seem difficult to sustain this claim in view of the expensive armies and navies which many of the modern na- tions maintain. But there are two observations which must be made before the military budgets of modern peoples can be accepted as proof that protection from foreign invasion is more burdensome now than formerly. First. In some cases the increase in military expenditures of the Imperial Government is due to the consolidation under one control of what before existed in the form of local ex- penditures. Second. Much of the expansion of military and naval budgets, of which so much is made in criticism of current politics, is due to the rapid development of naval and military PROTECTIl^E FUNCTIONS OF GOVERNMENT. 57 science, which gives rise to the necessity of improved army equipments and of larger and more perfectly constructed battle-ships; and this is an apparent rather than a real in- crease of the burden in question. Wars, if not less frequent than formerly, are of shorter duration, and are accompanied with a smaller percentage of casualties than in former times. In reality, therefore, progress in the art of offensive and de- fensive warlike equipments has commuted the burden of a war from a cost estimated in labour and life to a cost estimated in money, and is, consequently, in harmony with the civilizing tendencies of the last ten centuries, as reflected in the finan- cial organization of modern as compared with feudal states. A third observation might be made in this connection which, though true, is not peculiar to the military chapter of modern budgets, namely, that, when compared with the ag- gregate expenditure, or with the source of income from which all expenditures are drawn, the cost of army and navy appears to have decreased rather than increased in amount. To return, then, to the question asked, there seems ground for concluding that the tendency of civilization is to decrease the burden which the necessity of protection against foreign invasion imposes upon the people. This should be, certainly, the normal tendency. One mark of growth in what we call civilization is the continuous appearance of new rights and the establishment of peaceful means for their adjustment. As international arbitration extends, armies and navies will be less frequently called into service, and as the moral force and individual character of the several nations becomes more marked, the support of armies for preservation of peace will become less necessary. If for a generation an opposite ten- dency should be observed, it is equivalent to saying that civilization has in this particular suffered a temporary check. Our general conclusion, then, is that an absolute as well as a relative decrease may be expected in military expenses as time goes on. Some facts upon this point are presented in the fol- lowing chapter. (2) Police and Court Expenditures. — The second form in which the governmental function of granting protection makes its appearance brings into prominence the civic relation of citizens ; that is to say, protection to life, property, and re- putation. This function gives rise to expenditures for police S8 PUBLIC EXPENDITURES AND GOyERNMENTAL FUNCTIONS. and for courts. The function of personal protection, while not primitive, like that of protection which organic society de- mands for itself, is of very early appearance ; and it is only ne- cessary to contrast the state of society in which personal prowess or cunning was the only guarantee of individual safety, or of continued possession of property, with the present, when personal weakness or simplicity establishes a peculiar claim on government for protection, in order to appreciate how far this service of the State has developed. The expenditures occa- sioned by this service, however, have not grown in proportion to their importance, and this for two reasons. First. Protection to person, property, and reputation consists chiefly in maintaining a condition of safety and decency in the community, and not in taking each indi- vidual consciously under the protection of government. There is no other phase of social activity where the economy of " manufacture in the gross " can be so effectively realized. The service in question is subject to what may be termed the law of diminishing expense. Second. Of more importance, however, is the fact that among the normal results of an advancing civilization is the development of old personal rights or the birth of new ones. Now this means more than the rise of some claim on the part of any particular class of men : it consists rather in the general recognition of the justice of the claim, and in the conviction among the people at large that it should be granted. It means that man's moral nature on its social side is brought under the influence of higher ideals ; or, as it is sometimes expressed, it means the development of " social ethics." But, however characterized, it is clear that in proportion as these moral concepts work their way in the community the neces- sity for police enforcement of granted rights retires to the background. The reverse of this is equally true, and sug- gests a criticism on the budgets of some of our American cities. An increase of expenditures for police and for courts, at a rate more rapid than is justified by the growth or the shifting of population, or by the extension of duties imposed upon them, is proof of one of two things; it shows either that government is corruptly administered, or that the laws which the police and the courts are called uppn to enforce are not regarded as just bv the community. That is to say, it PROTECni^E FUNCTIONS Of- GOVERNMENT. 59 shows that civiHzation is in a condition of arrested develop- ment. The normal tendency is for police and court expenses to rest more and more lightly on the community as the years go by. (3) Expenditures for Protection against Social Disease. — According to the classification accepted, the protection of society from the spread of social disease is a governmental function of the same sort as protection of life and property. The agencies for rendering this service are of course quite various, and many of them, at least those which influence the budget in any decided way, are of comparatively recent origin. They do, however, at the present time make a very consider- able showing in the modern budget. A good illustration of the form of service falling under this category is found in the changes in prison discipline and management which have followed recent investigations in the science of penology. It is no longer the thought that a criminal should be punished because punishment is in justice demanded, but that he should be restrained for the protection of society. So far as the criminal himself is concerned, the thought of reformation, or restoring him to society as a self-respecting and self-sustain- ing citizen, not only gives tone to prison management, but form to prison architecture. Crime is looked upon as a phase of social disease, and the treatment prescribed by the science of penology aims to cure that disease. This un- doubtedly renders the prison service more expensive than the old method of incarceration, or the plan still followed in some parts of this country of working convicts in gangs upon public highways, or of hiring them out for such rough work as they can be made to do. That is to say, the first invest- ment is more expensive and the expenditure per criminal is greater ; but it is clear, if the criminal habit can be brought under control and the transmission of criminal tendencies checked by means of well-equipped prisons, reformatories, industrial schools for neglected youths, and the like, that the first cost should be regarded as a social investment the ulti- mate result of which will be to decrease the financial burden imposed upon society by the criminal class. The normal ten- dency therefore, of this chapter of expenditures is that they de- crease in direct proportion as the reformative policy succeeds. When it is remembered that a criminal reformed, or a man 6o PUBLIC EXPENDITURES /IND GOyERNMENTy4L FUNCTIONS. saved from becoming permanently a member of the criminal class, means the addition of a man to the ranks of producers, the investment of funds for the attainment of such results finds a double justification. Many other illustrations of this phase of the protective functions of the State naturally suggest themselves. Sani- tary regulations, for example, which aim to ward from the community the introduction of disease, or to check the spread of disease when it has once gained a foothold, or to compel the observance of cleanly and healthful living, must be re- garded as protective in their nature. Asylums for the insane, and in general for all the defective classes, are also protective in character. The fact that they are approved because of the sympathy which is felt for the unfortunate does not change this fact. Poor-law regulations, the administration of so- called public charities, old-age pensions (should public assist- ance go so far), and other like activities on the part of the State are the occasion of expenditures properly chargeable to the governmental function which we have termed protection. Pauperism is so closely allied to crime and vice on the one hand, and to weakness, deterioration, and contagion on the other, that it, also, can be treated as a disease to be extirpated if possible, or to be localized and controlled if extirpation is impossible. Attention might be called to immigration laws as yet another illustration of this phase of protection granted through the agency of the State. But sufficient has been said to make clear the character of this service. It thus appears that society is exposed to a very consider- able class of social diseases the control of which requires the employment of the coercive power of the State. The exercise of this control grants protection to the individual and guards society against weakness and decay. Will the expenditure for this phase of protection increase or decrease with the de- velopment of civilization ? The answer given above with re- gard to prison administration applies in a general way to this entire class of expenditures. Assuming that no changes take place in the civic life or social structure by which the evils re- ferred to are engendered, such as increased congestion of pop- ulation, increased concentration of industrial power, the intro- duction of undesirable foreign elements, and the like, it may be said that the normal tendency of an advancing civilization COMMERCIAL FUNCTIONS OF GOVERNMENT. 6i is towards the decrease of the financial burden which this phase of protection imposes. The agencies required for granting this protection are undoubtedly the occasion of large expenses at their first establishment, but in proportion as they are effective in doing what they are appointed to do, the ex- pense which they occasion will tend to disappear. The general conclusion, therefore, with regard to the pro- tective functions of government is that the influence of pro- gress is to lessen their financial weight. The greater increased economy of society which comes with a keener perception of personal right and a clearer apprehension of social duties, as well as the increased health and strength of society, physical as well as moral, renders the appeal to the State for protection less frequent and less imperative. 12. The Commercial Functions of Government. — The second class of governmental functions is suggested by the word " service," which brings into prominence all those com- mercial and semi-commercial relations that exist between a State and its subjects. We shall first characterize these ser- vices so that there may be no misunderstanding respecting them, and then trace their influence upon public expenditure. (i) Characterisation of Commercial Functions. — It may be said that all the functions of government are such as render services to the citizen, and that for this reason the phrase should not be used distinctive of any one class or group of public activities. In the strict use of language this may be true, but as employed in this analysis those services only are covered by the phrase which are direct in their nature and which address themselves primarily to the personal needs of the citizen as distinct from the social needs of the State. Such services exclude what the State does because essential to its own existence or to its own development, and in this regard differ from the function of protection which we have already discussed, or of the developmental functions which will come up for discussion, as suggesting the third and final class of governmental duties. The most significant point of comparison, however, be- tween the function of protection and that of rendering service to the citizen is that the latter does not, like the former, call into exercise the coercive power of the State. In the case of protection there must be uniformity of conduct on the part of 62 PUBLIC EXPENDITURES AND GOVERNMENTAL FUNCTIONS. officials and conformity of conduct on the part of citizens. There is neither choice nor alternative. It is not possible in the matter of protection for the relation of buyer and seller to arise between the sovereign and the subject. Protection is not offered to be accepted or rejected as the citizen may choose: it is imposed upon him whether he cares for it or not. In no other way could the " condition of security " to which reference has been made be established or maintained. In the matter of rendering service, on the other hand, the attitude of government is entirely different. It is not the life of the State but the interests of the citizen which are recog- nised as the ruling consideration. The character of these interests is of no importance, the pertinent point being that the services which minister to them do not from their nature, or on account of the relation they bear to the organic life of the State, necessarily demand public administration resting on coercive power rather than private management resting on commercial inducements. This second class of governmental activities may then be characterized as the commercial or semi-commercial activities of the State. It is manifest that commercial activities may be under- taken with a view to the service rendered or for the purpose of filling the public purse. These aims are in no sense neces- sarily antagonistic, although the rule according to which the rate of payment is determined when the State renders a direct service will differ in the two cases. Those activities which are likely to be undertaken for the purpose of rendering a service rather than of securing a revenue are such as address themselves to some want universally felt, and are common to all citizens irrespective of locality or situation in life. The want also must be one in the supply of which economy may be secured on account of an extended and an assured market. The State may deem it wise to create a public monopoly in the case of such service, but such a procedure is not an es- sential feature of the case. In judging of the universality of any particular want the extent of the jurisdiction of the govern- ment in question must of course be taken into the account. A local government may very properly enter upon a more comprehensive line of activities than the national government, since the more restricted the territory over which a govern- mpnt has jurisdiction, the greater likelihood will there be of COMMERCIAL FUNCTIONS OF GOVERNMENT. 63 community of interests among its citizens. With this sug- gestion the above statement may be accepted without reserva- tion. A large number of cases present themselves as illustrative of the functions undertaken by the State for the purpose of rendering services to citizens. The post-ofifice, which in all civilized countries is carried on by government, is per- haps the most universal example, and may be accepted as a type of many other services of the same class. Slightly dif- ferent in character is the function assumed by many govern- ments of carrying passengers, freight, and packages, of trans- mitting telegraph messages, and of furnishing telephone ser- vice. It is assumed by many writers that these services are similar to that of the transmission of letters ; but the fact that there is no harmony in the practice of modern states respect- ing these businesses suggests that they may not possess in all respects the same characteristics. While the further fact that such governments as do own and manage railways, tele- graphs, and telephones regard them as a source of revenue, while letters are commonly carried at cost, renders this sug- gestion highly probable. All, however, when undertaken by the State, belong to the same general class of public functions. Another illustration of public service rendered through the agency of the State is found in workingmen's savings-banks, insurance companies, and the like, although one is scarcely justified, owing to the limited sphere in which these agencies act, in saying that they represent an accepted governmental policy among self-governing people. The questionable feature of this class of services, and the reason why one may entertain some doubt as to their ability to hold a footing among governmental functions, is, that they pertain to the interest of a class, and a class interest is not easily recog- nised as a social interest. If, however, the business of bank- ing and insurance is acknowledged to lie within the sphere of government, it must be classed with the commercial activi- ties of the State. Somewhat akin to these services, though entirely different in their financial character, are those acts of government sup- ported in part or in whole by fees or assessments. The full discussion of these services must be postponed until the " Classification of Public Revenue " comes up for considera- 64 PUBLIC EXPENDITURES AND GOVERNMENTAL FUNCTIONiK tion. It is sufficient for the present to note that in the classi- fication of governmental functions the recording of a mort- gage, the granting of a passport, the laying of a sidewalk or the paving of a street, while of interest to society as a whole, do bring into prominence the important services which the government renders to a particular citizen. These ser- vices are not commercial in the sense that there can be any dis- pute as to the true policy of government respecting them, but they may be so regarded in the sense that the service is direct, and can be paid for, in part at least, by him who receives the benefit. It is on this account that they are assigned to the second general class of governmental functions. Many writers class among the commercial services of the State such undertakings as the administration of forests, of mines, of a system of irrigation, and the like ; and provided the care of these agencies of public welfare is brought to a paying basis it is probable that this classification is the most natural as well as the most helpful. Mines are never under- taken except for profit, but in many cases the business is brought under public control where the accruing profit is not sufficiently large to warrant the undertaking did the govern- ment have no ulterior end in view. Wherever forests are of long standing, also, and especially in those countries where forest lands have not been alienated, their output is considered as a commercial product, and the forests themselves are re- garded as a source of pubHc revenue. On the other hand, where the lands have been alienated and the forest destroyed by the sale of standing timber, if the government be induced to undertake the development of the forestry system it will be on account of the general advantages accruing therefrom to society, and not for the purpose of making them the source of public revenue. The same is true of an extensive system of irrigation, the ultimate purpose of which must be to reclaim arid lands, or to render lands already under cultivation more productive. The true classification of such enterprises, there- fore, depends in large measure upon the country for which the classification is made. In the United States forestry and irrigation must be regarded as ministering to the physical de- velopment of a State, and on that account would be included under the third class of governmental functions which hold in mind the physical and social development of a people. In COMMERCIAL FUNCTIONS OF GOVERNMENT. 63 European countries, on the other hand, where the sale of timber, charcoal and ash products, and the rental of water privileges are made the occasion of specific payments from citizens, their administration must be regarded as service to be met by the payment of a price. (2) Tendency of Expenditures for Commercial Functions. — The commercial or semi-commercial activities of a State, ac- cording to the foregoing analysis, include these three general categories of public functions : first, services sold to the citi- zen for a price ; second, services but partially covered by the price, the price being called a fee or an assessment ; and, third, services which justify public expenditure on account of the social interest involved, but which in the rendering give rise to a by-product that may be placed on the market at a price. The discussion now reverts to the original question, which asks what relation these industrial or semi-industrial activities of government hold to public expenditures ; and for answer- ing this question each of the above-named categories must be considered by itself. With regard to the purely commercial services, like the post-office, railways, insurance, and the like, the entrance of the government into the industrial field neither increases nor decreases the financial drain upon the social income. Pro- vided the standard of living maintained by the people be the same, and consequently the market for a given service as- sured ; provided the State and private agencies are equally efficient in the rendering of the service ; and provided the same rule be adopted for determining the price of the service — the social expenditure will be unaffected, no matter how far the State proceeds with industrial functions. The question does not, therefore, pertain to the theory of public expenditures, as such. It is fundamentally a question as to the agency through which a definite portion of the social income will be expended. The above conclusion must be allowed, even though the State decide to make a particular service the source of a general income by charging a price in excess of the cost, inasmuch as all that is secured in this manner will lessen the amount to be taken from the income of citizens through taxes. The social income by which all social func- tions are supported must include the earnings of pubHc as well as of private industries. 66 PUBLIC EXPENDITURES /iND GOVERNMENT/IL FUNCTIONS. There is one way in which the State will be likely to in- crease the current payments for those services which it un- dertakes beyond what they would be if the service were consigned to private control, and that is by giving greater at- tention to social and national development than to business considerations. One of the chief arguments urged by German writers in support of government railways is that the poor districts as well as the rich districts will in this manner be pro- vided with transportation facilities. Such a policy would naturally lead to a greater expenditure for the service of trans- portation than if rendered by private corpor:;tions, and, in so far as this be the case, the expenditure would tend to fall under the general head of investments of capital for the pur- pose of national development. It is likely, also, that the rule for determining the price of certain classes of services would be determined by social rather than commercial considera- tions, as is decidedly the case in connection with postal rates, so that a rich locality might be called upon to pay more than its proportion of the aggregate cost of the service; but the aggregate cost to the community as a whole would not on this account be in any way affected, except so far as traceable to a more extensive rendering of the service in question than would otherwise be the case. While it is doubtless true that the burden on the social income is affected in no very marked degree by the assump- tion of industrial functions on the part of the State, the aggre- gate expenditures of government are of course greatly in- creased. This is shown in the local and national budgets of most modern peoples, especially in England and on the Con- tinent. Whether or not the extension of government indus- tries is " in the line of advancing civilization " is a question about which history makes no absolute reply. The facts are variously interpreted. By some the extension of industrial functions under the direction of government is termed sociaHs- tic, and socialism is regarded as the inevitable and desirable outcome of democracy. There are others who, while agree- ing to characterize this tendency as socialistic, see in it a per- version of democratic concepts, and claim that the permanent tendency is toward the extension of private enterprise under voluntary association. There is still another class of thinkers who do not consider COMMERCIAL FUNCTIONS OF GOVERNMENT. 67 it worth while to define socialism in the language of govern- mental functions, but who assert that under present conditions certain industries can be managed by government with better general results than by private enterprise, and who assert that this is ample justification for the assumption by government of industrial functions. These thinkers do not regard any theory of social organization as important. The practice of the EngHsh-speaking people in the past seems to them emi- nently sensible, that is to say, to permit social principles to emerge from discussion of particular questions rather than to undertake to decide specific cases on the line of a priori prin- ciples. If Manchester desires to own street railways, let Man- chester try the experiment. If the experiment is successful, other cities will probably follow its example ; if not, other cities will be saved a false step. In such a condition of uncertainty respecting current opinion as to the interpretation of the assumption by the government of industrial functions, one cannot state with any degree of confidence what the future of public expendi- tures of this class is likely to be. They have increased enor- mously during the past forty years, nor is there any evidence that the tendency is exhausting itself. It seems probable, when one regards the social evils wrought by corporations in certain industries of collective interests, that local govern- ments at least will expand rather than contract the sphere of government administration. But whether this be true or not,, the important fact for the student of finance to hold in mind is that public industries are a source of income as well as of expenditure, and that the amount of industrial expenditure is a matter of fiscal indifference. The entire question turns upon the choice of the means of satisfying certain common collective wants, and this is a question of the relative efficiency of two methods of investing a given amount of capital, and not of the relative amount of capital invested. It is possible to answer a little more definitely with regard to the semi-commercial services paid for in part by fees and assessments and in part by general taxes. These expendi- tures will undoubtedly tend to increase with the increased complexity and intensity of modern life. This is true because the demand upon government for a certified evi- dence of its presence, its approval, its guarantee of right 68 PUBLIC EXPENDITURES 4ND GOVERNMENTAL FUNCTIONS or privilege, its attestation, its voucher, its assistance in legal processes, and the like, for which fees are paid, must increase. It may be that the collective or social in- terest will become so important that the attempt to assign any portion of the cost of these services to particular citizens in the form of a fee will be abandoned, but the presence of government in the varied relations of life can never be less than at present, except indeed society enter upon a period of decay. The above conclusion is equally true of assessments. Payments for bearing in part or in whole the improvements necessary to an agreeable and healthful municipal life, such as sewers, waterworks, sidewalks, paving, and the like, are certain to increase as long as the industrial forces continue to increase urban population. In a sense assessments do not constitute a payment for public services at all, but rather an investment of private capital, since the result of the expendi- ture is to raise the value of property ; and the only justification of interference by government in the matter is the imperative necessity of uniform action on the part of the holders of pro- perty within the municipality. For the present purpose, how- ever, this distinction is of no great importance. So long as cities continue to grow, payments in the form of assessments will continue to increase. It is not necessary to pass judgment in this connection upon payments incident to forestry, irrigation, the adminis- tration of mines, and the like, since the undertaking of such services in this country would under present conditions be regarded as general rather than direct services. 13. The Developmental Functions of the Government — Those lines of public activity which, according to the analysis here adopted, comprise the third and final class of govern- mental functions, are such as spring from a desire on the part of society to attain higher forms of social life. The aspira- tion of individuals, although necessary to this end, is not adequate for its realization ; it is equally important that so- ciety in its organized capacity should enter upon a series of orderly changes under the direction of a definite programme of social development. The theory upon which such a pro- gramme rests is supplied by modern science and modern philosophy, and assumes that it is possible for the State to de- DEyELOPMENT/IL FUNCTIONS OF GOyERNMENT. 69 termine, in a large degree, the conditions under which men live, and in this manner to make intelligent selection of the influences by which they are surrounded. Thus the struc- ture of society and, in a measure, the character of the citizen lie within the choice of those who formulate and execute laws. To make use of the language of modern philosophy, society is a conscious organism capable of determining its own en- vironment, and consequently of directing its own growth. It is this thought which warrants the acceptance of the phrase developmental functions of government as giving adequate ex- pression to that comprehensive line of public duties by which the conditions of life are determined, so far as they are de- pendent upon law and administration. It may be suggested by the critic that all functions of government minister to social and individual development, and on this account that it is improper to set aside any definite group of functions as developmental in character. In a sense this is true. The protection of life and property, for example, afifords conditions which invite healthful activity on the part of citizens; but the protective functions of the State are ad- dressed primarily to the evils of society, and are efficient in proportion as they repress the perverted inclination of indi- viduals or destroy the unpropitious conditions in society. The developmental functions, on the other hand, recognise the good in human nature and the useful in society, and are successful in proportion as they lead to the growth of what is good and the fruitage of what is useful. Both classes of public duties are necessary to social development, but the one being repressive in its nature, while the other undertakes a process of cultivation, there seems to be a clear difference be- tween them — a difference which is most significant when con- sidered in its relation to the natural law of public expendi- tures. It will be of assistance in tracing the influence of the de- velopmental functions of government upon public expendi- tures to analyze a little more closely the forms of activity which they embrace. Of these there are at least five suffi- ciently distinct to warrant separate consideration. They are as follows : 1. The function of public education. 2. The function of providing public recreation. 7° PUBLIC EXPENDITURES AND GOVBRNMENT/tL FUNCTIONS. 3. The function of creating and maintaining those legal and administrative conditions in which private business enter- prises will be conducted in a just and equitable manner. I 4. The function of public investigation, by which society may come to a knowledge of itself, and furnish to the adminis- trator and to the public at large such information as is neces- sary to guarantee the normal working of the principles of popular government and of voluntary association. 5. The function of developing the physical basis of the State in so far as that cannot be judiciously accomplished by ^private enterprise. (i) Expenditures for Education. — It is not necessary to con- sider at length the educational functions of the State in order to set forth the familiar arguments by which all civilized na- tions have beeji led to make more or less ample provision for public instruction. It is sufficient for our present purpose to observe that the institution of public instruction is one of the many results of the general recognition of solidarity in social interests. It is the natural unfolding of the theory of social relations which asserts that the cultivation of the individual is of greater relative importance to society than to the individual himself. This truth may be illustrated from any branch or phase of education whatever, whether it be a common-school education, industrial or trade education, professional or tech- nical education, art education, or what is called the higher general education. In every instance an analysis of the social results shows that the benefit of an education to the individual is proportionally less than its advantage to the other members of the community. The physician, for example, would secure relatively as large an income and enjoy as marked social dis- tinction on the basis of a less perfect as of a more perfect preparation for his profession, provided only he has acquired, according to his talent, the average or customary education of his class. Except for the scientific interest he may feel in the discovery of new truths, he has nothing to gain by raising the general level of professional practice. They who take the physic, and not they who give it, are in a position to appre- ciate most keenly the importance of high attainments in the medical profession. The line of reasoning involved in this illustration applies equally well to any phase of education, and makes clear the truth that the effective demand for profes- DEVELOPMENTAL FUNCTIONS OF GOyERNMENT. 71 sional or personal excellence is a social and not an individual demand ; and it is on this account that the true significance of an educational system, its relation to the progress of civilization, and the duty of government respecting it cannot be appreciated except it be considered from a social or col- lective point of view. The fact that education is a matter of public concern is, however, scarcely adequate to justify its support at public ex- pense. Why should not he who receives instruction pay its cost, or, if such a plan for any reason be regarded as untenable, why should not exclusive reliance be placed on private endow- ment ? These questions must be answered before the natural law of public expenditure for educational purposes can be discovered. The reason why education cannot be consigned to private enterprise is that the commercial expression of the social de- mand for individual excellence, that is to say, the willingness to pay for expert services, is not adequate to guarantee the needed supply. This is true, because it requires either ex- perience or imagination to appreciate the worth of trained service, and until universally appreciated the pecuniary in- ducements accruing will not warrant the investment of time and money in its attainment on the part of him who practises a profession. Now the public at large cannot have expe- rience with a quality or grade of attainment until it becomes the common possession of the class or profession that makes use of it, and the imagination which calls it into existence is not spontaneous, but imitative, so far as the mass of the popu- lation is concerned. It is essential, therefore, if orderly pro- gress is to be secured in the arts and the sciences, through rendering universal the exceptional attainments of individuals, that the State, availing itself of the judgment of experts, should have a directing voice in all matters pertaining to education. That the State should provide the means of education as well as prescribe the grade of attainments for those who pur- pose to render social service is equally conclusive, although the reasons which may be assigned for such a conclusion are not so simple of statement. It is a pertinent fact, though not final in the argument, that all great education systems have been developed under the influence of a social necessity ex- 72 PUBLIC EXPENDITURES /tND GOVERNMENTAL FUNCTIONS. pressed with more or less clearness through the medium of the State. Confining our attention, however, to those peoples who aim to realize democratic ideals, it is essential for the modern State to support public instruction, because there is no other way to guard against the fading of its own ideals through the rise of an aristocracy of learning. It is natural that institutions that look to the wealthy for further endow- ment should be influenced in their administration by the in- terests of the wealthy class ; it is natural, also, that the charge for instruction in such institutions should conform somewhat to the cost of rendering it : both of these results follow as a matter of course from the introduction of commercial prin- ciples into education, and it requires no great insight to per- ceive that the final result of exclusive reliance upon private benefactions for any phase or grade of education will be that the instruction provided will not only reflect the interests of a class, but will be confined to a class. This is no place to dis- cuss the far-reaching consequences of such tendencies. To say that they are not in harmony with the ideal of democratic civilization is to express but mildly a great truth. A State which aims to perpetuate democracy cannot decline to make ample provision at public expense for all phases and forms of education. In no other way can a system of public instruc- tion, which is by far the most potent agency in shaping civilization, be brought to the support of democracy. It must be remembered that the natural law of public ex- penditures, which it is the purpose of this analysis to discover, assumes the permanency of popular government. It assumes also an efficient democratic sentiment which stands not alone for equality of opportunity, but for a high plane of individual attainment and a high grade of social development. This be- ing the case, education will inevitably demand a continually increasing share of social expenditures, and in proportion as the antagonism between private endowment for education and the ideal of modern civilization is apprehended will the source of this expenditure be the contribution of the people to the treasury of the State, rather than the gifts of the fortuitous wealthy. A continual increase in the educational budget, therefore, must be expected as a natural result of social de- velopment, and may be accepted as a normal expression of a healthful society. DEyELOPMENTAL FUNCTIONS OF GOVERNMENT. 73 (2) Expenditures for Public Recreation. — The line of reason- ing presented above applies with slight modification to public recreation. What is commonly termed recreation is in part educational — a remark which applies to music, the drama, art and art museums, books and public libraries ; in part it is designed to give rest and refreshment — as is true of public parks and pubHc gardens ; in part it is designed to bring out the nobility of life by enabling the individual to associate with what is dignified and satisfying — as, for example, beautiful streets and worthy buildings. The suggestions to which a consideration of public recreation gives rise have indeed a broad outlook. Their point of view is that of the collective interests of society; their ideal, the purpose to make hfe a thing of worth. One is not, of course, at liberty in a practical treatise to rest important conclusions upon a forecast of the future; but the opinion may perhaps be ventured that government is coming more and more under the influence of the consciousness of collective interests ; and that as one re- sult of such a tendency, an increase in the expenditures of the State for public recreation (that word being used in its com- prehensive sense) may confidently be expected for years to come. Especially is this likely to be observed in the budgets of municipal governments. (3) Expenditures for maintaining Equitable Conditions for the Prosecution of Private Business. — Among the concessions made by economic theory during the last thirty years is the recognition of the necessity of .prescribing the conditions under which contracts may be concluded and voluntary as- sociation established. While industries remained small, be- fore factories were established, and before a world's market had been created by the use of steam in transportation, the arguments in favour of unrestricted and unregulated com- petition were fairly conclusive; but since the Industrial Revolution has modified class relations and shifted the centre of industrial power, the evils that follow the attempt to make an absolute separation between state and industry are so manifest as to compel the recognition of industrial functions on the part of government, in addition to the function of en- forcing contracts and protecting property. The conservative expression of the sentiment thus engendered, which acknow- lerlrres tlie inadequacy of the theory of non-interference, is 74 PUBLIC EXPENDITURES AND GOyERNMENTAL FUNCTIONS found in a demand for the extension of the sovereign power of the State in two directions : first, in determining the plane of competition where competition may safely be allowed ; and, second, by substituting 'the control of gMajt-judicial tribunals for the control of commercial forces in those industries in which competition is observed to work badly. The former leads to a long line of legislative acts technically known as " Factory Acts," the latter leads to the establishment of public " Commissions." It is the purpose of both of these agencies of the State to realize in industry the ethical ideals approved by the social conscience. Factory legislation depends for its efficiency on the exercise of police supervision. The service of mining in- spectors or factory inspectors is, for example, in its nature a police service, and the general conclusion arrived at respecting the natural law of expenditures for protective governmental functions applies in the main to this class of public duties; that is to say, the expense of the service tends to decrease in proportion as the service is effectively rendered. There is, however, in the case of those functions of government which aim to determine the plane of competition this peculiarity: the ideal of society as to what constitutes justice tends ever to a more refined conception of industrial ethics, and on this account the successful administration of a law which has fixed a certain plan of industrial activity prepares the way for fresh legislation by which the quality of business conduct is ap- proximated yet more closely to the ideal of justice. This means that expenditures for the administration of factory laws, provided they are successfully administered, will make clear the necessity for yet further legislation of the same sort, and in consequence become the occasion of constantly increasing ex- penditures. Such is the law of expenditure for those govern- mental functions which aim to realize in business life a plane of business conduct approved by the moral sense of the com- munity. The same conclusion follows from a consideration of the conditions that render commissions a necessary part of the machinery of those modern states which hesitate to own and manage such industries as from their nature are superior to the satisfactory working of competition. To avoid misunder- standing, it may be said by way of illustration, that the busi- DEVELOPMENTAL FUNCTIONS OF GOVERNMENT. 75 ness of inland transportation is typical of the class of indus- tries referred to. Many are the evils, political, social, and in- dustrial, which result from consigning this industry to the control of competition, and it is now universally recognised that railways must either be owned or controlled by the government. It would be out of place to consider here the arguments for public control rather than government owner- ship ; it may, however, be remarked that if the former policy be approved by public opinion, as is the case in the United States at the present time, it follows that commissions must be established with adequate power and ample means. But the necessity of commissions does not stop with the railway industry. Modern industrial life tends continually towards the crystallization of larger capitals in many lines of industry. The monopoly problem presents itself under many forms, and, with the continued differentiation which marks the business life of the day, it may be expected that new phases of that problem will continually present themselves. Now what is known as the " commission idea," according to which the government claims the right of representation on the board of management of a business enterprise for the purpose of guarding the interests of the public in its administration, must be granted a development pari passu with the development of the dangers to which those interests are exposed on ac- count of the growth of large industries; and from this it follows that as long as industrial development tends to the ooncentration of capital, so long will the government be obliged to extend this domain of its activity for the purpose of guard- ing society against the evils sure to arise from the crystalliza- tion of industrial power, and of directing the power thus generated to the service of the State. This means that the expenditure of government for the control of monopolies must continue to increase so long as industrial society continues to develop along the lines it has followed during the last half- century. The normal law of public expenditurca, therefore, for the support of factory legislation, or public commissions, these phrases being accepted as typical of the class of expenditures in question, is that such expenditures will continue to increase until industrial development has run its course, or until by ^6 PUBLIC EXPENDITURES /tND GOVERU MENTAL FUNCTIONS. some great upheaval in society the character of government itself shall have been changed. (4) Expenditures for Public Investigation. — Many reasons might be assigned why public investigation is to be classed among the developmental functions of government. Not only is a knowledge of conditions and tendencies, which can alone be obtained through careful statistical research, necessary to a rational programme of social progress, but at the present juncture in social evolution an extended use of statistical in- quiry and of the right of investigation on the part of ad- ministrative boards is essential to the realization of either of the two theories of government which present themselves for approval. Reference is here made to the theory of collective management of monopolistic industries on the one hand, and to the theory of governmental control over monopolis- tic industries on the other. The former is sometimes termed socialism ; the latter, new individualism. It is not intended to consider the function of public investigation or of statistical inquiry from the point of view of State socialism farther than to remark, that any political adjustment which relies upon the arbitrary adjudication of State officials, rather than upon the spontaneous activity of individuals, for attaining social progress must bring into prominence a universal system of industrial accounts. One of the chief activities of a socialistic government would be to keep the books of the social industries. In so far as socialism is realized, therefore, an increased expenditure for the collection, the classification, and the compilation of facts must be expected. The function of public investigation is not less important, though it may perhaps be applied in fewer lines of industry, where it is the purpose to solve the modern monopoly and labor problems in harmony with the theory of personal liberty as developed by the English-speaking peoples. A word of explanation may be necessary to make this clear. According to English political philosophy an extreme expression of the doctrine of industrial liberty would restrict the functions of the State to the protection of life and property and to the en- forcement of contracts, reliance beinc; placed upon commercial forces or, as it is termed, the principle of competition to '■"-irantoc reasonable prices and equitable treatment to the DEl^ELOPMENTAL FUNCTIONS OF GOVERNMENT. ^^ public. The evolution of great industries, however, has shown that this theory presents but one side of a complete pro- gramme of social development. There are some industries which are not subject to the satisfactory control of competi- tion, and upon these the State must impose judicial or ad- ministrative restraints. Whether these restraints should be judicial or administrative depends upon the nature of the in- dustry; but in either case a full and complete knowledge of the facts pertaining to the business, and to the conditions under which the business is carried on, are essential for eiifec- tive control. It may be expected, therefore, as industrial so- ciety becomes more and more complex through the diflferen- tiation of industrial functions, that new questions will arise for adjudication and new bureaus of administration estab- lished ; and it needs no argument to prove that an extension of public investigation will be a necessary accompaniment of this tendency. For the purpose of making this point clear, reference may be made to the reliance of the Interstate Commerce Commis- sion upon statistical investigation. The chief purpose of the law which created this Commission was to abolish the prac- tice of discrimination. With this end in view a special tribunal was created, clothed with the power to investigate cases of discrimination and to secure from the courts summary pro- cedure for the purpose of causing such discrimination to cease. Now it would be idle to suppose that five commis- sioners could exercise poHce surveillance over six or seven hundred railway corporations having in their employ upwards of nine hundred thousand men. Reliance must be placed for the execution of the law upon the willingness of shippers against whom the railways have discriminated to bring their complaints to the Commission. But this they will not do ex- cept there be some certainty of quick redress. Shippers who suffer the evils of high rates while their competitors enjoy low rates will prefer to carry their complaint to the managers of the railways and extort from them like privileges for them- selves. This suggestion leads to the following conclusion: that, as a condition requisite to the execution of the Inter- state Commerce Act, it is essential that the accounting system of the railways should be organized as a unit and placed under the control of the Commission, and that the Commission 78 PUBLIC EXPENDITURES yIND COyERNMENTy4L FUNCTIONS. should in this manner have access at first hand to all the facts in any case which may possibly arise. This means that the success of the Interstate Commerce Commission relies very largely upon the development of its statistical service, since in no other way can the act become self-executory, that is to say, rest for its guarantee of execution upon the interests of aggrieved parties. The reasoning employed in the above illustration is equally applicable to all cases where it is sought to guard the public against the evils of monopolies, great in- dustries, trusts, and the like, through judicial or administra- tive control. From another point of view, also, does the function of public investigation present itself as of continually increasing importance. The theory of society which relies upon the spontaneous activity of individuals for progress, except in those industries which are by nature monopolistic, appeals to the principle of competition for securing commercial equity and justice. The chief obstacle to the realization of this theory is found in the uncertainty which surrounds business trans- actions. This being the case, no government which aims to apply the theory of laissez-faire to non-monopolistic indus- tries can evade the necessity of making large expenditures for the purpose of collecting, compiling, and publishing those commercial facts which are essential to safe business calcula- tions. As publicity is essential to the spontaneous execution of those laws which aim to control monopolistic industries, so also is publicity necessary to provide the conditions in wliich the competitive theory may work satisfactorily for industries that do not tend toward monopolistic organization. From whatever point of view, then, one considers the future, whether that of socialism, of governmental control over monopolies, or competitive control over non-monopolistic industries, the student arrives at the same conclusion with regard to the law of public expenditures. Governments must continually in- crease the amount of money placed at the disposal of their statistical service. The function of public investigation is one which must expand with the development of societv. The principle of publicity is a most important principle for the realization of voluntary association. An increase in the ex- penditures for statistical investigation is not only a result of social development, but in its turn comes to be a cause of CONCLUSION. 79 further development; and the opinion may be ventured that no class of expenditure, excepting only that incurred for public education, is of more vital importance to the interests of the State. (5) Expenditures for the Development of the Physical Basis of the State. — ^The last of the dJevelopmental functions of government, according to the classification here adopted, pertains to the development of the fiscal conditions of the State. There is here included all those lines of activity which call for an investment of public capital and which are com- monly included under the general phrase " public works." Adopting the conservative view, such investigation would in- cluded the appropriation of public moneys for works of un- doubted advantage to society at large, but to which private capital will not be attracted on account of the uncertainty of /•profit or the long time covered by the investment before any M profit may be realized. Forestry, irrigation, the dredging of " rivers, and building of canals, docks, lighthouses, and the like, are illustrations of the investments in question. It is only necessary to mention what is embraced in this class of govern- mental functions to warrant the conclusion that the expendi- tures which they entail will tend to increase with the growth of society. Density of population, increase of wealth, and advance in the mechanical arts will induce each succeeding generation to contribute more largely to that class of invest- ment which gives a return in the form of public utility, rather than in the form of private income. Without further analysis, therefore, it may be concluded that the function of developing the fiscal basis of the State, in so far as that cannot be accom- plished by private enterprise, will, like the other developmental functions of government, tend to increase rather than de- crease its demands upon the public treasury. 14. Conclusion. — It is possible to summarize the results of the foregoing analysis and present them as a general conclusion upon the subject, and in doing so the division of the functions of government into Protective, Commercial, and Developmental will be observed. The protective functions of the State tend to decrease in their claims upon the social income. This is true because the protective functions of government minister to social develop- ment bv repressing the unpropitious forces in society, thus So PUBLIC EXPENDITURES AND GO^ERNMENTML FUNCTIONS. giving the propitious forces an opportunity to operate. They work in the same direction as the developmental functions of the State, but by a reverse process. The success of the re- pressive activities of the State tends to curtail the necessity of their exercise, so that in proportion as ample expenditure for the protective functions- is granted where there is need of their exercise, will society subsequently be relieved from the necessity of appropriations for this service. The practical con- clusion from such a law of expenditure is, that a government cannot afford to hesitate respecting this service. As protec- tion is the primitive function of government, so it is relatively more important than any of the duties of later development. The increase in appropriations for other functions may, and in a healthfully progressive state will, arise in part from the savings which accrue on account of the success attending the performance of the protective functions. In order, however, to properly apprehend this part of the law of expenditure for progressive peoples, it is necessary to make three observations respecting it : (a) The law applies more strictly to the exercise of " police power " than to the exercise of the military power, for the reason that the former is exercised under the jurisdiction of a single system of jurisprudence, while the latter implies con- troversy between several nations which may or may not con- form in the order of their thinking to a common ideal of jus- tice and liberty. In the one case, controversy invites the development of social ethics through a refinement of personal rights ; in the other case, nothing is decided as the result of the controversy except the relative strength of armies and navies. For this reason, while it is possible to speak with some degree of assurance respecting the normal trend of po- lice and court expenditures, the financier is not at liberty to speak with any great degree of certainty respecting the trend of military expenditures. (6) The second observation pertains to the statistics of expenditure rather than to the law of expenditure. In con- sidering the appropriations for protective service from year to year, it must be recognised that a part of the expenditures charged to current expenses ift the ordinary accounts of na- tions is in reality an investment of capital. It is as true of public as of private administration that expenses may be cur- CONCLUSION. 8 1 tailed by the employment of costly machinery. This remark applies to all the protective functions of the State. (c) It must also be held in mind that the protective func- tions of government so modify the nature of the service which they render from year to year that, should the services of policemen to-day be compared with those of fifty years ago, marked change in the nature of those duties would be ob- served. It would not of course be correct to say that the law of expenditure for police service must be confined to services of exactly the same sort ; but at the same time it must be ad- mitted that social development has occasioned an expansion of the functions imposed upon tlie police power, and that the statistics of expenditure for this service must be interpreted in the light of these constantly expanding functions. With these observations, all of which are gleaned from the pre- ceding analysis, no misconception can arise from the state- ment that public expenditures for protective functions of the State tend to decrease as society develops. Our conclusion respecting the commercial expenditures of the State is that they have nothing to do with the theory of public expenditures. So far, however, as they are general in character it is probable that they will increase rather than decrease with social development. The law of expenditures for the developmental functions of the State is that they tend constantly to increase with an increase of social intelligence and with the progress of social differentiation. Their peculiarity stands forth most clearly when placed in comparison with the expenditures demanded by the exercise of the protective functions. Success in the administration of the protective service tends to decrease the amount demanded for that service in subsequent years ; suc- cess in administration of a developmental service, on the other hand, results in an increased demand for services of the same class. The only observation which it is necessary to make lest the student misapprehend this generalization is that the " police power " is used by modern peoples as the agency through which many of the developmental functions of the State are carried out. The police service is broader than po- lice protection ; and much of the expenditure incurred for maintaining what is technically known as the protective agen- ?2 PUBLIC EXPENDITURES /IND GOl^ERNMENTy4L FUNCTIONS. cies should be charged in strict accounting to the develop- mental functions of government. The general law of public expenditure for progressive peo- ples, then, is as follows : Public expenditures tend constantly to increase, but this tendency does not apply in like manner to all governmental functions. Expenditures for protection exhibit a tendency to decrease in proportion as the protective service of the State succeeds ; expenditures for developmental functions tend constantly to increase. This being the case, the test of successful fiscal administration, so far as expendi- tures are concerned, is not found in the aggregate amount placed at the disposal of government (although this, as we have seen, is also subject to a social law), but in the relative amounts which from time to time are assigned to the several chapters of the budget. As a rule, a possible exception being made for military expenditures, the older the protective func- tion the less will be the percentage of aggregate expenditure assigned to it, while the newer the developmental function the greater will be the relative demand which it makes for the funds to be placed at its disposal. CHAPTER IV. SOME FACTS RESPECTING PUBLIC EXPENDITURES. Character of Public Expenditures Prior to the Nineteenth Century. Public Expenditures Since 1830. Public Expenditures and Wealth. Growth of Local Expenditures. Analysis of Aggregate Public Expenditures in the United States. The theory of public expenditures submitted in the pre- ceding chapter rests primarily for its sanction upon an analysis of those motives for action and conditions for judgment that present themselves to the common observation of all. If these motives and conditions have been properly understood, and their relative importance properly apprehended, the conclu- sions of the analysis cannot have gone far astray. Partly for the sake of testing these conclusions by such statistical data as it is possible to discover, and partly for the purpose of pre- senting the theory iij a more concrete form, but more espe- cially with a view of discovering to what extent increased expenditure means an increase of burden, and in what manner the weight of the public service shifts itself from time to time, it is the design of the present chapter to submit a few facts pertaining to the inquiry in hand. Certain questions, also, capable of throwing added light upon the problem of public expenditure may suggest themselves as the investigation pro- ceeds. 15. Character of Public Expenditure Prior to the Nine- teenth Century. — At the close of the Napoleonic wars it was the general assumption on the part of statesmen that public expenditures had reached the limit of their expansion, and it was expected that the payment of the principal and the reduc- tion of the interest of public debts would permit a reduction 83 84 SOME FACTS RESPECTING PUBLIC EXPENDITURES of ordinary expenditures. " Gentlemen," exclaimed Villele, the French Minister of Finance, when the French budget reached for the first time a million francs — " gentlemen, salute these figures ; you will never have an opportunity to contem- plate them again." * Although this sanguine view of states- men and publicists has not been realized, it is easy to under- sftand the state of mind by which it was indulged. In the first place, it must be remembered that military expenditures, including " marine and colonial," had for three hundred years been among the chief items in the annual budgets. These three centuries had witnessed the development of nationality through the centralization of power in the hands of a personal monarch. The feudal array had given place to the standing army, and the maintenance of paid retainers had become a necessity on account of dangers to the authority of the prince from within, and to the interests of the nation from without. The period was marked by internal revolts and commercial wars. " Fully one-half of the income of European states," said Justi in 1771, "is used by the military; in states with threatening neigbours two-thirds ; in Prussia three- fourths." f The military burden of Prussia during the period under consideration seems to have been up to the margin of the ability of the people to bear. Placing in comparison the two dates 1713 and 1806, it appears that the increase in popu- lation had been in the ratio of i to 6.69; the increase in the army meantime had been in the ratio of i to 6.58, and the increase in the expenditures for the army in the ratio of i to 6.50. So uniform an expansion of these three factors sug- gests, if it does not prove, that the army took from the people all the people had to surrender. The budgets of other Euro- pean states reflect the same general fact, although in France the lavish expenditures incurred for the court display were added to the burden of military expenditures. Speaking very broadly, this regime of monarchical rule was brought to a close during the first decade of this century, and with its fall it was natural to assume that the burdens peculiar to the past would no longer be continued. It must also be remembered in this connection that the * Quoted from Eheberg In article on Finance in Conrad's Ifand- ■wSrttrbuch. f Quoted from Roscher, Finamsivissenschaft, p. 495. EXPENDITURES SINCE iSjo. 8S philosophy of the early part of this century assumed to regard all government as evil, and proposed to substitute for it the principle of self-interest and voluntary association. One who believes in laissez-faire must conclude that a reasonable peo- ple will narrow, so far as possible, the functions of govern- ment, and that the expenditures of the State will, in conse- quence, be curtailed. This was the accepted doctrine of the first years of this century, and it is not strange, the balance of power having been restored, that the statesmen of Europe expected a reduction of public expenditures. The third fact to be held in mind is that previous to the present century land had been the chief reliance of the fiscal system. Agriculture was the principal industry of the peo- ple, and it was difiScult to see, in the Hght of its slow develop- ment, what new sources of income could be opened should the government desire to expand its functions. Even Macau- lay did not appreciate how rapidly national wealth was to grow. In these three facts, then, do we find an explanation of the sanguine view with which financiers and statesmen re- garded the nineteenth century at the close of the Napoleonic wars : (i) the people had gained influence in the State, and it was not foreseen that they would be as powerfully swayed by the spirit of national ambition as had been the rule of absolutism which they had overthrown; (2) the theory of social autonomy had succeeded to the practice of minute administration, and with the curtailment of public duties it was reasonable to expect a curtailment of public ex- penditures ; and (3) to these natural errors in judgment must be added the fact that the wonderful expansion of industrial life, and the resultant changes in the structure of society, lay beyond the horizon of the most astute observer. 16. Public Expenditures Since 1830. — While it is true that the termination of the Napoleonic wars brought to a close the period in which military and court expenditures formed the most considerable item in the ordinary budget, it is also -true that it marked the beginning of a new fiscal period ; and, in considering the facts of public expenditures, so far as reflected in reliable data, it may be well to notice, first, the increase in national expenditures since 1830. The past sixty years possess an industrial and political 86 SOME F/ICTS RESPECTING PUBLIC EXPENDITURES. character peculiarly their own. The year 1830 is recognised by students of industrial history as the beginning of that form of industrial organization which is the peculiar product of the nineteenth century, and which doubtless will be the permanent characteristic of the century upon which we are about to enter. The industrial revolution began, it is true, with the period of inventions in 1760. But invention in the domain of pro- duction could never have wrought those changes which marked the revolution of modern industry had it not been for the development of modern methods of transportation. This is no place to trace the results of railways and steam naviga- tion. Suffice it to say that the industrial world has been changed thereby, or ultimately will be changed, from an aggregation of local centres to a condition of national indus- try. New social forces, as well as new conditions for the prosecution of industry, were introduced with steam trans- portation ; and the year 1830 is the year, if a single date must be chosen, for an event that in reality spread itself over a series of years, in which the commercial world began to realize the excellence of railways and of steam navi- gation, and their significance for industry and trade. It is natural to expect that so momentous an event would be re- flected in public administration and in the finances of the State. What, now, are the facts of public expenditure since 1830 ? So far as the more important cotintries are concerned, national expenditures may be traced with some degree of accuracy. Local expenditures present greater difficulties. On page 87 will be found a graphic statement of. the increase in the national expenditure of European states from 1830 to 1890. The data for this diagram are taken, for the most part, from Mulhall.* While it is doubtless true that this writer possesses a gift for combination and estimate that few statisticians care to imitate, a somewhat careful scrutiny warrants the conclusion that in the present case the impres- sion left by the diagram is a correct one. From the statement given it appears that public expendi- tures in Europe have increased from $955,000,000 in 1830 to $3,600,000,000 in 1890, being an increase of 360 per cent dur- * Dictionary of Statistics. EXPENDITURES SINCE i8)o. 87 ing the sixty years named. It is also to be observed that the rise in the curve of increased expenditure is more marked with each succeeding decade. Stale for aggregate expendi- ture In mllUons of dollars. Scale per capita expendi- ture In dollars. 1830 1840 1850 1860 1870 1880 1890 35,000 17.50 y Ezjwnditure 30,000 15.60 _____>P< ir Capita Expenditure / 25,000 13.50 / 20,000 10.00 / r / 15,000 7.50 / ^^' .^^' »•• 10,000 6.00 ^ y ,-■' 5,000 2.50 ^ :-'' The diagram shows also the per capita increase in expendi- ture for European states. Beginning with a charge of less than $4 per capita in 1830, expenditures have risen to some- thing over $11 per capita in 1890. It is thus evident that the increase in population has not kept pace with the increase in national expenditures, a tendency which would be empha- sized if to national expenditures the cost of local government were added. It must not be assumed that the curve in the above dia- gram reflects the course of expenditures in any individual State. Each government is subject to the exigencies of its own con- ditions, and if studied independently will disclose a curve pe- culiarly its own. It is manifestly impossible to undertake such a study in a curtailed treatise. For the purpose of a more definite impression, however, there is inserted in the next summary a statement of expenditures for a few 88 SOME F/1CTS RESPECTING PUBLIC EXPENDITURES. selected nations, so far as continuity of political life and reliable statements respecting the cost of government permit. The classification was suggested by Fournier de Flaix, in his Traite de Critique et de Statistique Com- paree des Institutions Financieres, who divides modern states into three classes as introductory to the study of their repre- sentative financial systems. His classification is as follows: " First, those new states where the abundance of resources corresponds to the relative youth of the states themselves; such is the case in the United States, Australia, the English colonies of Africa, and the Dominion of Canada. Second, those states which by comparison are more or less ancient, as Russia and Italy, where temporary penury of resources is a serious embarrassment to the solution of financial problems and to fiscal administration. Third, those state's which enjoy full prosperity, as England and Germany, which on account of their constantly expanding economic development are in a situation to accomplish numberless changes in their financial organization and administration." In the main this is an admirable classification, but for our purpose we venture to modify it in one particular. Youth or age in a nation is in itself a matter of relatively slight signi- ficance. The important factor which determines the ability of a people to spare a continually increasing amount for public expenditures, or which opens up to the nation the need of new expenditures, is found in the yet undeveloped resources of the nation. Or, to express this thought in another way, a per capita expenditure must be counted as great or small ac- cording to the probable growth of industry and wealth in the future. Now there are two elements that determine a nation's potential development. ^. The first is measured by the per capita area of land,* the second by the general grade of in- dustrial intelligence and industrial skill ; and the classification which we have adopted rests upon the possession by a people of one, or both, or neither of those elements of industrial progress. It is as follows : Class I. Those nations that possess both undeveloped re- sources and a high degree of industrial intelligence, such as the United States, Australia, and in general all colonies other than those of Latin peoples. Class II. Those nations that possess a high grade of in- EXPENDITURES SINCE 1830. 89 dustrial intelligence and no considerable amount of unde- veloped resources, such as England, France, and Germany. Class III. Those nations that possess undeveloped re- sources but no considerable industrial intelligence, such as Russia and most of the colonies of Latin peoples. Class IV. Those nations that possess neither undeveloped resources nor industrial intelligence of the first rank, such as Italy, Spain, Greece, and Austria-Hungary.* Now it is clear that the same amount of per capita expendi- ture, or the same rate of increase in the per capita expendi- ture, cannot bear the same relative significance for all peoples. As the burden of what government expends at any particular time is measured against the social income, so the burden of a constantly increasing expenditure must be measured against the promise of a future industrial development. This being the case, the constantly increasing expenditures of nations should be regarded by them with solicitude in the order in which they are placed in the following summary of expendi- tures since 1830 : NATIONAL EXPENDITURES OF SELECTED STATES SINCE 1 830. IN MILLIONS OF DOLLARS. Claas. II. III. IV. Sutes. United States . Australia United Kingdom.. Germany France Russia. . Mexico. Htafy ■< Spain ( Austria-Hungary. Dates. 1830. 1840. 1S50. i860. 1870. 1880. 15 275 45 go 24 360 285 55 140 39 275 300 70 185 63 40 345 405 312 161 105 225 309 60 340 380 222 165 295 267 100 400 135 620 533 23 274 165 375 352 140 430 320 685 759 38 371 170 420 In view of what is known of the industrial and political history of the nations whose expenditures are included in the * I confess to some doubt as to the proper classification of Austria- Hungary in the above scheme. 9° SOME F/tCTS RESPECTING PUBLIC EXPENDITURES. above summary, there are quite a number of comments which present themselves for expression. Consider the ease with which the United States raised her ordinary expenditures from $63,000,000 in i860 to $309,000,000 in 1870. Australia shows even greater lasticity in the expansion of expendi- tures. The cost of government at the present time means relatively less to these peoples than to any other peoples of the world, for not only do they have ample means to meet present expenditures, but they have both skill and natural resources for development in the future. This potential fiscal ability is a dangerous possession, for it invites carelessness in the control of public affairs ; but it should also be remem- bered that it contains great promise. Turning now to the second class of governments, it is evident that financial expansion in England was prior to the period covered by the above summary. This is true in in- dustry as well as in finance, and it is at least possible that national expenditure in England since 1830 foreshadows what will prove to be the course of national expenditure in other countries. It is probable that the weight of national expendi- tures rests as lightly in England as in any other country. Even the per capita expenditure has not greatly increased. Germany seems to have taken upon herself new life since the establishment of the Empire. France, too, shows wonderful industrial attainments, but, owing to a slow increase in popu- lation, appears to labour more heavily under her increased expenditures than either of the other nations with which she is classed. Little can be said of Russia, except that her financial strength lies in her immense population and her undeveloped natural resources. An analysis of her budget would show that the claims of the civilizing interests upon her annual expendi- ture are less than for most of the other nations of Europe. Of her aggregate expenditures 29.54 per cent is for the support of her debt, 25.44 per cent for pubhc defence, while 3.80 per cent only is devoted to education and art. Her ambitions are pri- marily military, and when the character of her southeastern neighbours are held in mind it may be doubted if her budgets will show any considerable increase in expenditure for what we have termed the " developmental functions " until by her conquests she meets with a people as civilized as herself. To EXPENDITURES SINCE 1830. 9^ suggest what would be the effect upon European budgets of the completion of the scheme of conquest which seems to be the destiny of Russia would be an unwarranted indulgence in speculation. One may, however, venture to assert that it would bring about a decided change in the ratio of military and non-military expenditures. The chief obstacle at the present time to the reduction of expenditures for the army and navy in Europe, and to the consequent expansion of that class of expenditures designed to raise the grade of common living, is found in the military ambition of Russia. Could that ambition be exhausted by the accomplishment of its aim, or could it be weakened by the growth of commercial interests among her people, the financial situation of Europe would be greatly relieved. The above consideration leads naturally to a characteriza- tion of the financial situation of such countries as Italy, Spain, and Austria. These peoples have neither undeveloped resources, as is the case in Australia, nor do they possess a high grade of industrial and commercial activity, as is the case in England, but the expenditure's which they are called upon to meet are nevertheless constantly increasing. By virtue of their intelHgence they should rank with the best industrial peoples of Europe, but by virtue of their " tem- porary penury," to quote Fournier de Flaix, their ability to establish a rational scheme of expenditures is seriously em- barrassed. They need to invest large sums for the develop- ment of such resources as they possess and for the industrial education of their people ; they find themselves obliged to acknowledge military expenditures as relatively more impor- tant, and to drain the earnings of their citizens for an un- profitable investment of the nation's capital. These are the peoples who feel most seriously the burden of increasing ex- penditures, since for them it means delay in reforms which they regard as important, and in the attainment of a higher plane of living by their people. These observations have perhaps been sufficiently ex- tended to impress upon the reader the fact that while there may be a fundamental social law reflected in public expendi- tures, the conditions under which that law asserts itself are so various that the significance of a given amount of expendi- ture or of a given tendency in expenditures must be peculiar 92 SOME F/1CTS RESPECTING PUBLIC EXPENDITURES. for any particular nation studied. Our further investigation will confine itself for the most part to those nations that have fairly ample resources at their command. 17. Public Expenditures and Wealth.— No statement of the tendency in public expenditures is complete that fails to compare the increase in expenditures with the increase of wealth. It is not possible to arrive at a satisfactory estimate of wealth for any considerable number of people. The state- ments that follow are confined to the United States, Great Britain, and France. Since the dates for which reliable esti- mates of wealth may be obtained are not the same for each nation, no attempt is made at a single uniform statement. NATIONAL EXPENDITURES OF THE UNITED STATES COMPARED WITH POPULATION AND PROPERTY BY CENSUS YEARS 1 840 TO 1890, INCLUSIVE. Date. 1840 1850 i860 1870 1880 1890 Population.* 17,069,000 23,191,000 31,443,000 38,558,000 50,155,000 62,622,000 Properly.* $7,135,000,000 16,159,000,000 30,068,000,000 43,642,000,000 65,037,000,000 Proper- ty per Capita. $308 514 780 870 1,036 National Expenditures.t Expen- diture Capita, $24,000,000 $1.42 39,000,000 1.71 63,*ooo,ooo 2.01 309,000,000 ^5^03 . 267;ooo,aso ^.'34 320,000,000 5^ Percent- age of Expendi- tures to Property. ,004J * United States Census Reports. t Revised Treasury Statements, net amounts. NATIONAL EXPENDITURES OF THE UNITED KINGDOM COMPARED WITH POPULATION AND PROPERTY FOR DATES NAKED. Dates. Population. Property.* Proper- ty per Capita. Expenditures. Expen- diture per Capita. Percent- age of Expendi- tures to Property. 1822 1845 1865 i8go 21,000,000 28,000,000 30,000,000 37,000,000 £2, 500,000.000 4,000,000,000 6,000,000,000 10,000,000,000 £120 143 aoo 270 ;^58,ooo,000 56,000,000 65,000,000 86,000,000 £3-4^ a. 00 2.16 2.32 .0228 .0140 .0108 .0086 • Giflen, Tht Crnvtk o/Cafilal, p. no. EXPENDITURES AND IVEALTH. 93 NATIONAL EXPENDITURES OF FRANCE COMPARED WITH POPULATION AND PROPERTY FOR DATES NAMED. Dates. Population.* Propertjr.t Fr. Proper- ty per Capita. Fr. Expenditures. Fr. Expen- diture per Ca^ta. Percent- age of Expendi- tures to Property. 1853 36,108,000 36,544,000 37.2t2,ooo 38,219,000 125,000,000,000 175,000,000,000 200,000,000,000 200,000,000,000 3,462 4.794 5,374 5,233 1871 1878 1886 3,046,000,000 3,348,000,000 3,294,000,000 83-35 89.94 86.18 .0174 .0167 .0164 * De Foville, La France Ectmontigugy p. g. t De Foville, La France Aconomigue^ p. 516. The exhibit submitted for the United States does not ex- tend beyond the year 1840, and the first safe estimate of wealth is for the year 1850. Nor would it be desirable, were it pos- sible, in this somewhat cursory survey of the subject, to en- ter upon an investigation of the early years of this century. There is little in common between the industrial character of the period prior to 1840 and that of the period subsequent to it. While it is true that machinery was, to some extent, employed in the earlier years, it cannot be said that society was in any marked degree influenced by the development of the factory system. When, however, we confine our attention to the fifty years subsequent to 1840 no country reflects so clearly in its financial and industrial history the character- giving forces of the nineteenth century as does the United States. The exhibit for the United Kingdom extends from 1822 to 1890, and represents a continuity of political and industrial life for sixty-eight years. It will be remembered that Eng- land stands as the most advanced industrial nation of the world, that in 1822 her wealth was very considerable when placed in comparison with that of other nations, and that the period of her expansion in national expenditures was during the Napoleonic wars. The statement for France covers the years from 1853 to 1886. The estimates of property appear to meet the approval of M. de Foville,* those of 1878 and 1886 being the result of * Alf. de Foville, La France &conomique Statistique Raisonnie et Com- parative, p. 515. 94 SOME FACTS RESPECTING PUBLIC EXPENDITURES. his own computations. A calculation based upon the returns of succession duties warrants Mr. Giffen in asserting " that the growth of property in France has been very rapid, as rapid during the present century as in the United Kingdom." * For the last twenty years, however, it may be doubted if there has been any marked increase in money values in France, from which it appears that any further expansion of public expenditures must tend to become a serious matter for the French people. The data presented in the above summaries will serve as a corrective to some of the erroneous applications that have been made of the general fact that public expenditures tend [constantly to increase. Of the three nations subjected to [analysis the tendency has been for property to increase at a Tate relatively more rapid than national expenditures ; and for the United States the growth of population also appears to be more rapid than national expenditures. This fact leads to several important conclusions which, regarded as contri- butions to the practical rules for fiscal administration or as a statement of current sociological tendencies, are believed to be new as well as important. In the first place, while it is true that public expenditures have continuously expanded, it is not true that they have be- come correspondingly more burdensome ; and should the financier discover that the fiscal system rests with ever- increasing weight on industry as time goes on, he must look for an explanation of so culpable a result to the structure of that system and to the manner in which it makes appeal to the citizen for payment rather than to the amount which it demands. This remark cannot be construed as in any sense an apology for unnecessary expenditure. It is no excuse for lavish appropriations that the government leaves relatively more in the hands of the people each year than it takes from them. It does, however, direct attention to the truth, too frequently overlooked, that the burden of the fiscal system lies rather in the rules adopted for collecting revenue than in the amount of revenue collected — a truth of especial pertinence to the fiscal conditions of the States, municipalities, and minor civil divisions in this country. * Robert Giffen, Thi Growth of Capital, p. 131. EXPENDITURES AND IVE/tLTH. 95 The second observation suggested by the data contained in the above table is that the expansion of public expenditures does not call for a corresponding expansion of the basis of taxation. The facts in the case give no support to the assump- tion so generally applied in the reasoning of financiers that a continually larger number of sources of revenue must be opened to supply the growing demands of the State.* On the contrary, the growth of property at a rate more rapid than the development of the demands of government would lead to the conclusion that, other things being equal, the in- crease in public expenditures might be met even though the basis of the fiscal system were narrowed year by year. The practical conclusion from this is that the financier performs his whole duty when he meets current demands without im- pairing the patrimony of the State, and without obstructing the development of national riches. When it comes to ques- tions of investment he is doubtless obliged to have regard to the future, but so far as current ordinary demands are con- cerned he may limit the horizon of his observation to the present. The " elasticity of revenue " necessitated by the " law of increasing expenditures " is amply ' provided for so long as wealth tends to outstrip expenditure in its growth. The third observation is sociologic in character. The facts portrayed in the above statement do not lend their support to the prevailing idea that government in these later days is encroaching upon the domain of private initiative, and that coercive association is expanding more rapidly than volun- tary association. Were this true it might indeed be the oc- casion for alarm to those who believe that the continuance of our present form of society demands a stable balance be- tween governmental and private activities. The impression that government is growing at the expense of private asso- ciation is doubtless due to the rapid expansion in certain directions of governmental functions; but it should be held in mind that this is balanced by an equally rapid expansion of functions non-goyernmental in character. The proof of this assertion is found in the fact that among peoples of a high grade of industrial attainment public expenditures do not in- crease at so rapid a rate as the property from which they are * Cf. article on Finance by Dr. Edmund J. James in Cyclopedia of Political Science. 96 SOME F/ICTS RESPECTING PUBLIC EXPENDITURES. met ; and when it is recognised that a continually larger share of social income exists in the form of earnings from labour and enterprise rather than as earnings from capital, it is also clear that public expenditures do not increase at so rapid a rate as social income. The financial statistics of govern- mental administration offer no proof of the assertion that the development of public functions tends in any degree to destroy the established balance between public and private activities. 18. Growth of Local Expenditures. — It is clear what the tendency in local expenditures ought to be if the analysis of governmental functions presented in the fore- going chapter, and of the shifting of their relative impor- tance with increased differentiation of social functions, be correct. It was there claimed that " expenditures for the developmental functions tend constantly to increase." It would not be correct to assert that local expenditures are exclusively assigned to the support of the develop- mental activities, and national expenditures to the protec- tive activities, of government. The large appropriations for rivers and harbours by Congress in the United States, or for schoolhouses and education by the Assembly in France, would contradict such a generalization. Notwithstanding numerous exceptions, however, it remains true that the de- velopmental functions predominate over the protective func- tions in local government, while the protective functions pre- dominate over the developmental functions in national govern- ment ; from which it follows that the relative increase in local and national expenditures may be accepted as a test of that portion of our general theory of public expenditures which pertains to the developmental functions of the State. With this explanation the summary on page 97, which gives the per- centage of national and local expenditures for the United States, the United Kingdom, and France during the past half- century, must be accepted as significant. There seems to be no doubt respecting the modern ten- dency in local expenditures. In France there has been a steady increase in the percentage of local expenditures, and a relative decrease in the percentage of national expenditures, since 1864. In the United Kingdom, with the exception of the period in which national expenditures were influenced by the Crimean War, the same tendency may be discerned; while in the GROIVTH OF LOCAL EXPENDITURES. 97 STATEMENT OF THE PERCENTAGE OF NATIONAL AND LOCAL EXPENDITURES FOR SELECTED DATES FOR COUNTRIES NAMED. Countries and Dates. r 1850.. I i860.. United States ■{ 1870. . I 1880.. [ 1890*. United Kingdom 1840. 1850. i860. 1870. 1880. , 1890. France Percentage of Expenditures. National. Local. 49 51 39 61 53 47 47 53 39 61 84 16 81 19 82 18 66 34 58 42 56 44 87 13 79 21 70 30 United States, again making an exception for the influence of the war of 1861, the figures exhibit the same trend. It is of course recognised that population has massed itself in cities during the period under consideration. It is also recognised that municipal corruption, especially in the United States, has exerted considerable influence upon municipal expenditures. "^NATIONAL AND LOCAL EXPENDITURES OF THE UNITED STATES FOR THE YEAR 189O. Organs of the State charged with Expenditure. Amount Per Capita. Per Cent. National government, including postal service States and territories, except for 352,218,614 77,105,911 114,575.401 232,988,592 139.065,537 -4,62- 1.23 1.83 3-72 2.22 39 9 12 25 15 Counties, except for common schools Municipalities, except for common 915,954.055 14.62 100 1 Commercial enterprises are included onljr in case of net deficits. 98 SOME F/iCTS RESPECTING PUBLIC EXPENDITURES. ' A student of municipal government would assert, further, and very properly, that the increase in local expenditures repre- sents in part an investment of public capital in municipal pub- lic works. But, making liberal allowance for these considera- tions, so far as they contradict our generalization, it yet re- mains true that the increase in local expenditures at a rate more rapid than the increase in national expenditures illus- trates, if it does not prove, the rapid growth of the develop- mental activities of the State. As has been already pointed out, a very considerable portion of the increment of expendi- ture assigned for the support of the police power has fur- nished the means for the expansion of developmental func- tions. Other nations besides those included in the above summary present the same tendency. In Belgium,* for example, there has been a growth in the local expenditures of the great cities during the twelve years prior to 1890 of 55 per cent. Accord- ing to Herrfurth, the per capita of expenditures in Prussia for local purposes in 1849 was 3.77 marks ; in 1869, 6.47 marks; in 1876, 9.58 marks; in 1880, 10.53 marks; in 1884, 11.46 marks. The tendency seems to be universal, and it may be accepted as a general truth that expenditures for local pur- poses are increasing at an unusually rapid rate. According to the analysis of the previous chapter, de- velopmental functions present themselves under five general heads. It is not possible, on account of the diverse classi- fication followed in public reports, to submit a comprehensive statement of the movement in expenditures incident to these several services. As illustrative of the tendency, however, a few facts are here presented respecting the increase in ex- penditure for educational purposes. Even this statement must be limited and fragmentary. In the United States the amount of money which was expended for educational purposes for public common schools in the year 1890 was $145,583,115. This is equal to nearly 17 per cent of the aggregate expendi- tures. The only item of expenditure in excess of education is " pensions, charities, and gratuities " ; and, as every student of current history knows, the pension payments of the United States could never have reached their present figure had it * Eheberg, article " Finanzen." Conrad's HandwSrterbuch der Staats- ivissfiischaften. EXPENDITURES IN THE UNITED ST/tTES. 99 not been for the difficulty which the United States Govern- ment experienced in the reduction of its revenue. The trend of expenditures for education in the United States may be clearly observed by instituting a comparison between the year 1880 and the year 1890. Confining our statements to public common schools — that is to say, exclud- ing expenditures for State universities, normal schools, and the like — the expenditure for 1880 was $79,528,736 ; the expendi- ture for 1890 was $137,065,537. The expenditure for public common schools per capita of population for 1880 was $1.59; in 1890 it was $2.24. The expenditure per capita per pupils enrolled in common schools in 1880 was $7.99 ; in 1890 it was $11.03. There is no other item of ordinary expenditure which has grown at so rapid a rate. Other countries present the same tendency. In Bavaria, for example, the expenditure for education and instruction in 1868 was 1,507,000 florins; in 1890 it was 15,701,000 marks. The per cent of total expenditures, both national and State, assigned to education and science is the following for the countries named: Prussia, 10.14; Austria, 5.96; Italy, 4.1 1; France, 9.63. 19. Analysis of the Aggregate of Public Expenditures in the United States. — ^The facts presented in this chapter do not amount to a proof of the generalization that was ventured respecting the trend of public expenditures, although, they do support that generalization so far as they may be brought to bear upon it. As further strengthening the impression that the financial interests of modern states are influenced by the demands of the civilizing process going on in society, there is next inserted for the consideration of the student an analysis of the aggregate expenditures of the United States for the y«ar 1890, all grades of government and all agencies of ex- penditure being included. Each item is made the subject of a remark indicating whether the expenditure is incurred for the support of the protective activities, the commercial activi- ties, or the developmental activities of the State. It will be observed that certain items, as " Interest on Debt," "Executive Department," "Congress and Legisla- tive," are not classified as protective, commercial, or develop- mental, the reason being that it is impossible from the head- ing of the item to have any idea as to the nature of the service loo SOME FACTS RESPECTING PUBLIC EXPENDITURES. AGGREGATE NATIONAL AND LOCAL EXPENDITURES No. 9 lO 12 13 14 15 16 17 18 19 20 21 22 23 24 Administration Classification of Expenditures. Pensions, charities, and gratuities Educational purposes and public common schools Interest on debt Roads, sewers, ditches, and bridges Postal service New buildings, works, and sites, construction and purchase separately reported Salaries, separately reported, fees, and commis- sions Military purposes Police Judiciary, including county courts, inquests, and inquiries Public buildings and sites, care and maintenance, including construction not separately reported. Executive department Fire Naval establishment, except for new vessels Penal and reformatory institutions Improving harbours and rivers Lighting Congress and legislative Constructing new war vessels Indians Health Public parks and places Foreign intercourse Miscellaneous Amounts. $146,895,671 145.583,115 82,748,423 72,262,023 66.259,547 38,890,970 37,552,655 35,537,611 23.934.376 23,071,075 17.950,177 16,770,801 16,423,820 15,174,403 12,381,425 11,737.438 11.363.780 10,485,826 6,831,803 6,708,047 3,280,294 2,962,697 1,648,277 109,499,801 for which the payment provides. In the case of interest, for example, it would be necessary to know how the proceeds of the loans supported by the interest were expended in order to classify the payments. So far as this interest supports national obligations, it probably should be assigned to the protective activities of the State; so far, however, as it sup- ports State and municipal obligations, it should be assigned either to the commercial or the developmental activities. The same is true also of the expenditures of the Executive Depart- ment or of the expenditure for the support of Congress and the State legislatures. The amount paid for the support of these branches of government is common to the three classes of public functions, and should be distributed among them. EXPENDITURES IN THE UNITED STATES. OF THE UNITED STATES, 189O. Classification of Expenditures as Protective,Xominei>:ial, and Developmental, No. Commonly regarded as protective . . Developmental Depends on use of proceeds of debt. Developmental Commercial Developmental primarily. Depends on service performed. Protective Protective primarily Protective primarily. Developmental primarily Calls for distribution Protective Protective Protective and developmental. Developmental Protective and developmental. Calls for distribution Protective Protective Protective primarily Developmental Protective and developmental. II 12 13 14 15 16 17 18 19 20 21 22 23 It will also be observed that, in the light of our analysis of public activities, certain of the items of expenditure are common to the protective and the developmental functions. Such, for example, is the cost of the police service or of the penal or reformatory institutions. Even the public lighting, which primarily was undertaken for the purpose of greater security, is capable of being interpreted in part as ministering' to social development. The separation between the various classes of activities is much clearer for the purpose of analysis than for the purpose of administration, but it is impossible for one to review even this administrative analysis of public expenditures without being impressed with the fact that one of the ruling considerations in the determination of public I02 SOME FACTS RESPECTING PUBLIC EXPENDITURES. expenditures is the purpose on the part of those who adminis- ter pubhc affairs to provide for the State a healthful growth and for society an orderly development. It is the social ideals rather than the social necessities which are coming to deter- mine the amount of money placed at the disposal of the State. BOOK II. BUDGETS AND BUDGETARY LEGISLATION. CHAPTER I. GENERAL CONCEPTION RESPECTING BUDGETS. Concerning the Meaning of the Word Budget. Concerning the Relation of Budgets to Constitutional Govern* ment. (i) General Considerations. (2) Basis of Budget Right in England. (3) Basis of Budget Right in France. (4) Basis of Budget Right in Germany. (5) Basis of Budget Right in the United States. As pointed out in the Introductory Chapter to this treatise, the most fruitful source of financial disorder is found in the carelessness and uncertainty likely to attend financial legisla- tion ; and it is an appropriate task for the Science of Finance to consider somewhat at length those parliamentary rules de- signed to render the several steps in financial legislation cer- tain and clear, as also those constitutional provisions by which publicity may be secured and responsibility realized. The evils of which complaint is made are, for the most part, beyond the domain of statutory enactment, and consequently the po- litical remedy must be relied upon for holding them in check. In order that this remedy may be effective, and that they who vote taxes and legalize appropriations may do so with a just regard to public interest, it is essential that certain general rules of procedure should be laid down before the business of fiscal legislation be entered upon. A consideration of these rules and all that they imply, both historically and analytically, is now entered upon; and, in conformity with accepted 103 *04 GENERAL CONCEPTION RESPECTING BUDGETS. nomanclature, is presented upder the name of Budgets and Budgetary Legislation. 20. The Meaning of the Word Budget. — The origin of the word budget is perhaps of antiquarian rather than scientific interest. " The word budget, bouge, or bougett, according to Pasquier and other ancient authorities, as well as in the old language of Rabelais, is derived from the Latin word bulga, become Gallic, which expressed a bag, a pocket, a purse. Its origin is therefore Latin and French. England has applied it to the great leather bag which for a long time contained the documents presented to Parhament to explain the resources and the wants of the country." * The transi- tion in the meaning of this word from the bag carried by the treasurer to the documents which the bag contained, and finally to the scheme of rights and rules of procedure which arise in connection with their use, was a most natural one in view of the paramount importance of carefully drawn and detailed documents for sound financial administration. When in 1803 the word appeared for the first time in French financial no- menclature it was used as a substitute for the phrase " esti- mates of receipts and expenditures." The desire to substitute this somewhat indefinite word for a definite expression is pos- sibly explained by the fact that the phrase " estimates of re- ceipts and expenditures " was joined in the minds of the French people to the financial abuses of the ancient regime. while the word budget had been dignified by the role it had played in England in the development of constitutional government. This incident in French financial history should at least suggest to our minds what is undoubtedly true, that the word budget is more comprehensive than a report upon the income and expenditures of the State. An estimate of income and expenditures is possible for the individual or for the sovereign who conceives of the State as a private property ; but a public budget, as that phrase is interpreted by modern political development, is impossible except for a people which enjoys, in some degree at least, the constitutional right of placing a limit to public income and of exercising a control over public expenditures. Without undertaking a formal definition of the word * CI. Journal 0/ the Statistical Society of London, Vol. XXIX, p. 125. MEANING OF THE IVORD BUDGET. 105 budget it may be well to consider one or two of its general characteristics as preliminary to a comparative study of the several forms which budgets have assumed among various peoples. In its formative stage the budget is a report upon a nation's finances designed primarily to show to the legislator the condition of the public treasury and the fiscal needs of the State. This is true whether the government in question be imperial or democratic. If imperial the report will be made by the monarch in his capacity as administrator to himself in his capacity as legislator ; if democratic it will be made by the administrative to the legislative department of govern- ment. The aim of this report is to give information to the legislative body, and this fact determines many of the technical questions which arise respecting it.* The budget regarded as a report for the information of the legislature will cover at least twice the fiscal period ; that is to say, it will contain a statement of the results of the opera- tion of fiscal laws during the period closed, and an estimate of what reasonably may be expected during the period to come. These two parts of the budget are sometimes called the executed and the estimated budgets. The former enables the legislator to determine the adequacy of existing fiscal laws, and to judge of the efficiency and economy of those who ad- minister them; the latter is made the basis of current legis- lation. If in its first stage the budget is a report, in its second stage it becomes a project of law. The conversion of the re- port into a legislative bill is a process respecting which one can make no very definite statement except the political conditions and parliamentary methods of some particular people be held in mind. Nor is this the point that should claim the atten- tion of the student. The essential fact is that a report upon past fiscal operations must precede new fiscal legislation. The comprehensive nature of budgets, however, is not sug- gested by regarding them either as a report or as a project of law; they must be conceived as a part of the political ma- chinery essential to the realization of the ideal of popular government before their dignity and importance can be adequately appreciated. Inasmuch as the avowed purpose * For a series of definitions see Stourm's Le Budget, son histoire et son m/canisme, § I. Io6 GENERAL CONCEPTION RESPECTING BUDGETS. of budgets is to secure care and economy in fiscal legislation, so far as that is dependent on an orderly method of procedure, it follows that a comprehensive study of budgets will embrace a consideration of those parliamentary rules and laws of ad- ministration designed to further this end. This being the case, the study of the budget comes to be a study of adminis- trative and parliamentary organization and procedure; and since this in turn is dependent on the fundamental organiza- tion of states, it will be necessary to make frequent references for the purpose of explanation and argument to the accepted principles of constitutional government regarded as an ideal, and to the peculiar requirements of the constitutional pro- visions of particular peoples by which that ideal is worked out. Here, indeed, is the starting-point, historically as well as analytically, for an investigation into budgets and budgetary legislation. 21. The Belation of Budgets to Constitntioual Oovern- ment. — The relation between budgetary regulations and the ideal of personal rights and social relations underlying popu- lar government is a very close one. Budgets, indeed, are one of the most important means through which those ideals are realized in public administration. It is an old saying that political power lies with whomsoever holds the public purse, and it is the first lesson of history that the struggle for constitutional government has, in large measure, been confined to the question of control over fiscal affairs. It may be well to refer to a few familiar instances which illustrate this point. (i) General Considerations. — hs early as 121 5 in England it was asserted as an ancient right that the king could not demand payment or service from his subjects in an arbitrary manner. The twelfth article of the Magna Charta reads as follows : " No scutage or aid shall be imposed in the king- dom, unless by the Common Council of the realm, except for the purpose of ransoming the king's person, making his first- born son a knight, and marrying his eldest daughter once, and the aids for these purposes shall be reasonable in amount." By the fourteenth article, in case a general council is deemed necessary to take into consideration the question of aids, the king is bound to issue a formal summons to those who have a right to meet in council, and to state in the summons the RELATION TO CONSTITUTIONAL GOVERNMENT. 107 cause for which the council is convened. In these articles may be found an assertion of an ancient right: that without the consent of the subjects no imposts could be levied. This assertion doubtless bore a very different meaning in the thir- teenth century from its interpretation under modern political conditions, but it shows that the principle of control over government through control over the sources of revenue is a very ancient one. As bearing upon this point Creasy says : " Among au the nations of the Gothic stock, whether of its Scandinavian or of its Teutonic branch, and in all the kingdoms founded by them out of conquered Roman provinces, councils or assemblies of some form existed, whose consent the ruling chief was bound to obtain in order to legalize all important measures of State. We have already drawn attention to the assemblies of the principes, and the general assemblies of freemen among the primitive Germans, and to the Tings of the primitive Danes. The student may also here usefully refer to what has been said respecting the witenagemotes of the Anglo- Saxons. At least he must bear in mind that it was only with the sanction of this witan that an Anglo-Saxon king could make new laws, or impose new taxes ; that the prelates and the great nobles and thanes attended these assemblies; and that the inferior class, the ceorls, though not directly repre- sented there, yet were not without protectors and advocates, inasmuch as certain of the magistrates whom the men of every borough and township regularly elected from among them- selves for the purpose of local self-government might be pre- sent at the witan for the purpose of obtaining redress for any wrong which might have been committed, and for the redress of which the ordinary tribunals were inadequate. When once present at the witan, though ostensibly only for the purpose of remedial justice, the ceorl magistrates must have had some influence in other matters also, inasmuch as the cheerful co- operation of the bulk of the community in carrying any par- ticular measure into effect never can be thought immaterial, even by those who have the power of enforcing sullen obedience. The Anglo-Saxon polity was overthrown by the conquering Normans; but the recollection of this virtual though indirect system of representation must have survived among the bulk of the population, and may have greatly io8 GENERML CONCEPTION RESPECTING BUDGETS. facilitated the adoption and insured the good working of the subsequent parliamentary representation of the commons." * In France as well as in England appeal was made to the same principle as a principle of ancient establishment. In 1787 the right of control by the people over revenue in France was declared to be one of the " primitive laws of the State." In an address by the President of the Parliament of Paris to the king are found the following words : " The con- stitutional principle of the French monarchy is that all im- posts should be consented to by those who are called upon' to support them. It is not, sire, in the heart of a beneficent king to alter this principle which holds to the primitive laws of your State. ... If your Parliament has for many years believed that it was able to answer for the obedience of the people in matters of impost it has more frequently consulted its zeal than its power." f The great charter of Holland, also, the origin of which, according to BeauHeu, " is lost in the night of time," imposed upon the executive the duty of coming in person before the assembly should he desire a grant of money. Many other citations might be made in evidence of the antiquity and universality among all peoples of Western civilization of this fundamental principle which, historically at least, must be re- garded as the basis of all budgetary legislation. The relation of fiscal affairs to the development of consti- tutional government appears most clearly in connection with the later history of the English people. After the downfall of feudalism, and the consequent political enfranchisement of the great body of the people, a struggle arose between the sovereign, who claimed exclusive privileges, and the com- mons, who claimed to represent the people. It was the principle of democracy arrayed against the principle of monarchy; and as the feudal lords on the occasion of the Great Charter asserted as a primitive right the right of con- senting to supplies, so now the representatives of the nation asserted as an inheritance of the past this same primitive right. The struggle between the commons and the crown is too familiar a chapter of history to warrant our dwelling at this * Creasy, The Xise and Progress of the English Constitution, pp. 183, 184. f Leroy-Beaulieu, Traittf ,if la Srience des Finances, Vol. II, p. 4. REL/tTION TO CONSTITUTIONAL GOVERNMENT. 109 time upon the events which it narrates. The result of that struggle was a concession to the commons of the right of control over the source of public supplies. Speaking, then, historically and for peoples whose govern- ments recognise constitutional limitations, the budget is not merely a report from the administrator to the legislature upon the finances of the country, but it involves a constitutional right that such a report shall be made in order that the people may control the finances of the nation.* Indeed, the extent to which this right is recognised may be regarded as one of the surest indications of the degree to which popular government is developed. The fundamental law of every State which pretends to enter upon a constitutional regime contains some specific mention respecting the fiscal rights of the people, or of the popular legislative branch which is com- monly accepted as representing in a peculiar manner the in- terests of the people ; and as preliminary to the further study of budgets it may be well to consider briefly the form in which these rights are expressed. (2) Basis of Budget Right in England. — In England the constitutional fiscal rights of the House of Commons are three and as follows : First. The right of consenting to the imposition of taxes, of raising the rate of existing taxes, or of the renewal of pe- riodic taxes. Second. The right of consenting to public loans in every case. Third. The right of consenting to expenditures ; that is, of making specific grants for specific purposes, and of limiting * The importance of the right of popular control over finance to a well-administered State has never been more vigorously expressed than by de TocqueviUe in his treatise upon L'ancien regime d la r/volu- tion. He says: "I dare to affirm that upon that day when the nation, fatigued by the long disorders which accompanied the activities of King John and the fall of Charles the Sixth, permitted the kings to establish an impost without its consent, and when the nobility had the cowardice to permit the third estate to be taxed provided only that it itself was exempt — on that day there were sown the seeds of all the vices and all the abuses which worked themselves out in the ancient r/gime during the rest of its life and which caused its violent death." — Stourm, Le Budget, p. 35. no GENER/IL CONCEPTION RESPECTING BUDGETS. such grants to a specific time. Such is the legal basis of the English budget. (3) Basis of Budget Right in France. — Since the Revolution of 1787 the French people have lived under eighteen different constitutions ; all of them, however, recognise the right of the representatives of the people to control fiscal affairs. Al- though the form of government in France may still be re- garded as a political question, the lesson of absolutism seems to have been thoroughly learned, and all the constitutions of the present century have been in substantial conformity with the principles laid down in the Constitution of 1787, so far as questions of fiscal right and procedure are concerned. This principle was also asserted in the Declaration of Rights. In Art. XIV, sec 9, of that Declaration may be found the following : " All citizens have the right of proving either by themselves or their representatives the necessities of public contributions, to consent to them freely, to . scrutinize their employment, to determine their amount, their assessment, their collection, and their duration." The Constitution of 1789 had three statements which may be accepted as the basis of the French budgetary system : First. It is stated in section 5 that no tax, impost, charge, duty, or subsidy can be established without the free consent of the representatives of the nation. Second. It is stated in Article VI that the representa- tives of the nation ought to hold surveillance over the em- ployment of subsidies. In consequence the administration ought to render a strict account to them. Third. It is stated in Article VII that the ministers and the other agents of royal authority are responsible for every in- fraction which they commit against the laws, whatever may be the order they have received. (4) Basis of Budget Right in Germany. — It lies in the theory of the German Government that the representatives of the people should control expenditures, although the machinery for working out that control is not as yet fully developed. The principle finds expression in the Prussian Constitution of 1850, which grants in a definite manner to the representa- tives of the country the right to control through their vote public receipts and public expenditures, and German publicists are fond of narrating the foUowinj; incident as proof of the RELATION TO CONSTITUTIONAL GOyERNMENT m loyalty with which this constitutional provision is regarded. In 1862, a plan for reorganizing the army having been sub- mitted, the deputies of the Prussian Landtag refused to make an appropriation for carrying out the proposed reorganization. Without narrating the incident in detail, or reviewing the arguments by which the measure was urged, it is sufficient to say that the reorganization of the army was carried through without the consent of the representatives of the people. The question was a matter of controversy for several years. When, however, in 1866 the battle of Sadowa demon- strated the merit of the reforms in the military by the victory of Prussia over Austria, and the Prussian people in conse- quence were well disposed toward the government, the king of Prussia asked the pardon of the deputies for his illegal act. " The public expenses made during this period," said the king, " were without legal sanction," and he requested of the Landtag a vote to legalize what the government had thought it wise to do. It would be foolish to grant to this incident all the significance which the German publicists as- sert for it, but it at least shows that the constitutional lawyers of the Prussian kingdom did not regard success an adequate sanction for the fracture of a clearly expressed constitutional provision. In the Constitution of the German Empire adopted in 1871 the following articles are to be observed as bearing upon the legalization of financial measures. Article 69 affirms that " all income and expenditure of the empire must each year be estimated and brought into the imperial accounts." This, it will be noticed, does not state that all income and expenditure must be voted each year, but that the budget, so far as it is a report, must be comprehen- sive and complete, Article 70 defines the sources of im- perial income. Article 71 states that common expenditures must, as a rule, be agreed to (bewilligf) each year, although in certain cases a grant extending for a longer period may be allowed. Article 72 imposes upon the Imperial Chancellor the duty of laying before the Bundesrath and Reichstag an annual statement respecting the expenditure of the imperial income. These articles, like all constitutional provisions, bear the meaning placed upon them by the laws passed to secure their enforcement, but a casual reading must give rise to the 112 GENERAL CONCEPTION RESPECTING BUDGETS. impression that the influence of the people upon the general poHcy of government by means of their control over income and expenditure through the popular branch of the govern- ment—that is to say, the Reichstag— is much less direct than in the case of England or France; and this impression will be strengthened when the nature of that influence is sub- jected to a more careful analysis. No special provisions are made for the enactment of financial laws, these being re- garded in all particulars in the same manner as other legis- lative enactments, and subject to the general rules which control the exercise of legislative power. Indeed, it is a significant fact that the articles of the Constitution referred to above, and which may be regarded as providing the basis of German budgetary legislation, pertain primarily to matters of administration rather than to questions of fundamental right. The " agreeing " to appropriations provided for in Article 71 is, from the constitutional point of view, an essen- tially different act from the consent of the House of Com- mons in the case of English fiscal legislation, as will be seen when the effect of a failure to agree, or to consent, to pro- posed governmental measures in the two countries is con- sidered. It should be noted further that the Constitution itself is regarded as complementary to the fundamental provisions of the established institutions of the land, and must be inter- preted in the light of its relation to these institutions. When, for example, in Article 71, it is asserted that common expendi- tures should be agreed to each year, the words do not quite mean what they seem to imply. German jurists assert that the power of the Reichstag to withhold supplies is limited by the established institutions and principles of the empire. Thus the Reichstag cannot deny those supplies essential to the carrying on of the government. Expenditures are divided into two classes : first, those which can be withheld, or " op- tional expenditures " ; and second, those which cannot be withheld, or " necessary expenditures." For all supplies of this second class — that is to say, those necessary for the main- tenance of the established governmental institutions — the con- current vote of the Bundesrath is necessary before they can be legally withheld. It thus appears that the popular branch of the legislature has at most a veto power upon expenditures, RELATION TO CONSTITUTIONAL GOVERNMENT. "3 and this veto power is limited in its exercise. The German Empire is doubtless a constitutional government, but it is not a popular parliamentary government in the sense in which that phrase is commonly understood ; and the budget as a means of exercising control over governmental policies is, in Germany, in a decidedly rudimentary state. (5) Basis of Budget Right in the United States. — The funda- mental law of the United States upon financial matters, as, indeed, upon all others, is found in the constitutions of the Federal Government and of the several States; and it may be said of all these constitutions that it is their aim to secure to the people absolute control over income and expenditure, and in this manner to guarantee to them supreme influence over governmental policies. Omitting from consideration the constitutions of the several States, there may be found in the Federal Constitution four provisions designed to accompHsh this end. First. In Article I, sec. 8, clause 12, it is stated that " no appropriation of money [for the support of armies] shall be for a longer term than two years." In view of the use to which standing armies were put in the eighteenth century, and of the practice, more or less prevalent, of employing mer- cenaries for the purpose of military service, and, further, in view of the popular jealousy with which a strong central au- thority was regarded at the time the Constitution was adopted, it is not strange that this provision should have found place in the fundamental law of the land. Whether or not this clause would be inserted in the Constitution were that instrument in process of formation to-day is a question respecting which there may be some difference of opinion. There are, howiever, many who, in view of current events, profess, even at the present time, to regard this clause as of paramount impor- tance to the realization of popular government. Second. In Article I, sec. 9, clause 7, it is asserted that " no money shall be drawn from the treasury but in con- sequence of appropriations made by law," a provision designed to impose responsibility for expenditures upon Congress, and to provide against any encroachment by the executive upon the rights and prerogatives of the people. Third. It is further asserted in the same article that a " regu- lar statement and account of the receipts and the expenditures J 14 CENERy4L CONCEPTION RESPECTING BUDCET5. of all public money shall be published from time to time." In this clause is found the constitutional necessity for a re- port, which, as already stated, is the first form in which a budget makes its appearance, the demand for which by the representatives of the people was, as a matter of historical record, the first step toward th^ealization of popular govern- ment. It is interesting to not'ice that the phrase " from time to time " was never interpreted to mean an annual report until 1800, and that so long as the Federalist party was in control of government the question as to the nature of these reports from the Treasury Department to Congress was con- tinually in dispute. In that' year, however, largely through the influence of Albert Gallatin, a law was passed which provided for an annual report. By this law the provi- sion of the Constitution referred to was given effect, and its result has been, what was undoubtedly the purpose of the framers of the Constitution, to increase the importance of the legislative body in matters of public policy by giving to it absolute control over all questions of income and expendi- ture. " The law undoubtedly increased the power of Con- ' gress over money matters, and this power was still further increased by the creation of a House Committee of Ways and Means, with well-defined duties and privileges. From this time on the control of the Secretary of the Treasury grew weaker and weaker, until finally the House, through the Com- mittee of Ways and Means, became the sole judge of all kinds of budgetary legislation. Occasionally there was a Secretary who, by superior force of character, so imbued the House with a belief in his ability to manage the finances that his plans were accepted almost without question ; but as a general rule the chairman of the Ways and Means Committee had far greater influence than the Secretary of the Treasury in the preparation of financial measures." * Fourth. The fourth provision of the Constitution which presents itself in seeking for the legal basis of the American budget relates to the origin of revenue bills. In Article I, sec. 7, clause i, it is asserted that " all bills for raising revenues shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other * The Control of the Purse in the United States Government, by Ephraim D. Adams, Ph.D. REL/ITIOh! TO CONSTITUTIONAL GOVERNMENT. "S bills." So far as formal expression is concerned, this is an unique feature of the Constitution of the United States and of those constitutions modelled upon it, although the end which it aims to secure is recognised by all peoples who en- deavour to realize popular government. The minutes of the convention which framed the Constitution do not indicate that this provision was regarded as of very great importance. " Many considered it the most convenient ground on which to base a compromise, others thought it necessary in order to secure the adoption of the Constitution by the people, while there were a few who were either in favour of it because of a firm belief in the principle or were opposed to it because of an equally firm disbelief in the wisdom of such a provision. " It was, however, of very little importance that the ma- jority of the framers of the Constitution did not regard the restriction of the origination of money bills to the House of Representatives as a great constitutional principle, for the people did regard it as such, and Gerry was right when he said that the presence or absence of such a provision would have much to do with the acceptance of the Constitution by the people. That this provision has come to be regarded as a constitutional principle is clearly shown by the fact that many of the State constitutions which have been either altered or adopted since 1787 contain sections al- most, and in many cases exactly, similar to Art. I, sec. 7, of the Constitution of the United States. It cannot be said that the principle of the English Constitution in this matter was accepted by the constitutional convention and therefore placed in our form of government. But once placed there it was accepted by the people as what they were pleased to call " a self-evident truth " ; and it has been believed by the American people ever since the adoption of the Constitu- tion that the people, through their representatives, should control the extent and purpose of taxation." * From the above summary it is evident that budgets rest upon the fundamental law of states, and assume an impor- tance in proportion as the people or their representatives con- sciously aim at control over public policies. The treasury is the heart of the State. " Money is the vital principle of the body politic." He who controls the finances of the State * Adams' The Control 0/ the Purse. n6 GENER/1L CONCEPTION RESPECTING BUDGETS. controls the nation's policy. Constitutionalism is the idea, budgets are the means by which that idea is realized. Not until the proprietary conception of government shall again attain supremacy, as was the case under the absolutism of the French monarchy, will the question of budgets aifd budgetary legislation cease to bear a popular as well as a scientific in- terest CHAPTER II. CONCERNING THE PREPARATION OF THE BUDGET. By Whom should the Budget be Prepared ? (i) General Considerations. (2) Practice in England. (3) Practice in Germany. (4) Practice in the United States. (5) Criticism on the American Practice. "What should be the Date of the Fiscal Year? Respecting the Rules for Making Estimates. (i) Practice in the United States. (2) Practice in France. What should be the Form of the Budget? Having considered budgets in their relation to popular government, we are now prepared to enter upon an analysis of their form and to undertake a study of the many detailed questions which arise respecting them. There is no room here for original method in treatment. The general order of presentation seems to be fairly well established, and that order will in the main be adhered to in the analysis that fol- lows. It is probable, however, that this analysis may receive a slightly different colouring on account of the fact that all questions of detail will be treated from the point of view of the American Constitution; and, as was pointed out in a previous chapter, this Constitution is peculiar in the care with which the principle of the separation of governmental func- tions and the balance of governmental powers are worked out. A budget passes through three stages in its progress to hifitory ; the first pertains to its preparation, the second to its legalization, the third to its execution. The present chapter has to do with the preparation of the budget. 22. By Whom should the Budget be Prepared? — ^The first question that arises in connection with the preparation IlS PREPARATION OF THE BUDGET. of the budget inquires what public officer or department of government should be charged with the duty of making fiscal estimates and financial proposals, and of presenting them as projects of law. We shall first answer this question in a general way, and then state the practice in England, Ger- many, and the United States. (i) General Considerations. — ^Wherever fundamental law al- lows the executive to be an active member of the legislative body the preparation of the budget should be the act of the government, that word being used in its strict parliamentary sense. This is true because the government is directly re- sponsible for the fiscal policy of the State, and should "be free to control that policy. No other answer is possible in those countries which seek to realize efficiency of administration on the one hand, and the liberty of the subject on the other, through the principle of political responsibility. This will be seen more clearly when we consider the practice in Eng- land. In addition to this general reason for imposing upon the administration the duty of preparing the budget, one or two minor considerations may be mentioned. There is greater likelihood that impracticable theories which look well on paper, but which cannot be realized in practice, will be ex- cluded from the fiscal policy if the administration, whose duty it is to execute the budget, shall have a controlling voice in its formulation. Again, the men who are responsible for the administration of the government are, by virtue of their offi- cial positions, better acquainted with the details of financial questions than any other body of men, and on this account it may be presumed that the budget if prepared by them will be well adjusted even in its initial stages. Or, should it be recognised in the course of subsequent discussion upon the budget that it has been carelessly prepared, or prepared in ignorance of the real needs of the State, it lies in the work- ing of responsible government that the body of men thus convicted of carelessness or ignorance should resign in favour of those who have successfully criticised them. This being the case, it may be assumed that the preparation of the budget by the government insures for this work the best talent placed at the disposal of the public. Yet another reason for placing the preparation of the BY IVHOM PREPARED. 119 budget in the hands of the administration, though it may pos- sibly be regarded as an application of the reasons already given, is found in the fact that under such circumstances there is greater likelihood that an harmonious budget will be even- tually voted than would otherwise be the case. Harmony or balance is accepted as one of the most important marks of a well-adjusted budget. The harmony in question is of two sorts. The first pertains to a balance between the estimated and the executed budget, while the second has in view a just apportionment of the aggregate of public expenditures to the various lines of public service. An harmonious budget in this sense of the phrase can only be expected where responsibility for the form in which the budget is voted is direct, personal, and complete. Such considerations as these justify the conclusion that where the fundamental law of the State permits the government to come into parliamentary relations with the legislative body, the budget should not only be prepared by the government, but the government should have control over it at all of its stages. ^^ (2) Practice in England. — The above considerations reflect fairly well the practice in England. In this country the cabinet, by which the government is administered, is in reality a committee of the House of Commons, and, so far as finan- cial measures are concerned, is held to absolute and unlimited responsibility for all its acts. Though a single body, it acts in many capacities. As executive it draws up and presents to the legislature a report upon the manner in which fiscal laws have been administered in the past; as member of the legislature it presents its financial policy as a project of law which of necessity must reflect the public policy for which it asks grants and supplies ; as " the government " it pre- sents to the legislative body, whose support it seeks, such arguments as may be urged in favour of the policy submitted. Nothing could be simpler or more effective than government by a committee responsible to the popular branch of the legis- lature. It is because of its simplicity, its efficiency, and of the degree of responsibility which it realizes that this organi- zation has received so general a support from students of political science. The above statements, however, do not give full expression to the degree to which the responsibility of the cabinet in 120 PREP/I RATION OF THE BUDGET. England in matters of money is carried. The estimates of the fiscal needs must of course come, in the first place, from the heads of the various departments of government, who, in their turn, are obliged to rely upon the detailed knowledge of subordinate officers who have charge of bureaus or divi- sions. Now, according to English practice, the Chancellor of the Exchequer is given a constitutional control over the estimates of the departments and of the subordinate officials. This does not mean that he is granted a legal right to modify their estimates, but, as the theory of responsibility has worked itself out in England, he does, by virtue of the necessity of defending the budget as a whole before the House of Com- mons, and of securing support for it from that body, have a controlling voice in determining both the aggregate of grants to be asked, and the apportionment of that aggregate to the several lines of expenditure. This is a characteristic feature of English practice. It is an extreme application of the prin- ciple of administrative centralization, and would be incompati- ble with the idea of political liberty were it not that the power thus centralized is wielded under the restraints of immediate and direct responsibility. There is perhaps no other country where this principle could work as smoothly and successfully as in England ; and the fact that it succeeds in England can- not be accepted as proof of its adaptability to other states and other conditions. (3) Practice in Germany. — In Germany, and indeed in all countries whose constitutions are of the monarchical rather than of the popular type, practically the same adjustment is arrived at as in England, so far as the form of procedure is concerned ; but the results which follow are essentially dif- ferent. Holding in mind the Imperial Constitution rather than the Constitution of the States, the government, in its double capacity of executive and legislature, is charged with the preparation of the budget as a report, and in connection with the Bundesrath of converting this report into a pro- ject of law. It is true that the members of the Reichstag are granted the right of initiative, that is to say the right of pro- posing finance bills, so that a project of law might, so far as constitutional privilege is concerned, be drawn up and voted independently of the government ; but, inasmuch as the Im- perial Chancellor is responsible to the sovereign for his ap- BY 1VHOM PREPyiRED. 121 pointment, and can retain his office even though he fail to be supported by the majority of the popular branch of the legisla- ture, and in view of the constitutional principle that the sove- reign can alone give authority to law, such a measure would be abortive, except it be accepted by the Imperial Chancellor and made a government measure. It is quite conceivable that as a means of educating the German people to an appre- ciation of the true nature of their government the Reich- stag might be induced to draw out and to vote a budget of its own making. Such a step, however, would be revolu- tionary, and if successful would result in shifting the centre of real power from the sovereign to the representatives of the people. Thus, while it may be true that the German people follow the same general method in the preparation of the budget as the English, the responsibility for this act, both as regards its nature and its residence, is of an entirely different sort. It need hardly be added that under the German sys- tem the government exercises an effective control over the many centres from which the parliamentary estimates are drawn. An harmonious budget, therefore, may be expected in Germany, as in England, so far as that result is dependent on the centralization of authority in its preparation.* (4) Practice in the United States. — The peculiar feature of the Federal Constitution of the United States, and of consti- tutions of the American type, is found in the separation of governmental functions for which it provides. It was be- lieved that the best results would follow should each de- partment of government be independent in the performance of functions assigned to it. As a result of this adjustment Y no governmental task whatever can be performed without the concurrent acts of these independent repositories of political authority. In England the House of Commons is sovereign; in Germany the centre of government is Im- perial authority; in the United States there is no one department which may be called sovereign or the centre of sovereign authority. In view of the separation of govern-"^! mental authority prescribed by the Constitution of the United ; States, it follows that the budget cannot be prepared as a complete document either by the executive or the legislative ^' * This paragraph does not undertake to suggest the relations that exist between the Imperial Chancellor and the Bundesrath. 122 PREPARATION OF THE BUDGET. branch of government. As a report upon the condition of finances, upon the efficiency of fiscal laws, and as the first step in the estimates for the ensuing fiscal period, it is the act of the executive department; as a project of law, however, it must from the nature of the case be an act of the legislative body. Thus the preparation of the budget in the United States may be accepted as a political process different in character from that of either England or Germany; and, inasmuch as a considerable number of constitutions are framed upon the American model, it is as a type and not as an isolated case that its merits and defects must be considered. It will be of assistance to describe somewhat in detail the process by which the budget comes into existence in the United States. The Constitution requires that " a regular statement and account of the receipts and expenditures of all public moneys shall be made from time to time," and it goes without saying that this must be the work of the official at the head of the Treasury Department. By the law of May lo, 1800, it was provided that this report should be laid before Congress at the beginning of each ses- sion, and that it should be a report on the subject of finances " containing estimates of the public revenue and the public expenditure, and plans for improving or increasing the revenue " ; but it was specifically added in the law that this should be done " for the piirpose of giving information to Congress." ■ From the above statement it is evident that the line of separation between the executive and the legislative function for which provision was made by the framers of the Consti- tution was regarded as of great importance by subsequent legislators. Were there any doubt of this, ample evidence could be secured from the debates of Congress previous to the law cited respecting the clause which imposes upon the Secre- tary of the Treasury the duty of including in his report a fiscal " plan." There were those who objected to this when in 1789 the matter was first brought up. " It might be well enough," said one of the members, " to enjoin upon him [the Secretary of the Treasury] the duty of making out and pre- paring estimates, but to go any further would be a dangerous innovation upon the constitutional privileges of this House; it would create an undue influence within these walls, because BY IVHOM PREPARED. 123 members might be led by the deference commonly paid to men of abilities who give an opinion in a case they have thor- oughly studied to support the minister's plan even against their own judgment." * Another member spoke in the course of his argument as follows : " Does not the Constitution ex- pressly declare that the House solely shall exercise the power of originating revenue bills ? Now what is meant by report- ing plans ? It surely includes the idea of originating money bills, that is, a bill for improving the revenue, or, in other words, of bringing revenue into the treasury. For if he is to report plans they ought to be reported in a proper form and complete. This is giving an indirect voice in legislative busi- ness to an executive officer. . . . But if my construction is true we are giving up the most essential privilege vested in us by the Constitution." -}■ ,, As against this view it was urged that so long as Con- gress was free to accept or reject the plan of the Secretary as the basis of the legislative bill no constitutional privilege had been abandoned by imposing upon that officer the duty of sub- mitting a plan. It was this sensible opinion which finallyv prevailed. The debate is significant, however, in that it shows that the difference between the budget as a report and the budget as a project of law was early recognised, and that the statesmen who framed the Constitution were loyal to the prin- ciple which rendered such a distinction necessary. The report of the Secretary of the Treasury is a document ^^ of from fifty to an hundred pages. It begins with a condensed statement of receipts and expenditures for the year passed, which is commonly followed by a comparative statement showing the decrease or the increase by items during the year. Then come an estimate of revenue and an estimate of expen- ditures for " the present fiscal year " upon the basis of existing laws. These estimates, so far as expenditures are concerned, are the totals taken from a detailed and itemized statement of all the branches of the public service, which, as the " Book of Estimates," are submitted to Congress, and which may be regarded as an appendix to the Secretary's report. The formal text of the report begins after the results of the estimates are made known, and presents in a condensed form the condition * Mr. Page. Cf. Annals of Congress, Vol. I. p. 592. f Mr. Gerry. Cf. Annals of Congress, Vol. I. p. 601. 124 PREPARATION OF THE BUDGET. of the various divisions or bureaus or offices of the Department of the Treasury, and calls attention to recommendations or sug- gestions of subordinate treasury officials for the advantage of their respective services. The report of the treasury officials to the Secretary are commonly bound up with the Secretary's report as appendices, making in the aggregate a volume of from twelve to fifteen hundred pages. These reports are designed to give a complete exhibit of the condition of the treasury and of the views of those who are responsible for its efficient administration. That portion of the Secretary's comments made in obedience to instructions to submit a " plan " for the con- sideration of Congress is of course the most interesting and significant. The subjects discussed are as comprehensive and various as the several divisions of the Department of the Treasury,* and go far beyond the strict limits of budgetary considerations. Currency, banking, the mint, the independent treasuries, the rules for collecting revenue, and many other kindred topics are subjected to discussion according to the exigencies of the service or the needs of government. There is no public document regularly published which reflects so clearly the current history of the nation as the annual report of the Secretary of the Treasury. On one occasion at least it gives rise to the suspicion of having been written with the purpose of influencing the nation's foreign policy.f But notwithstanding the great importance of this report and of the influence frequently exerted by means of it, the re- port itself does not pass beyond the first stage of the formal budget. It is a report for the instruction of the legislative body, nothing more. The fact that it is presented in the form of a " plan " and is commonly expressed in the language of a government policy does not change in the least its real character. The " plan " is not recognised by the Constitu- tion as a governmental policy, and cannot become such a policy by any act of the executive. It is not too much to say that the Secretary of the Treasury can exercise no constitu- tional influence upon fiscal legislation. He has no right to appear upon the floor of the House of Representatives in * For statement of the organization of the Treasury Department see § 34. + Gallatin's report of 1807. BY IVHOM PREPARED. 125 order to explain or urge his plan ; and his appearance in any of the committees of either the House or the Senate is a courtesy, and not a constitutional right. In the United States the budget as a report is absolutely severed from the budget as a project of law. The preparation of the former pertains to the executive, that of the latter to the legislative, department of government. The report of the Secretary of the Treasury, together with '^ the Book of Estimates, having been submitted to the Speaker of the House of Representatives, it is referred by the Speaker to the appropriate committees, and from this point on until an approved bill is submitted to the President for his signa- ture the constitutional control over financial legislation lies entirely in the hands of Congress. A word may be necessary respecting the committee system in order to explain the preparation of those financial bills which taken together constitute the budget in its second stage. The most important of these committees is that on Ways and Means, which in 1795 was made a standing committee to hold during the session of the Congress by which it was ap- pointed, and in 1802 was given a permanent place in the parliamentary organization of the House of Representa- tives. As constituted in 1802 the Committee of Ways and Means was charged with two distinct and comprehen- sive lines of duty. In the first place it was " to take into \> consideration all such reports of the Treasury Department, and all such propositions relative to the revenue, as may be referred to them by the House; ... to inquire into the state of the public debt, of the revenue, and of the expendi- tures ; and to report from time to time their opinion thereon." In the second place it was stated that " it shall be the duty of^^ * this committee ... to examine into the state of the several public departments, and particularly into the laws making appropriations of money, and to report whether the moneys have been disbursed conformably to such laws, and also to report from time to time such provisions and arrangements as may be necessary to add to the economy of the departments and accountability of their officers." It is the first of these lines of duties with which this study is at present especially concerned, that is to say, the task of raising public revenue and of localizing its expenditures. It 126 PREP/IRATION OF THE BUDGET. is significant that the resolution does not call for a report from the Committee of Ways and Means in the form of a bill, but states explicitly that the report shall be a " report of opinion." This doubtless reflects the jealousy with which the House regarded any possible curtailment of its authority. At the present time, however, it is the universal practice of this committee, as also of other finance committees, to report in the form of bills. According to accepted practice the Com- mittee of Ways and Means has almost exclusive control over that side of the budget which has to do with the raising of revenue. Its preparation is under the control of the commit- tee, and, as a rule, the work is performed in the committee. Without pausing to call attention to the several experi- ments which were tried from time to time, it is pertinent to notice that in 1865 the duties assigned to the Committee of Ways and Means were modified in a marked degree by the creation of a Committee on Appropriations. The mover of the amendment by which this committee was created ex- plained that it was designed to divide the work of preparing finance bills between two committees, and in this way to secure greater care and greater economy in the management of the government finances. The duties of this new commit- tee as presented in paragraphs 76 and yy of the Rules of the House are as follows : * Rule 76 : " It shall be the duty of the Committee on Ap- propriations to take into consideration all executive com- munications and such other propositions in regard to carry- ing on the several departments of government as may be presented and referred to them by the House." Rule yy : " It shall also be the duty of the Committee on Appropriations within thirty days after their appointment at every session of Congress, commencing on the first Monday of December, to report the general appropriation bills for legislative, execu- tive, and judicial expenses ; for sundry civil expenses ; for - consular and diplomatic expenses ; for the army ; for the navy; for the expenses of the Indian Department; for the payment of invalid and other pensions; for the support of the Military Academy; for fortifications; for the service of * Rules of Order of 37th Cong., House Journal, 1863-63, 3d Sess., Appendix, p. 632. Also Cong. Globe. 2d. Sess., 38th Cong. pp. 666, 1311-1317. BY IVHOM PREPARED. 127 the Post-Oflfice Department and for mail transportation by ocean steamers; and in failure thereof the reasons for such failure. And said committee shall have leave to report such bills at any time." It will be noted that among the duties of this committee is that of rendering its report on appropriations in the form of bills, which from the constitutional point of view- makes the committee of a decidedly different character from the old committees, which were to report " opinions." It shows that the House of Representatives had abandoned the attempt to "originate" money bills, as that phrase was understood in 1789, and that American practice had moved in the direction of committee responsibility as the solution of the problems of parliamentary procedure imposed upon this country by the separation of governmental powers. A third committee should be noted in this connection. In 1883 the Committee on Rivers and Harbours was created to study and prepare such bills as pertain to appropriation of moneys for the improvement of rivers and harbours. Two years later this tendency was carried yet further. It happened in that year that the gentleman who had for several years been chairman of the Committee of Ways and Means was at variance with the leaders of his party, and with the adminis- tration, upon the subject of the tariff. For certain political reasons, however, it seemed wise for the Speaker of the House to continue him in the chairmanship of that committee. It will be remembered that appropriation bills take precedence of other legislation, being bills of the highest privilege, and the chairman of the Committee on Appropriations did not hesitate to use his power to obstruct any legislation not ap- proved by him. At the beginning of the Forty-ninth Con- gress it was determined by the Speaker to take from the juris- diction of the Committee on Appropriations the majority of the appropriation bills, and after a sharp contest this was done. Thus the bill for the support of the diplomatic service was given to the Committee on Foreign Affairs, the bill for the support of the military establishment was given to the Com- mittee on Military Affairs, the bill for the support of the naval establishment was given to the Committee on Naval Affairs, the bill for the support of the Indian service was given to the Committee on Indian Affairs, and the bill for the support of V 128 PREPAR/ITIOn OF THE BUDGET. post-offices and post-roads was given to the Committee on Post- offices and Post-roads. This left to the Committee on Appropria- tions only the executive, the administrative, the judicial, the pension, the District of Columbia, the deficiency, and the per- manent appropriation bills. The practice thus established has been maintained to the present time. It thus becomes evident that the tendency in this country is towards the dis- persion of responsibility for financial legislation, rather than towards the concentration of responsibility in the hands of a single committee. Going back now to the main question from which this in- , quiry started, it appears that the preparation of the budget I in the United States is begun by the executive department of government. The communication from the executive de- partment may be in the form of a note from the President as well as a report from the Secretary of the Treasury. Only under unusual conditions would other members of the cabinet venture to submit recommendations embracing estimates of expenditures, although, as will shortly be explained, officials of minor offices do make personal appeals to the members of the various appropriation committees for modifications of the Secretary's recommendations. The budget as it leaves the hands of the executive is submitted in the form of (i) a report upon the execution of existing fiscal laws for the past fiscal period ; (2) an estimate of the fiscal needs of government for the period about to be entered upon ; (3) an outline of the policy upon fiscal affairs which may be accepted as an ex- pression of the desire of the administration. This document, or documents, being accepted by the Speaker of the House of Representatives, is referred to the several committees con- cerned, to be used by these committees in such manner as they shall see fit. According to the usual practice the re- port and the estimates of the Secretary of the Treasury are made the basis of fiscal legislation, but there is no legfal or constitutional requirement to this end. f^j , The preparation of the budget in its second stage is wholly 1^ a legislative act, and in this country is performed by the ap- propriate committees. These committees may adopt the executive recommendation as the basis of their bills, in which case they convert tlie advice of the executive into a legally expressed governmental policy for the consideration of the BY IVHOM PREP /I RED. 129 legislature; or they may ignore the recommendations of the administration and prepare bills according to their own liking. (5) Criticisms upon the American Practice. — ^The evils which arise in connection with the An;erican method of preparing money bills are three and as follows : First. The treasury official, who is nominally responsible; for the estimates submitted to Congress, is given no consti- ! tutional or legal authority to control them. His duty is ! largely clerical. Accepting the estimates of the heads of the various independent departments and bureaus of the i government, he causes them to be classified and summarized, ! and transmits the result as the Book of Estimates.* He feelsy no official responsibility for the amounts which it contains, nor is there any guarantee in the manner in which the esti- mates are brought together that they reflect the fiscal needs of the government economically administered, or that a just balance is maintained between the appropriations to the va- rious branches of the pubHc service, as would be the case were the Book of Estimates recognised as the basis of all legislation upon appropriations. As an individual or as a member of the cabinet, and through cabinet courtesy, he may doubtless in- fluence somewhat the estimates of the various departments. In his capacity of auditor also he may call attention to the necessity of greater economy in certain departments than the officials in charge have seen fit to recommend ; but inasmuch as the authoritative opinion on expenditures as presented to the legislature is that of the Committee on Appropriations and other committees rather than of the Treasury Department, the Secretary feels no imperative necessity of presenting the esti- mates in the shape in which, according to the administrative policy, they ought to become law.f This must be recognised * " The estimates of this department are submitted as made up by the officers in charge of the public duties to which they respectively per- tain, and while exceeding those of last year by the sum of 11,699,332.69, they are in excess of the appropriations made for the department at the last session of Congress only to the extent of I608.55." From the 1881 Report of the Secretary of the Treasury, p. vii. + The Secretary of the Treasury cannot be constitutionally, the possessor of that " ferocity " which, according to M. Thiers, ,is,:ess^n- tial for a successful Minister of Finance. The following is quoted l?.y Stourm as indicating the quality or character that must be displayed by one intrusted with the administration of public expenses. After 13° PREPARATION OF THE BUDGET. as a serious defect, and one which will inevitably lead to serious evils. Each department, freed from all control, freed also from that sense of responsibility which comes with the contemplation of the ways and means to meet expenditures, and incited by the desire to increase its relative importance in the govern- ment by increasing the money voted for its support, will esti- mate its needs in a very lavish manner. The aggregate of expenditures asked for will, under such conditions, be greater than under a system which recognises the estimate of the ad- ministration as the final and authoritative estimate. If to this be added that the Committee on Appropriations, when it undertakes an analysis of the estimates, consults with the heads of the various departments and bureaus, and even with sub-officials of the departments and bureaus, rather than with the Secretary of the Treasury as the representative of the ad- ministration in matters of expenditure, it is easy to see how inter-departmental emulation and private interests will tend to swell the aggregate of expenditures. There is thus dis- closed a most serious defect in the American system of prepar- ing money bills. This defect might in part be removed should the Committee on Appropriations recognise the Secre- tary of the Treasury as the only means of financial communica- tion between itself and the administration. Such a ruling would be a reform in the direction of concentration of re- sponsibility, and as such would be in perfect harmony with the theory of an effective popular government. This proposal will be further considered when the question of reform is taken up for discussion. Second. The second difficulty in the attainment of good results under the American practice is due to the separation of responsibility in the preparation of the budget in the legis- lative body itself. The Committee of Ways and Means has praising M. Mange for " sweet temper and rare good sense, qualities of great importance for one who administers public finances," M. Thiers continues his address as follows : " To this praise, if you permit me, I desire to add a slight reproach [" Ah ! ah ! "], but very slight. I shall not reproach M. Mange for the lack of any good quality ; no ! I shall reproach him for the lack of a certain fault. This fault (I search for a word to characterize it; I am obliged to employ one a little strong, but jrou will pardon me), this fault which M. Mange lacks is a certain ftrocity which I regard as indispensable to a Minister of Finance." CI. Stourm, /,/ Budget, p. 63. BY IVHOM PREP/4 RED. 13* to do with raising revenue ; the Committee on Appropriations has to do with expenditures. These are independent com- mittees of equal and coordinate authority. Were they both obhged by custom, rule, or law to consult with the head of the Treasury Department relatively little harm would arise from the fact of their independence; but as it is there is no guarantee of harmony between income and expenditure. On the other hand there is every reason to expect a discrepancy between the two sides of the budget. It is true, as was asserted at the time the Committee on Appropriations was created, that this committee may consult with the Committee on Ways and Means, but the liberty to consult is essentially different as a principle in parHamentary organization from the legal necessity of consultation or the legal authority to control. Neither committee is obliged to adjust its discussion to the policy of the other. It may be said as against this criticism that the Committee on Appropriations has existed since 1865, and that no serious complaints have been heard respecting its action; but it should be remembered that during the thirty years of its life the Federal Treasury has been in constant possession of sur- plus funds. How the difificulties arising from the separation of authority will be adjusted' when the task imposed on the Committee of Ways and Means is that of augmenting the revenue rather than reducing it is a question upon which the 'experience of the United States has as yet thrown no light. The separation of the committee on expenditures from the committee on income, and the removal of both committees from any constitutional influence or legal control of the execu- tive department, leads to an unwarranted looseness in all mat- ters of fiscal legislation. In this lies the weakness of the American budgetary system ; and if, with the separation of legis- lative responsibility above referred to, it is recognised that the Committee on Appropriations is such in name only, owing to the fact that many of the important committees can bring in bills for the expenditure of public moneys, one begins to appreciate the extent to which responsibility for fiscal legisla- tion in the United States is diffused by the established practice of Congress. Third. The third defect in the method of preparing the budget as presented in the United States is due to the fact 132 PREP/tRATlON OF THE BUDGET. that the authority of the President cannot be brought to .bear upon fiscal legislation during its initial stage. Such legisla- tive authority as he possesses rests upon his right to veto bills presented for his approval, and this cannot be exercised until the bills have passed both Houses of Congress. The practical result of this is that the President has no voice in the adjust- ment of the details of finance bills, and this is equivalent to saying that his opinions are of slight importance in questions of income and of expenditure. It was undoubtedly the intention of the framers of the Con- stitution that this should be the case, but it is at least open to question whether or not they adequately appreciated the in- congruity of the situation. They did not foresee the rise and influence of standing committees. The President is the only officer elected by the people of the entire country. He is the only person who by virtue of his election may be said to repre- sent the popular will. The committees, whose powers, as will shortly be pointed out, are almost absolute in the framing of laws, are composed of men who represent congressional dis- tricts. Is it not an incongruity that in a matter of such vital importance to the entire nation as the laws for raising and disbursing revenue the men who, by virtue of their position, are the most influential are responsible not to the country at large, but to a small district of a possibly small State ? It is a matter of serious complaint that the will of the people as expressed in presidential elections is so tardily reflected in current legislation, and this in large measure is due to the inability of, the representative of the people to influence in an official manner the details of bills while yet they are in their formative or plastic state. Nowhere does this evil present itself more clearly than in connection with financial legisla- tion. 23. What should be the Date of the Fiscal Year?— Another series of questions brings into view the time element of the budget. What should be the length of the fiscal pe- riod ? What date should be chosen for the beginning of that period ? At what time in the legislative session should the budget be presented ? So far as the length of the fiscal period is concerned, the practice seems to be quite uniform. The year — that is to say, a period of twelve months' duration — is accepted as the most DATE OF THE FISCAL YEAR. 133 convenient period contemplated by fiscal legislation and fiscal administration. This does not mean that for some purposes the year may not be broken into fractional parts, or that for other purposes it may not be used as the submultiple of a longer period. In the great majority of cases, however, the unit of time is the year, and the phrase " fiscal year " is a familiar one in financial discussion. This is but a recognition of the universal practice, the reasons of which are too manifest to require statement. With regard to the date at which the fiscal year begins there is not the same uniformity in practice. Thus in France the fiscal year is the calendar year. It begins with January 1st and ends with December 31st. Formerly this was the commonly accepted fiscal period, but at the present time the majority of nations have selected other dates. After several experiments England, in 1855, adopted April ist as the be- ginning of her fiscal year, a precedent which has been fol- lowed by the German Empire, by Prussia, Wurtemberg, Den- mark, and Roumania, as also by other states. The United States used the calendar year as her fiscal year until 1844, when a change was made to July ist. This date was adopted after a somewhat extended discussion as to the relative merits of several proposed periods. Other states which accept July 1st as the beginning of the fiscal year are Spain, Portugal, Norway, Canada, and Mexico. In Belgium the fiscal year, as in France, coincides with the calendar year, but in order to overcome the difficulties incident to this practice, and which, indeed, induced other nations to adopt April ist or July 1st as the beginning of the fiscal period, Belgium has found it necessary to break the fiscal year for certain pur- poses into months, and to recognise le dousieme provisoire as a necessary adjustment in her budgetary system. The choice of the fiscal period, then, does not seem to be entirely an ar- bitrary matter ; on the contrary, it is a detail of considerable importance. The considerations by which the date for the beginning of the fiscal year is chosen are the same, in a .general way, as those which determine the time at which the budget should be presented to the legislative body. It is of course desirable that the estimates, whether of income or of expenditure, should be as accurate as possible. The budget as estimated 134 PREP/IRATION OF THE BUDGET. should harmonize with the budget as executed. In order, however, to secure this balance between estimated and actual expenditure and income it is of importance that the votes which provide for revenue and legalize expenditure should be taken as short a time as possible before the date at which fiscal laws are to go into operation. There is no way of accomplish- ing this except to place the date for the beginning of the fiscal period as short a time as possible after the date when, in or- dinary parliamentary practice, the final vote on fiscal bills will be taken. Thus the beginning of the fiscal year should, in a general way, coincide with the end of the parliamentary year. The importance of allowing as short a time as possible to intervene between the date of the vote upon the budget and the date of its going into operation will be appreciated if the source of discrepancies receives a moment's consideration. It is possible for estimates to err either on the side of income or of expenditure. Revenue from some sources may be ac- curately calculated. Thus revenue from a land tax or a poll tax may be accurately determined. Revenue which is likely to accrue from an income tax, also, provided it be of long stand- ing in a community, may be estimated with confidence. Yet even here any considerable change in the rate will so modify the inducements to concealment and false statement as to in- validate somewhat the trustworthiness of the estimate. When, on the other hand, the financier is called upon to estimate the probable proceeds of indirect taxes, such as excise duties or "duties on imports, he encounters a number of variable factors. ."Such taxes are paid by the consumers of taxed commodities, .and their proceeds consequently fluctuate with the consuming . ability of the community. Now this is a variable factor, and . one which cannot be determined with any certainty for any ^considerable length of time before the date at which the esti- imate is made. It is essential, therefore, in order to venture a tair guess respecting income, that the guess should be made at a time when the probable industrial condition of the coun- try can be foretold with some degree of accuracy. This is the reason why the final estimate — that is to say, the vote of the legislative body on fiscal matters — should be placed as closely as possible to the beginning of the fiscal year. Expenditures are perhaps capable of greatei" accuracy of estimate than income, since they are, in a measure, a matter of DATE OF THE FISCAL YEAR. 13S choice with the government. Thus the expenses of the army or of the navy in time of peace will probably be about the same from year to year. This is also true of the civil list, while payments to the sinking fund and other contractual pay- ments are capable of exact calculation. It is, however, impos- sible to estimate accurately the expenses of the foreign ser- vice, of the judiciary, or indeed of the amount which must be expended any particular year for public works. But it is true of expenditures as of income, that the less time intervening between the estimated and executed budget the greater is the likelihood of harmony and of balance. A study of the practice among various states bears testi- mony to the truth of these considerations. In, England, whose financial administration is equal to that of any other country, the time intervening between the first presentation of the budget and the date of its going into operation seldom ex- ceeds five months. The circulars calling for estimates from the various departments of state are sent out toward the end of October, and are presented to the House of Commons some time in February. Thus both the estimates and the vote are brought close to the date of execution. In the United States the report of the Secretary of the Treasury must be presented to Congress within ten days after the beginning of each ses- sion of Congress, while the committees on Ways and Means and on Appropriations are required to report to the House within thirty days from the time the estimates are submitted to them. Thus from six to seven months may be said to in- tervene between the first estimates and the beginning of the fiscal year to which these estimates apply. When, however, it is recognised that the estimates of the Treasury Depart- ment are not authoritative, but that these may be and com- monly are revised by the committees, it follows that the period between the estimated budget and the beginning of its execu- tion is much shorter. The practice in France does not commend itself to one educated in the stricter schools of English or American finan- ciering, since fourteen or fifteen months frequently intervene between the estimates of income and expenditure and the time when the laws based upon those estimates go into opera- tion. For example, the administration will begin its estimates for the year 1897 in October or November of the year 1895. 136 PREP/4R/ITI0N OF THE BUDGET. Under such conditions accurate estimates cannot be expected, since it is impossible for any one to tell so, long beforehand what the commercial condition of the country will be. It is not, therefore, surprising that the estimates in France should exert little influence upon financial legislation. Nor is it sur- prising to learn that France, of all countries in Europe, does not find it inconvenient to retain January ist as the date be- ginning its fiscal year. The conclusion of this analysis is that April ist or July ist is the best date for the beginning of the fiscal year, since in this manner the least possible time intervenes between the legalization of income and expenditure and the opening of the period to which the laws apply. 24. Bespecting the Rnles for Making Estimates. — The first step in the formation of the budget consists in making estimates of the income and expenditures for the year to be covered by the fiscal legislation of the budget in question. The importance of sound estimates arises from the fact that at no time in its brief history is the budget in so plastic a con- dition as during its initial stage ; at no time can it be brought so easily to reflect the policy of the government or the interests of the public. Should the budget go far astray in the matter of estimates it would be very difficult, if indeed possible, to bring it into shape during its progress through the legislature, for that body cannot be brought to show an equal interest in all chapters of so comprehensive a scheme of legislation, a fact due in part to the large numbers that compose it, and in part to the local character of the representation which its members sustain. Sound fiscal legislation must begin with a conservative estimate of probable receipts, and a purposeful estimate of probable expenditures. As Stourm very pertinently remarks, the qualities neces- sary for correct estimates are sagacity and integrity : sagacity to see clearly into the future, integrity to declare with truth what one sees.* It is of course impossible to cultivate these qualities, or to secure them at will for the service of the State in case they exist. The most that can be done by the Science of Finance is to inquire respecting the various methods adopted for arriving at correct estimates, and to derive from • Stourm, /.f Budget, p. 156. RULES FOR M/tKING ESTIM/iTES. < 137 such an inquiry some suggestions concerning the most appro- priate method of procedure. It is evident that the care with which the financial items of a given period may be estimated depends in large measure upon the proximity of the time at which the estimate is made to the period it is designed to cover. The bearing of this re- mark has been already suggested when discussing the date for the beginning of the fiscal year ; and from considerations then submitted it is evident that a rule for making estimates that might work well in the case of a nation which, like England, permits but four or five months to intervene between the formulation and the execution of the budget could not be followed with satisfactory results if practised by a nation which, like France, interjects from twelve to fifteen months between the beginning and the end of the process of fiscal legislation. The method followed in England, Italy, Germany, and the United States is practically the same, and consists in providing conditions that invite the exercise of sagacity. The practice in France, on the other hand, discourages the exercise of sagacity because it substitutes for an estimate an arbitrary calculation. (i) Practice in tl: United States. — As indicating the general practice among nations, the method followed in the United States mky serve for illustration. The report of the Secre- tary of the Treasury, which is submitted to Congress early in December, gives, first, the covered receipts and expenditures for the fiscal year just passed — that is to say, for the year end- ing on the 30th of the preceding June. From this statement Congress may learn the results of such laws as were in opera- tion during the period in question. In addition to this state- ment there is next inserted a statement of receipts and ex- penditures for the first quarter of the current fiscal year. This brings an accurate statement of income and expendi- tures to the close of September 30th preceding the December in which the report is submitted. The significance of this second statement is that it shows the results for three months of such laws as are in operation at the time Congress is called upon to consider further fiscal legislation. Moreover, the. accounts of the Treasury Department are kept in such a man- ner that the Secretary knows pretty well concerning the opera- tion of these laws during the months of October and Novem- 138 PREP/1RAT10N OF THE BUDGET. ber, and is, on this account, in a position to modify the esti- mates he is called upon to make by the appearance of any unusual distufbance in the orderly course of receipts or ex- penditures. Under such conditions it ought not to be diffi- cult to forecast with considerable accuracy the estimates for the remainder of the current year, since, as a matter of fact, the government has before it the actual receipts and expendi- tures for five out of twelve months of the period under con- sideration. We have not, however, come to the most difficult task im- posed upon the Secretary of the Treasury. The important estimate contained in his report pertains to the fiscal year following the current year in which his report is submitted to Congress ; that is to say, his report for the year ending June 30, 1896, must contain a statement of actual and estimated receipts for the year ending June 30, 1897, and an estimate of income and expenditures which may be used as a basis of fiscal legislation for the year ending June 30, 1898. The prac- tice usually adopted is to calculate what would be the probable receipts of the government on the assumption that existing laws should be continued, and then to modify this estimate on the basis of proposed changes in the laws or in the services to be undertaken. It is evident that the variable element in such a calculation, and the one which calls for sagacity and intelli- gence, arises from the instability of business and commercial conditions. The movements in population affecting the general consumption of a nation may be forecast with a fair degree of accuracy. Beyond this, however, there is no as- sured stability in the conditions which determine the produc- tivity of taxes. A depression in business prosperity will de- crease the revenue to the State, while unusual prosperity will tend to increase that revenue. The strength of the perturbing forces cannot be measured in any arbitrary manner, although the Secretary, in arriving at his estimates, is obliged to as- sign a definite influence to each of these forces and to make allowance accordingly. The accuracy with which governmental receipts may be es- timated for a period which lies in the future depends upon the ability of the Minister of Finance to forecast the commercial and industrial life of the period. There is perhaps no other task in connection with the administration of finance that calls RULES FOR M /IKING ESTIMATES. »39 for so comprehensive a knowledge of industrial forces, or so minute an acquaintance with statistical data.* The accumu- lated experiences of successive years will undoubtedly result in the formulation of certain rules that will prove to be of great assistance in making estimates, but these rules should always be used with intelligence and discretion. Such are the considerations urged in support of the theory so generally accepted that the only guarantee of satisfactory estimates con- sists in establishing those conditions that invite the exercise of sagacity. This is done by bringing the date of estimate as near as possible to the period for which the estimate is made, since in this manner not only is the task rendered re- latively easy, but the results of a slovenly estimate will quickly appear as a censure to him responsible for it. (2) Practice in France. — As a contrast to the general method of procedure followed by the larger number of modern nations, the practice in France bears a peculiar interest. It must be held in mind that the period intervening between the time for which the budget is estimated and the period to which it applies is much longer in France than in other coun- tries, and that a careful calculation of probable receipts is on this account rendered more difficult. The broad margin of time between the estimated and executed budget invites a play of the imagination not permitted, at least to so great a degree, under the conditions adopted by other peoples. Such being the situation, it is perhaps natural that France should have adopted an arbitrary rule for arriving at probable re- ceipts. Since the time of the Restoration it has been the accepted practice to report in place of an estimate the covered receipts of the last preceding year. To make clear what is meant the following is quoted from the speech of M. Sadi-Carnot, who was Minister of Finance in 1886. He says : " The direct taxes have been calculated according to the old method, which consists in taking for the basis of the future period the receipts realized during the last period for which the accounts are com- plete" (" c'est-a-dire, les recettes del'annee antepenultieme ").t Such a process cannot, of course, result in presenting to the * It is on this account that a well-equipped statistical bureau is essential to the equipment of the Treasury Department, t Quoted from Stourm, Le Budget, p. 158. I40 PREPyiR/ITlON OF THE BUDGET. legislature an accurate statement of probable results which can be used as a basis of fiscal legislation, and its inevitable ten- dency must be to invite the legislature, in making appropria- tions, to disregard the estimate of receipts submitted in the budget. It would be difficult to conceive of a more pernicious tendency in financial legislation than to proceed in the voting of appropriations or in the revision of revenue laws without a clear appreciation of the receipts which existing laws would be likely to secure. This embarrassment has been frankly recognised by the publicists of France, and there have been two suggestions designed to remedy this defect. The old rule for estimates having been interrupted by the revolution of 1848 and subse- quent events, the question of the proper method of procedure was formally considered m 1854. Speaking of this question the chairman of the Budgetary Commission expressed him- self as follows: "The old method of procedure has certain advantages which we do not overlook, but it has the incon- venience of contributing to receipts an estimate always inferior to their reality, and of necessitating also an estimate of ex- penses upon a scale which is generally known to be below their reality. From this there arises the grave inconsistency of having by the side of the avowed budget a budget held in re- serve." * To remedy this defect it was proposed to substitute the systetne des majorations, which means in effect that to the covered receipts of the antepenultimate year should be added an estimate of the increase in receipts for the year to which the budget applies on account of the expansion of commerce and trade, or for any other cause known to the Minister. This plan, however, was not followed for any considerable length of time ; and when the confusion occasioned by the Crimean, the Italian, and the Mexican wars had passed, and the ques- tion of orderly estimate was again considered, the old rule was brought forward and formally accepted. This was in 1863. In 1882 the question was again discussed, and it was proposed by M. Leon Say to revive the practice of estimates, although in a somewhat modified form. His proposal was to accept the average receipts of the five years previous to the date of estimate as the basis of calculation, and to modify the result thus obtained by general considerations which would suggest * Quoted from Stourm, Le Budget, p. 160. FORM OF THE BUDGET. 141 themselves in attempting to forecast tlie operations of laws in the future. It would have been interesting to observe what might have been the result of this plan, but unfortunately it was followed for a year only. It is not likely, however, that the practice would have exerted any marked influence upon the financier. The difficulties in the French system are radi- cal. The period intervening between known results and the date for estimate is too long, while the accounts of the treasury are so tardily closed that the data for estimates would in any case be comparatively old. The system invites neither careful estimates nor careful legislation. The practice of other peo- ples is rather to be commended. 25. What should be the Form of the Budget Statement? — The third of the technical questions respecting the prepara- tion of the budget pertains to the form in which it shall be presented to the legislature. Upon this point it may be said, in the first place, that whatever its form it should be the same from year to year, or at least that no arbitrary or unnecessary changes should be introduced. The reason for this may be easily stated. The rules and customs concerning the passage of money bills should be so firmly established and so well known that no member of the law-making body can plead ignorance, either of the condition of the bill at the time his vote is requested or of the parliamentary effect of his vote, as an excuse for an erroneous decision. An established rule re- specting the form and classification of estimates cannot, of course, enable a legislator to avoid error of judgment respect- ing the general policy embraced in a proposed law, but it may enable him to understand what is implied by any particular vote on any particular chapter of the budget at any particular stage of its progress. An illustration will make this clear : Suppose that for a series of years the customary appropria- ,tions for United States marshals has been included in that of the judiciary, and that without proper notification it is changed to some other chapter of the budget. Under such circumstances it would not be strange should some member of the- legislature cast his vote for the judiciary appropriation, as- suming that by so doing he had made the customary provision for the marshals. It is futile to suppose that every member of the legislature can keep himself informed respecting the details of all bills that claim his suffrage at all their stages of progress 142 PREP/IRATION OF THE BUDGET. towards law. He performs his full duty (except for such bills as he may introduce or as come from the committee of which he is a member) if he keeps himself in touch with the general legislative principles and governmental policies involved in the great mass of bills ; and he is justified in assuming that, in the absence of formal notification to the contrary, the rules of procedure, the classification of items, the terminology em- ployed, and the like, of regularly recurring bills, will continue the same from year to year. Permanency in the adopted form of a budget is, perhaps, of more importance than the particular form adopted. That the budget should be introduced as a comprehensive document will doubtless be conceded. This is true because the general condition of a nation's finances must be known before a rational opinion upon any particular proposal re- specting either income or expenditure can be entertained. It it necessary, therefore, that a budget statement should begin by an exhibit on a single page of the aggregate of actual re- ceipts and expenditures for the year past; the aggregate of receipts and expenditures, actual and estimated, of the year current; and the aggregate of estimated receipts and expen- ditures for the year for which laws are to be enacted. This is the general practice of nations, and in this regard the annual report of the Secretary of the Treasury may be ac- cepted as a model of concise and comprehensive statements. To say that the budget statement should be comprehensive does not, however, answer all the questions that arise respect- ing its form, for the query still remains respecting the classi- fication of income and expenditure most conducive to clear- ness of discussion and intelligent legislation. The budget will probably be voted in substantially the form in which it is presented; such, indeed, is the common practice of nations, whatever their political or parliamentary organization. The form that the budget should assume cannot be determined by reference to any one consideration. The question which it presents is partly a question of administrative organization, partly a question of convenience for legislative study, and partly a question that calls for compromise between the finan- cial and the political interests involved. The consideration last mentioned is the only one that calls for comment. The natural demand of the financial interest is that the FORM OF THE BUDGET. 143 budget should be clear, simple, easily understood, and of few classifications. Afcout all that the rank and file of the legis- lative body is called upon to consider is the aggregate of ex- penditures, and the apportionment of this aggregate to the several lines of public service ; for, so far as income is con- cerned, it can hardly be expected that the individual members of the legislative body will proceed in their analysis of finan- cial affairs beyond a study of the general principles underlying ■ the project of the law. It is of course necessary that estimates should rest on a careful scrutiny of details, but, as we have already seen, this task is either performed by the government or is intrusted to a specially appointed committee. All this detail must be taken for granted by most of those whose votes legalize income and expenditure. This being the case, it is not necessary that any considerable amount of detail should be included in the budget in the form in which it is presented to the legislative body for general discussion and approval. A further consideration against too great detail presents itself in case expenditures are voted by chapters and each chapter voted independently, for under such conditions there is great danger that the aggregate of expenditures will not be properly apportioned to the several services calling for sup- port. This is primarily a question of how the budget shall be voted, rather than how it shall be presented ; but, as leading to a just balance between the items, or clauses of items, which make up the aggregate of appropriations, the financial interest seems to require that the budget should come before the legis- lative body in the form of a few comprehensive classifications. The constitutional interest, which, in the opinion of some writers, demands a compromise with the financial interest, presents the following claim. The budget, it is asserted, is the principal means by which the administration is held in check and the general policy of the government controlled. The classifications should not, therefore, be so comprehensive as to render difficult a test vote upon any question of public policy likely to arise in connection with appropriations. The administrative classification approved by the financial interest is too comprehensive for this purpose. On the other hand, that which by contrast may be termed the legislative classifi- cation would be so minute as to destroy the sense of com- pleteness which should result from the first reading of a 144 PREP/IR/tTlON OF THE BUDGET. budgetary statement. No general conclusion can be laid down for bringing these two conflicting interests into harmony. Each nation must decide for itself what is wise, resting its decision upon the degree to which the constitutional principle has been developed, and the extent to which other means have been established by which the constitutional influence of the legislature can be made efifective as against the executive. This much of a generalization, however, may be ventured if confined in its application to American conditions. Good government in this country at the present time is placed in jeopardy rather by loose methods of business procedure than by an undue extension of administrative influence. The impor- tant problem in the United States at the present time pertains to the control of the legislature by the people, and not to the control of the executive by the legislature. The finan- cial interest, therefore, is relatively of more importance than the constitutional interest, and should be granted a greater influence in giving form to the budgetary statement. Some progress toward the recognition of sound business principles in financial legislation may be expected from clearness, sim- plicity, and permanency in the budget as presented to the legislative body. The question thus brought to notice will receive further attention in connection with the passage of the budget to its vote. It appears, then, that the basis of an acceptable classifica- tion for the budget statement is found in the organization of the government for the purpose of administration. The Book of Estimates should be compiled so as to reflect the departments, bureaus, or offices into which the government is divided. The classification of receipts, also, should be ad- justed to the source from which those receipts are drawn. Such a classification would, in the main, meet the con- venience of the legislature for the purpose of study and of the administration for the purpose of estimate. Another strong consideration in its support is that it is the only classification which will be likely to continue for any considerable length of time. Our general conclusion, then, respecting the form in which the budget should be presented is that it should be drawn conformable to the administrative divisions of the government, but that these great divisions may with propriety be divided into appropriate chapters, which in their turn re- flect the organization within the departments themselves. CHAPTER III. ON THE PASSAGE OF THE BUDGET TO ITS VOTE. Orqanization of the Legislature for Study of the BudgkT. (i) Practice in England. (2) Practice in France. (3) Practice in the United States. Should All Moneys be Voted Annually? (i) Several Considerations. (2) Practice in England. (3) Practice in France. (4) Practice in the United Statei. (5) Practice in Germany. (6) Conclusion. In What Form should the Budget be Voted? Reform of the American Budgetary System. (i) Enumeration of the Defects. (2) Consideration of Remedies. Most writers on finance draw clearly a line between the preparation of a budget and the passage of a budget to its vote. In all countries where cabinet government prevails, or where the ministry is responsible to the monarch, and con- sequently independent of the legislature, the preparation of the budget is a process distinct in fact as well as in theory from its legalization. Only in countries v/here there is a con- stitutional separation between the executive and the legisla- tive departments, and where all bills of all sorts take their origin in the legislature, is it difficult to maintain this distinc- tion at every point. The present treatment of the subject has, however, endeavoured to conform to the usual course of analysis, and, as an aid to this end, has everywhere treated of the budget first as a report, and second as a project of law. That which claims the attention of the present chapter is the budget as a project of law, no matter by what means it passed 14s 146 P/tSSAGE OF THE BUDGET TO ITS yOTE. from the first to the second stage of its development. The question to be discussed pertains to the most appropriate rules, parliamentary as well as constitutional, by which a project of law becomes an authorized bill for the raising or the expend- ing of public funds. 26. Organization of the Legislature for Study of the Budget. — The first question which presents itself in this con- nection pertains to the organization of the legislative body for the study of a fiscal policy presented for its approval. In all countries of any size this organization takes place under some form of the committee system. In England the com- mittees in question are the House organized as committees of the whole. In France provision is made for committees of investigation by the rules of the Chambers. In the United States standing committees have come to be a recognised part of parliamentary machinery. All the essential principles re- specting the organization of parliamentary bodies for the pur- pose of studying a financial policy will present themselves in connection with an analysis of the practice of these three countries. (i) Practice in England. — The initiative of all business in England is the throne speech and the address in reply. This speech is a part of the ceremonial remaining from the time when the monarch was in fact as well as in theory the centre of poHtical power. It contains an estimate of the fiscal needs of government, and the first vote taken is that a supply be granted. This is neither amendable nor debatable except on the day agreed to. The vote is significant because it is a guarantee that the ordinary operations of government will not be jeopardized by political controversies.* The formal vote of supply being passed, however, the House, by a second vote, appoints a day on which to resolve itself into a committee to consider the supply granted, or, as it is commonly called, a Committee of Supply. It is in this committee that the legis- lative study of the budget, as distinct from the executive study which has been previously given to it, takes place. The ap- propriations having been decided, so far at least as to deter- * The interpreters of the Imperial Constitution of Germany aim at the same thing when they say that the Reichstag is not at liberty to withhold appropriations essential to the maintenance of established institutions. Cf. § 21, (4). STUDY OF THE BUDGET. 147 mine in a general way the aggregate of expenditures, the House resolves itself into a committee to consider the ways and means of raising the money granted. This committee is called the Committee of Ways and Means. It is in connection with the session of this committee that the Chancellor of the Exchequer delivers his " budget speech." The organization of Parliament for the study of finance bills centres in the character of the two committees referred to, namely, the Committee of Supply and the Committee of Ways and Means. They are neither standing committees nor special committees. They are the House of Commons convened under the free and easy rules of a committee rather than under the stricter rules of a parliamentary body. Nothing could be farther removed from an ideal adjust- ment. The scrutiny of the budget ought to be committed to a small body of picked men who, by virtue of their experience and ability, understand the needs of the country and the prin- ciples of finance. The procedure ought to be such as to invite study and avoid oratory, and it would certainly seem that the organization of the House into a committee freed from the stricter rules of parliamentary practice would prevent fruitful discussion and conservative deliberation. It is therefore something of a surprise to learn that the plan works well, but the fact that it works well must not be accepted as commenda- tion of the plan. The success of this manner of studying the budget testifies to the natural aptitude of the English for self- government; it does not prove that it can be followed with success by other peoples. It will add something to our knowledge of the subject if we inquire why this loose method of procedure succeeds so well. What is the secret of its success ? To answer definitely, it works well because of the efficient organization of political parties, and of the potency of public opinion speaking through the leaders of those parties. Although as a matter of po- litical right any member of the House of Commons may be present at the meeting of the Committee of Supply or of Ways and Means and participate in the conferences, as a matter of fact none but the leaders commonly attend, and none but the representatives of some party or some faction of a party ven- ture to take part in the discussion. This means that the study of the details of the budget is committed to a set of men 148 PASSAGE OF THE BUDGET TO ITS VOTE. brought together by a process of natural selection, and pre- sumably the men most capable and fit to deal with intricate subjects by virtue of their experience, their talent, and their political position. An inferior man, a new man, or a man who represents merely his personal views on matters of finance, would not be tolerated. He could not secure a hearing, for it must be remembered by one who desires to understand the English Constitution that a healthy Englishman is by nature impolite. The method of procedure in the committees is as informal as the unwritten rules respecting the constitution of these committees are rigid. The discussion, especially at the initial stages, and when there is no great question of national policy at issue, is somewhat conversational in character. After the introduction of the budget it is in place for the opposition to ask questions, ostensibly to elicit information, but in reality to embarrass the government. The resoilt is that any weak point in the policy of the government will surely be brought to light; and while the English ministry is very jealous of hesi- tancy on the part of Parliament to sanction its estimates for expenditures, it has always manifested a willingness to modify its policy for raising revenue to meet the criticisms of either political friends or foes. The English method of studying the budget is not the product of design, but of an historical de- velopment. It fits English character and conditions. It realizes the two essentials of a good organization, namely, a small body of experts brought together for free discussion, and so organized as to include all the interests which have a right to be heard on financial affairs. (2) The Practice in France. — ^The French method of organi- zation as compared with the English is highly artificial. The Chamber of Deputies is divided into eleven bureaus or groups, the division being made by lot. Every legislative proposal is referred to these groups, where, according to the theory upon which they are organized, it will receive a cursory examina- tion, and all general principles respecting it will be determined. Each group then appoints a certain number of its members, who, in connection with members similarly appointed from the other groups, form a legislative committee. The duty of this committee is to study at leisure and in detail the legislative project in question. The number usually appointed from each STUDY OF THE BUDGET. 149 bureau is one, which results in a legislative committee of eleven members ; but in the case of the budget three members are appointed from each bureau, so that the Budget Commit- tee comprises thirty-three members of the Chambers of Depu- ties. It is in this committee thus constituted that the serious study of the budget takes place in France. Does this adjustment commend itself to general confi- dence ? In the first place, it is said that the idea of a pre- liminary or even cursory study of legislative proposals in the several bureaus is not realized in practice. Thus the theory breaks down at its most vital point, namely, as a plan which requires every legislator to study every bill. The bureaus have come to be in reality the machinery by which the effective com- mittees are appointed, and judged from this point of view the arrangement seems of doubtful expediency. The bureaus, it will be remembered, are appointed by lot, and the most one can ex- pect from a committee made up of representatives of bureaus so created is that it will reflect the average ability of the Cham- bers. A matter, however, of such paramount importance to the nation as its fiscal policy should be committed to nothing less than absolutely the best talent and experience which the country affords. The French system may do worse than commit the study of the budget to a committee composed of men of average ability ; it may bring together men of decidedly inferior talent. It is conceivable that chance should throw the only eleven men preeminent as financiers into the same bureau, which would mean that three only out of the thirty-three members of the Budget Committee would be fitted for the task assigned. This is doubtless an extreme assumption, but it indicates what may be the character of committees made up of repre- sentatives of bureaus chosen by lot. As- against this criti- cism it is urged that the Budget Committee is sufficiently large to guarantee, according to the doctrine of chances, that some of the best men will surely be included. This may be true, but the ideal adjustment is one which claims for finan- cial questions the attention of all the best men and none of the poor ones, and that in the form of a small and compact body of students. The criticism here noticed has been urged in France, and in 1887 the Budget Committee was chosen by ballot in the ISU P/tSS/tGE OF THE BUDGET TO ITS yOTE. Chambers. The result of this experiment did not, however, seem to justify a permanent departure from the accepted rule, for the old method of appointing the committee was again resorted to the succeeding year. It should further be noted as a partial relief from the criticism urged above that the task imposed upon the Budgetary Committee is to study the detail of financial propositions " in order to facilitate general discussion." This differs from the policy in England, where the vote of the Committee on Supply or of the Committee on Ways and Means practically disposes of the question at issue. This is the important point in the comparison. The English committee feels responsible for its decisions, while the de- liberations of the French committee are relieved from that sense of responsibility which attaches to a determining, if not a final, vote. While the French system may be conformable to French character, and so defensible from that point of view, it certainly does not meet the requirements of an ideal or- ganization for the study of the budget. The committee to which the study of the budget is given over is not a small body, it is not necessarily composed of experts, and there is no guarantee that it will represent all interests which have a right to be heard. The determining discussion will probably, under such an organization, take place in the Chambers, a practice which will inevitably lead to corrupt legislation, because it invites bargain with factions in order to secure a sufficient number of votes to pass the main measure. (3) Practice in the United States. — At the time the Federal Government of the United States was created it seems to have been the accepted theory that legislation ought to be the direct product of the deliberation of Congress. The necessity of special organization for the study of special questions was not apparent, since the interests involved were less complex, the legislative body less numerous, and the questions presented for consideration fewer than at the present time. The com- mittee system was regarded with jealousy and was of slow development. In 1802 there were but five standing commit- tees in the House of Representatives, and it was not until 1816 that the Senate consented to a standing committee. The logic of necessity, however, proved stronger than a theory of government, and the committee system developed, until at the present time there are between fifty and sixty standing com-- STUDY OF THE BUDGET. 151 mittees of the House, and over forty standing committees of the Senate, regularly appointed each session of Congress. It is not too much to say that the committee system of legislation is developed in the United States in its most extreme, and, as some of its critics assert, its most tyrannical, form. It would seem from the fact that the legislative body is broken up into a large number of independent committees that this country conformed in a general way to the parlia- mentary practices of France rather than of England. In form this is true. But when one considers the manner in which com- mittees are appointed, and the influence which they have ac- quired, they will be recognised as possessing a legislative character peculiarly their own. It should be noted in the first place that all committees of the House of Representatives are appointed by the Speaker. But the Speaker is a member of the body over which he pre- sides and owes his election to the votes of his fellow members. The election of a Speaker is one of the most significant events in the political history of a Congress, since it indicates with considerable clearness the colouring of the laws likely to be passed by the dominant party. It is well known before the election takes place who will be the chairmen of the impor- tant committees. The Speaker is the leader of his party in the House, and must from the pressure of his situation appoint the strong men of his party to the leading positions. Thus party responsibility is recognised in the organization of Congress for the consideration of bills, a result which would be impossible should the appointment of committees be intrusted to chance, as in France. It should in the second place be noticed that the chief concern of the Speaker as the leader of his party is to secure from th? committees such reports as will readily be enacted into law. He cannot, therefore, in making up the committees ignore the leaders of the opposition, nor the re- presentatives of any interests or localities which have peculiar claims to be heard on the question in hand. There is thus secured by virtue of political pressure what in England is se- cured by natural selection, namely, a strong representative committee for the consideration of all important bills. The third point in which the American committee system has developed a character of its own pertains to the degree of 152 PASSAGE OF THE BUDGET TO ITS yOTE. influence which these committees exert. Inasmuch as the budget committees, appointed in the manner described, are sure to be composed of strong and representative men, all arguments likely to be presented in an open session of the House will find their clearest and most forceful expression in the previous sessions of the committees. This means that the serious study of the budget takes place in the committees. It is here that witnesses are examined, testimony taken, and the pleas of interested parties granted a hearing. It is here, also, that comparison is made between different measures, that con- sideration is given to details of items, and that all questions pertinent to a sound judgment upon the project in hand are presented and discussed. As a matter of law no bill can be legalized without a vote of at least a majority of the Repre- sentatives ; as a matter of practice the laws upon which the Representatives may express themselves by vote are deter- mined by the committees. The rules of the House require that all committee reports shall be considered in the commit- tee of the whole. Any member of the House has at this time the right to submit an amendment, or indeed to propose a bill to be substituted for the report of a committee ; but, so long as the committee retains the confidence of a majority of the party in power, no such amendment or proposal can influence legislation unless approved by the committee in charge of the bill under discussion. The means by which the directing influence of the commit- tee is retained are simple in the extreme. It is a rule of the House that no bill can be discussed until it has passed throueh the hands of its appropriate committee, and this gives to the chairman power to " kill " an irregular bill by refusing to report it. It is true that the House may order a report, but a motion for such an order will not be carried unless some con- siderable portion of the party to which the chairman of the committee belongs are dissatisfied with his leadership, or are more interested in the particular measure than in preserving party discipline. When to this is added the custom that a member cannot gain the recognition of the chair to propose an amendment except he has previously made some arrange- ment with the chairman of the committee it is pretty clear that the committee is complete master of the situation. That Congress should tolerate such tyranny (as some are pleased SHOULD ALL MONEYS BE yOTED ANNUALLY? 153 to call it) is perhaps its best justification. The truth seems to be that the committeee system is essential for the transaction of business. The guarantee against the too arbitrary use of this great authority is found in the fact that the chairmen of the important committees are the influential men in the party to which the people have intrusted the conduct of the govern- ment, and as such they feel party responsibility. The chief concern with them is to secure votes for the measure upon which 'they have staked the future of their party, and this renders it highly probable that due consideration will be shown in allotting time for debate, and that legitimate in- terests will be granted opportunity to be heard. It is doubt- less true that the power of a dictator is granted the chairmen of the great committees, but it is a power that can, as a rule, be exercised only so long as it is not used in too dictatorial a manner. A careful consideration of the political, constitutional, so- cial, ethnological, and geographical conditions of the Ameri- can people will, it is believed, lead the student of finance to ap- preciate the committee system as well adapted to meet the peculiar needs of the American people. It conforms, so far at least as financial measures are concerned, to the three require- ments of a good organization for the study of the budget, namely, a study of the budget by a small body of men, by a body of men who are experienced in political affairs, and by men who represent fairly well parties, factions, sections, and interests. 27. Should All Moneys be "Voted Annually? — Having dis- cussed the form of legislative organization we are prepared to consider certain other questions of parliamentary procedure which arise in connection with the passage of the budget to its vote. Important among these questions is the one which asks if all moneys should be voted annually. (i) General Considerations. — The point which here lies in controversy cannot be determined in a very definite manner, at least no answer can be given of such a sort as to be of uni- versal application. The extent to which permanent appro- priations may be used with safety (this being another way of stating the question) depends in large measure upon the stage of development at which a people have arrived in their realization of constitutional government. It is one of the 1 54 P/tSSAGB OF THE BUDGET TO ITS yOTE. lessons of history that the executive cannot be trusted to fix the amount and determine the character of pubHc expenditures, no matter what the form of poHtical organization, for such a concession would deprive the people, or their representatives, of any influence in the shaping of public affairs. Strictly speaking, it lies in the theory of constitutional government that every item of expenditure should be submitted each year for legislative sanction ; and it is but reasonable to con- clude that, so long as any uncertainty exists concerning the respective political rights of the government and the people, it is not safe to go very far in voting permanent grants of pub- lic moneys. Looking at the political situation as it exists among most peoples of Western civilization, the right of popular control over public affairs is so fully recognised, and the various checks upon the arbitrary use of public authority so well de- veloped, that the necessity of an annual sanction for every item of expenditure has in large measure passed away ; and it must be admitted that certain embarrassments arise whenever it is attempted to adhere strictly to the policy of annual appropria- tions, and that it is for this reason that permanent appro- priations are regarded with favour. It may be well to notice the character of these embarrassments. In the first place, an unnecessary vote is a waste of time, and this, in view of the large number and great variety of questions presented for the consideration of the legislative body, is a serious matter. Permanent appropriations, there- fore, are justified on the ground of economy. In the second place, it should be observed that the larger the number of items in the annual appropriation bills the less likelihood is there that adequate study will be given to those parts of the bills which need the closest scrutiny. Thus the importance of care in the consideration of questionable items suggests that at least those items respecting which no possible doubt exists should be provided for by permanent legislation. Of more importance, however, is the fact that, in the absence of permanent appropriations, the government would find great difficulty in making contracts which involve financial responsi- bility — a result likely to be attended with serious conse- quences, since it would render impossible the performance of many functions which lie within the legitimate sphere SHOULD ALL MONEYS BE ^OTED ANNUALLY? 155 of government. It would, for example, preclude the con- sideration of a system of public improvements, since the capital for such improvements must be collected by an issue of pubhc bonds. It would, also, seriously embarrass a government in its attempts to make headway against such a fiscal emergency as is sure to arise in case of an expensive war. In any cir- cumstances in which it is desirable to place at the disposal of government an amount of capital greater than its ordinary in- come serious difficulties would be encountered should the ability of the legislature to guarantee payments for a series of years be in any way impaired. From the point of view of ad- ministrative efficiency, therefore, permanent appropriations are highly desirable. It may be said as against the last of the above considera- tions that a sovereign State cannot be forced by legal means to regard its obligations, and that what is considered a per- manent appropriation by one legislature may be repealed by the next. This is doubtless true, but it is also true that greater confidence is felt in a law which makes provision for an annual payment for a specified series of years than in the caprice of successive legislatures. One who has observed the financial history of free peoples must recognise that the moral sanction which among self-respecting democracies attaches to per- manent appropriations when they are a part of a public con- tract, either directly expressed or implied in the conditions under which the contract originated, does, as a matter of fact, give an added value to the promises of government, and en- ables the State to enter upon many lines of activity, or to make headway against fiscal emergency, which would lie beyond its ability should every item of expenditure be voted upon each year. The general conclusion to which the above discussion seems to point is as follows. In the first stage of the development of constitutional government — that is to say, so long as the question of the residence of control over pubhc policies is still in controversy — permanent appropriations are not recognised as ill harmony with the interests of the best national develop- ment ; but when this controversy has been settled through the substitution of popular sovereignty for proprietary monarchy the considerations which support the policy of annual appro- priations are no longer pertinent. The practical question, IS6 PylSS/IGF. OF THE BUDGET TO ITS yOTE therefore, seems to be, not whether permanent appropriations should or should not be used, but what class of expenditures may be safely and advantageously provided for by permanent legislation. On this point it may be well to inquire respecting the practices of the leading constitutional peoples. (2) Practice in England. — In England there has grown up quite a list of permanent appropriations, covering in the aggre- gate about one-third of the total of annual expenditures. These are paid out of what is known as " the consolidated fund," and comprise at the present time the interest and principal on the public debi (so far as the debt is paid through annuities), the civil list, pensions (civil and military), salaries and allowances to certain independent officers, courts of justice, and a mis- cellaneous series of expenditures, including guarantees of interest upon the debts of certain foreign countries. The consolidated fund was created after the Revolution of 1688. A knowledge of the history of this revolution and of the century and a half preceding is necessary to correctly in- terpret the creation of this fund. It aimed to draw a line be- tween the revenue of the king and of the nation. " The funds destined to the expenses of the crown became entirely dis- tinct from those destined to the expenses of the State. This is the origin of the civil list." As time went on, however, other expenditures were charged to this fund, until at the present time provision is made in this manner for all obligations which rest on contract or arise on account of permanent in- stitutions or definite demands. The principle of permanency is carried yet farther on the side of income, the duty on tea and the income tax being the only sources of revenue which are now submitted to annual vote. This was also true of the duty on sugar until 1874. Four-fifths of the annual revenue of England is now provided for by permanent legislation. The question of permanency, however, is relatively of less importance when considered from the point of view of income than from the point of view of ex- penditure, since it is in connection with appropriations rather than taxation that the policy of government is brought into the foreground. For this reason the permanency of revenue laws is not subjected to special consideration. (3) Practice in France. — In France the question of perma- nent appropriations has been the subject of considerable dis- SHOULD ALL MONEYS BE P'OTED ANNUALLY f 157 cussion, but without any very definite results. It was urged by Mirabeau in the great debate of 1789 that no tax should be voted for more than a year except the one devoted to the ser- vice of the debt and the civil list. In this form the idea failed to secure support, although in the Constitution of 1791 it is explicitly stated that " under no pretext shall the funds neces- sary to the satisfaction of the debt or the payment of the civil list be liable to either refusal or suspension." In 1827 the matter was again brought forward for consideration in the form of a proposal 'that the budget should be divided into two parts, namely, the budget of the consolidated funds and the extraordinary budget, the former comprising all permanent and fixed services, the latter all new services and all charges of an accidental or temporary nature. The charges against the consolidated fund were to be permanent, and thus, according to the author of the proposal, the Chambers would gain con- siderable time, which might be devoted more advantageously to the examination of the new expenses. But this proposition was not adopted, and, as Stourm remarks, " the French budget continues to reproduce each year all those columns of figures which the ministers and chairmen of committees com- nient upon without ceasing, only to accede at last to the inevitable grant." * (4) Practice in the United States. — The practice in the United States may be simply stated. Appropriations are di- vided into three classes, known as " annual," " permanent an- nual," and " permanent specific " appropriations, and the an- nual appropriations embrace all not included in either of the other classes.f The idea underlying permanent appropria- tions in this country is about the same as in other countries. From the administrative point of view the definition submitted by Mr. Sherman when Secretary of the Treasury is perhaps adequate. He said : " The words ' permanent appropriations ' should be confined to appropriations such as private bills, * Stourm, Le Budget, p. 307. t " The general policy now is to construe all appropriations as annual unless a contrary intention is expressed in the act, or it clearly appears in the character of the object or service appropriated for that Congress must have intended the money to be available until the object is fully accomplished, or the service fully completed." — Report of the Secretary of the Treasury, 1894, p. Ixvii. 158 PASS.4GE OF THE BUDGET TO ITS VOTE. where nothing is left to executive officers for examination or inquiry except to identify the party or to comply with some specific duty pointed out by a specific appropriation." * From this it would seem that any expenditure of money fixed by the terms of a contract, or which occurs on account of an existing law and may be definitely calculated because the terms of the calculation are expressed in the law, or for assured compen- sation to certain officers, may with safety be made exceptions to the rule of annual vote. In how far this generalization ap- plies to the practice of this country may be seen from a state- ment of permanent appropriations as they exist in the United States. They embrace the following objects of expenditures : First. Salaries of public officers not political, as judges of the Supreme Court. Second. Salaries and expenses of officers whose duties are essential to the carrying on of the government, as the super- visors at elections; salaries and expenses of collecting customs. Third. Payments to institutions under the patronage of the government, as the Smithsonian Institution. Fourth. Constantly recurring claims, such as overreceipts in taxes, drawbacks, errors, and the like. Fifth. Permanent claims which are determined by calcu- lation according to the terms of some explicit law, such as in- terest on the public debt, the amount due the sinking fund, and the like. None of the above payments can by any possibility come into political controversy, and under the practice of periodic elections it is not necessary that Congress should expend time in making these appropriations each year. The chief difficulty in administration pertains to the inter- pretation of " permanent specific " appropriations. The law upon this point is in the form of an exception to the general statement that " all unexpended balances of appropriations which shall have remained upon the books of the treasurer for two fiscal years are to be carried to the surplus fund and covered into the treasury." The lans:uage of the exception is as follows : " That this proviso shall not apply to permanent specific appropriations, appropriations for rivers and harbours, * Letter of the Secretary of the Treasury to Hon. Samuel J. Randall Speaker of the House, December 14, 1877. SHOULD ALL MONEYS BE I^OTED /INN U ALLY? IS9 lighthouses, fortifications, or the pay of the navy and marine corps, but the appropriations named in this proviso shall con- tinue available until otherwise ordered by Congress." * The idea underlying this provision for permanent specific appro- priations seems to be that a service approved by Congress, and of such a nature that serious damage would ensue from an interruption of work once begun, and of such a sort also that the time and conditions for making the expenditures cannot be fixed by law, should be granted an appropriation which, while definite in amount, is indefinite as to the time of expen- diture. This is shown by the services specifically named in the law, as also by the practice of interpreting appropriations for public improvements, such as Yellowstone Park, Military Park, Fort Ethan Allen Military Reservation, and the like, as permanent specific appropriations. This is quite in harmony with Mr. Sherman's definition, in the communication already referred to, when he says : " A specific appropriation is one where the amount, or subject, or person is designated par- ticularly or in detail. It may be and usually is permanent in terms because not limited as to time, like an annual appro- priation." Permanent specific appropriations, then, may be charac- terized as appropriations for a service which would be endangered should Congress undertake to make, any definite statement respecting the time or rapidity with which the moneys assigned to its support should be expended. It holds in a sense the same relation to the administration of public affairs that a, construction account does to the administration of a railway corporation. The appropriation is not properly classed as current operating expenses. It is more akin to an investment of capital. For this reason also it appears that the chief question for the legislature to decide is whether or not a definite amount of money can be expended for the service in question, leaving the time and manner of. expenditure to the administrative officers. On the side of income all revenue laws in the United States are permanent ; that is to say, they continue in force until by the enactment of some subsequent law, or by an amendment at some subsequent time, the law is repealed or its conditions changed. * Section 5 of the Act of June 20, 1894. i6o P/ISSy4GE OF THE BUDGET TO ITS VOTE. From the financial point of view a serious criticism may be urged against this practice, in that it does not contemplate the annual adjustment of income to expenditure. In order to insure adequate revenue for all years, it is found necessary to provide a surplus in ordinary years. So long as a govern- ment can expend this surplus in the reduction of debt, or in some other flexible demand, no serious difficulty, perhaps, will arise on this account; but should there be no means of ex- pending in a judicious manner the surplus accruing in pros- perous years its influence upon business conditions, as also upon current appropriations, will be decidedly injurious. Much better results would follow if one or two sources of reve- nue were brought annually to the consideration of Congress, and the rate of taxation for each year adjusted in such a man- ner that, added to the receipts from permanent revenue laws, the aggregate revenue should be made to conform to the ag- gregate of appropriations. Reference has already been made to the fact that all sources of income in England rest upon per- manent laws, with the exception of the income tax and the tax on the importation of tea. This is not due to any peculiar constitutional dangers that reside in these taxes, but these taxes are reserved for annual consideration and their rates are adjusted each year, so as to preserve a balance between annual income and annual expenditure. With the exception pro- vided for by this consideration, the theory of permanent revenue laws must be approved. To extend this permanency to all revenue laws, however, results in loose appropriations and finally in the necessity of providing for an increase in revenue. (S) Practice in Germany. — The German people, who, from the point of view of constitutional government, cannot safely go as far with permanent financial legislation as the people of England or of the United States, do, as a matter of fact, go much further. Provision for the army, for example, is made for a period of seven years, and in this manner practical con- trol is given to the Emperor over all those varied services and far-reaching policies which in the actual condition of Euro- pean politics are bound up with military authority. The ques- tion at issue was put very concisely by Bismarck when, in 1887, he impatiently exclaimed : " Ought our army to be the army of the empire or of the parliament ? This is the ques- SHOULD ALL MONEYS BE yOTED ANNUALLY? i6i tion." With regard to other expenditures also, the govern- ment enjoys guarantee that established institutions will be maintained. All that is left to the representatives of the peo- ple is the limited right of denying grants for new services. From the administrator's point of view this is undoubtedly an admirable adjustment, since it insures stability in the military and the civil service, and without stability efficiency cannot be secured ; from the point of view of constitutional govern- ment, however, such an adjustment cannot be defended, since it regards the political liberty of the individual as of less worth than efficient administration. The lesson to be learned from the practice of Germany is that permanency in the assignment of moneys to the various branches of the public service is one of the requisites of efficient administration, and it should be the ideal of those peoples who aim to develop popular government to so strengthen the non- financial checks upon the arbitrary exercise of power as to permit an extension of permanent appropriations. England and the United States seem to have assigned greater impor- tance in the adjustment of their budgetary methods to political liberty than to administrative efficiency. Germany, on the other hand, assigns greater importance to administrative efficiency than to political liberty. The ideal of the perfect organi- zation is efficiency with liberty, and the rule for determining what class of expenditures should receive annual sanction, and what class should rest on permanent legislation, will be developed out of a conscious effort to harmonize these two conflicting interests. (6) Conclusion. — ^The foregoing survey ot the practice of governments shows that the question of permanent appropria- tions is in a somewhat unsatisfactory condition. The proposal which was rejected in France in 1827, that expenditures for new services should be the only ones to receive the approval of the current legislature, admits of many arguments in its favour, but a consideration of the kinds of expenditures which this would place outside of current parliamentary dis- cussion shows it to be too comprehensive in its character. A newly established service should receive the repeated votes of successive legislatures before it can safely be regarded as among the established institutions of the State. The difficulty seems to lie in the fact that no scientific classification of ex- i62 Py4SSAGE OF THE BUDGET TO ITS yOTE. penditure has ever been undertaken for the purpose of group- ing together those which bear the same social significance, and, consequently, no general rule can be laid down. There are some grants that should never be made permanent, be- cause they pertain to services which, though constantly recur- ring, do not recur under constant conditions. There are other grants which should not be permanent, because assigned to the support of an imperfectly developed branch of the public service, and if made permanent the future development of the service in question would be endangered. Such, for example, is the grant for the Interstate Commerce Commis- sion. While the idea underlying the Commission may be accepted as sound, and the Commission itself accepted as a permanent institution, the law upon which it rests is so imperfect as to preclude the satisfactory performance by the Commission of the duties assigned to it ; and it would be unwise to make the expense of this bureau a permanent charge before the principles of railway regulation are crystal- lized into a rule for permanent practice. The question of rail- way regulation in its present unsatisfactory condition should come annually before Congress for discussion, and the only guarantee for this is found in the necessity of annual appro- priations for its support. It is, on the other hand, an unnecessary expenditure of time to vote each year the expenditures for the courts. The judiciary is a fixed institution, and the amount necessary for its support is a matter of bookkeeping and not of policy. This is a good illustration of a grant which in all countries may safely be made permanent. All expenditures whirh rest on contract, also, should, for reasons already stated, be permanent in character. This question of the permanency of revenue laws, like so many questions which arise in the Science of Fi- nance, must be determined by each nation in view of the po- litical, industrial, and social conditions in which it finds itself. 28. In What Form should the Budget be Voted?— It has been conceded that a budget should be presented to the legislative body as a complete and comprehensive document. It remains for us to consider what form the budget should assume for the purpose of a vote. So far as laws providing income are concerned, there seems to be little opportunity for difference of opinion. The discussion which has taken place IN IVHAT FORM VOTED. 163 upon this question pertains for the most part to appropria- tions, the practice respecting tax laws being in large measure determined by the nature of the laws themselves. With re- gard to appropriations, however, there exists the greatest di- versity in practice. In some cases the appropriations are gathered into a single bill for the purpose of vote, while the separation of appropriations in such a manner as to require three, or four hundred independent votes on the part of the legislature is not uncommon. The question in hand, there- fore, is a pertinent one, and inquires if there be any principles by which an appropriate classification of expenditures for the purpose of vote may be arrived at. Some light is thrown upon this question by the observation of Leroy-BeauHeu, who says : " The right of voting taxes bears with it two separate rights, first that of verifying the necessity of the tax itself, and second that of assigning the proceeds of the tax to a definite purpose " ; and it will be at once conceded that any division of the budget for the purpose of vote more minute than is necessary to attain these ends will be the occasion of embarrassment to the legislative body. On this point those considerations urged above in favour of permanent appropria- tions may be accepted as applicable to the case in hand. Nowhere has there been a greater variety in practice than in France. In that country the appropriations were voted en bloc under the first republic and under the first empire ; by ministries during the first part of the Restoration and the first part of the second empire; by grand sections at the end of the Restoration and once during the second em- pire; by chapters in 183a, in 1853, and since 1869. The practice of voting the budget by chapters has much in its favour provided these chapters represent some definite in- terest. The danger, however, is that the divisions will be made so minute that the same interest or service will claim from the legislature several separate votes, in which case one is not sure in giving his approval to an appropriation what ad- ditional sums may be necessary to make full provision for the service in question. This being the case, it is likely that such portion of a given service as first receives the attention of the legislative body will secure a larger share of the funds which may appropriately be granted than is justified by its relative importance. The same danger arises as between the several 1 64 HASSACE OF THE BUDGET TO ITS yOTB. interests themselves, except they be combined in some com- prehensive group of services. Nothing is more common than that ample provision is made for the service which first pre- sents its claim, and that other services equally meritorious should find the funds exhausted before their claims are pre- sented. This is the natural result where the legislature votes the budget in the form of a large number of unclassified chap- ters. Such a method tends to destroy a just balance in appro- priations, not only between various bureaus or departments which together make up the public service, but between the various interests that lie within the bureaus or departments' themselves. The custom of voting the budget en bloc or in a few grand sections is equally pernicious, since in this manner the vote is deprived of any definite and specific meaning and the ad- ministration is largely freed from legislative control. This would be equivalent to the practice which existed in England, when the extent of the influence of the legislature over ex- penditures was to limit the amount of money raised by taxes placed at the disposal of the sovereign for expenditure, a prac- tice which existed in the American colonies also, previous to the adoption of the Constitution.* Thus the second of the two rights which Beaulieu finds embodied in the right of the people to consent to taxes is practically, or at least in large measure, given up where money is voted en bloc. As the in- terest of a well-balanced budget stands opposed to the voting of money by chapters, so the constitutional interest is opposed to the drafting of money bills by grand sections. The general principle seems to be that the chapters submitted for final vote should not include an aggregate so large that each vote fails to have a definite and precise meaning; on the other hand, that the appropriations should not be divided into so many bills as to endanger a just balance between the various lines of public service. The appropriate method must be a compromise between these conflicting interests, and each na- tion must formulate its appropriation bills in view of its own peculiar constitutional requirements. One suggestion a little more definite in character may per- haps be submitted. In view of the way in which estimates are made, the budget on the side of appropriations will, as origi- •Goodnow, Comf fight to issue notes, and placing at their disposal unusual amounts for the discount of commercial paper, it is believed that the government can, acting through the banks, prevent the appearance of a serious commercial stringency, or, if that is impossible, prevent the extreme disasters of a commercial panic. In England commercial pressure which threatens to 2 14 FINANCE L ORGANIZ/ITION ^ND ADMINISTRATION. exhaust the resources of the bank is met by an order from the government to issue notes for the discount of commercial paper without bullion security. In France there is no limit placed to the issue of notes, and the bank itself determines when unusual issues shall be made. In Germany the situa- tion is practically the same, except that the tax on circulation increases with the size of the issue, a provision which works to limit the amount of notes in circulation to the needs of com- merce. It thus becomes clear that for these nations the ques- tion of how public moneys are kept is subordinated to the question of the control of the country's circulation ; and that, having decided to attain elasticity by a more or less direct regulation of discounts, the entire business operations of the State are brought into as close touch with the commercial world as possible. It is necessary to grasp this fact in order to apprehend the theory upon which the opposing policy of governmental isolation rests, a policy formally adopted by the United States when it established the independent treasury or sub-treasury system. (2) Practice in the United States. — It may be well to say a word, by way of a prefatory observation, respecting the man- ner in which the United States Government kept its funds be- fore the formal establishment of the independent treasury in 1846. The common impression seems to be that during the existence of the first and second national banks * these insti- tutions were made the fiscal agents of the government, receiv- ing its deposits and disbursing its funds. This, however, is an erroneous impression. There is nothing in the charter of the first National Bank which goes to show that it was designed to be the depository of the public funds. This could not have been done had it been regarded as desirable, for communica- tion between the dififerent parts of the country was so difficult and uncertain, and local jealousies were so strong, that a finan- cial institution under the patronage of Congress with branches in all parts of the country would have been an impossibility. Private banks were, therefore, used, and there is no indication that the public bank had precedence over private banks in any matter that pertained to deposits or disbursements. The charter of the second National Bank was drawn with the * The charter of the first Kational Bank extended from 1791 to 1811; that of the second National Bank from 1S17 to 1837. HOH^ SHOULD PUBLIC MONEYS BE KEPT? 215 idea of securing a centralized control over public deposits ; but it was never intended that this institution should have ex- clusive use of public moneys. Private banks were always used as depositories, but, at first, under rules prescribed by the directors of the National Bank. The difficulties that arose on this account, and which led the bank in 1818 to give notice that it would no longer act as the agent of the government, present considerations too minute for the present broad writ- ing. The significant fact is that the Federal Government tried the experiment of a bank of the European type, so far as that was possible under the conditions which then existed for trans- portation and communication. The experiment seemed to fail, and for that reason Congress undertook to solve the prob- lem in another way. Provision was made for public deposits by building vaults and establishing sub-treasuries ; for collec- tions and disbursements by making use, so far as possible, of its own machinery for the transfer of value ; and for an elastic currency either through the agency of State banks, as was the case prior to 1863, or, as at present, by means of a system of national banks. The Government of the United States does not acknowledge its responsibility for providing funds to meet unusual commercial demands. It is its aim rather to keep itself separate from tlie flurries and panics of the commercial world. The title of the law which declared the policy of indepen- dence is " An Act to provide for the better organization of the Treasury, and for the collection, safe keeping, transfer, and disbursement of the public revenue." The quarrel of Presi- dent Jackson with the second National Bank, the withdrawal of public deposits from this bank and their distribution to State banks, the consequent expansion of State banking, the increase of speculation, the extension of public improvements under the insane enthusiasm of State governments and private corporations, the commercial panic of 1837 and the banking panic of 1843 which resulted from this unhealthy commercial ac- tivity, the losses sustained by the Federal Government through its deposits with State banks, the difficulties encountered by the public treasury on account of the great variety of money offered for the payment of public dues, the embarrassment to business occasioned by the desire of the Federal Government to maintain a specie basis for its receipts and expenditures — 2i6 FlNANCl/IL ORG/INIZATION /tND ADMINISTRATION. these, and all other facts of that period of commercial disas- ter and financial disgrace from 1830 to 1845, ^re well known to the student of American history. The policy of depositing public Tunds in State banks without the restraining influence ^of a national bank over their issue of notes, and without ade- quate provision for the proper use of public funds and their prompt repayment, could no longer be supported by public opinion. On the other hand, so great was popular prejudice against Federal interference with local affairs that it was im- ttj possible for the Federal Government to establish a banking institution which should be the exclusive depository of pubhc funds, and which should have adequate power to establish and maintain a uniform currency throughout the United States. It must be understood that the design of the sub-treasury l^system is the absolute separation of the treasury from business affairs. Not only was the influence of the treasury in com- mercial affairs regarded with suspicion by the merchants, and the creation of the Federal bank regarded as an encroachment upon' the rights of the State by the people, but the Federal ^ Government, on its part, feared to trust its funds to commer- cial agencies for temporary use lest it should be subjected to loss. In such a state of affairs nothing remained but the establishment of an independent treasury system. The policy of separating public from private business hav- ^ ing been formally established, what c^n be said of the result ? , Is it possible for a government which handles from three to four hundred millions of dollars a year, and which is imposed with the duty of providing a circulating medium, to evade the necessity of performing banking functions, even though it -OB refuses to assume responsibility for the administration of a banking corporation ? The experience of the United States upon this point will perhaps be more instructive than an at- tempt at theoretical consideration. Three facts may be / noticed as bearing upon this question : 'V) First. It was a part of this scheme of separation that the government should employ specie in its own transactions to the exclusion of all other forms of currency. The notes of the State banks were not only unsafe, but they lacked the uni- formity of a national currency. The only stable and uniform money was gold and silver ; and the government, having trans- ferred to tlip States all control over banking, chose to confine HOIV SHOULD PUBLIC MONEYS BE KEPT? 217 itself to that form of money over which, by the Constitution, it was obliged to retain exclusive jurisdiction. This phase of the general policy of treasury isolation was not attended with any marked degree of success. Not only was it impossible for the government to transact its business in conformity with the rules laid down by the " specie circular " ; but, in so far as it was able to command specie, it embarrassed the operatioiis of the State banks, which relied upon the fund of specie in the country for their reserves, and rendered them less safe than they otherwise might have been. Dr. Colton, writing in 1856, said : " This government institution [the independent treasury], therefore, thus becomes an interfering power with the banking operations of the country to disturb and embar- rass them." * We admit this to be a curt disposal of a ques- tion which at the time was the subject of extensive discussion and bitter controversy ; but the simple fact is that the attempt to separate the fiscal transactions of the Federal Government from the commercial transactions of industry is one that can- not be realized. A sovereign State cannot evade its responsi- bility for establishing and maintaining a national currency, and any attempt to do so not only occasions loss to itself by its use of local currencies, but it results in general commercial embarrassment. Second. In the second place, the Federal Government has, , contrary to the theory cff independence, seen fit to establish a "^ note-issue business, and to this extent has converted the - Treasury Department into a banking organization. Reference is here made to the fact that the treasury notes issued during the War of the Rebellion, and which in 1879 were brought to par value with specie by the policy of " resumption," have since then been sustained in circulation by the maintenance in the Treasury Department of a gold reserve. The notes thus sustained constitute twenty per cent of the currency in circu- lation. To this extent the currency is fixed and inflexible. Whether or not this is wise we shall not undertake to discuss, nor shall we venture to inquire whether the issue of notes can appropriately be undertaken except in connection with the banking functions of exchange and discount ; our only point is that in this particular, also, the theory of independence *Cf. Kinley's Tht Independent Treasury of the United States, p. 37, 2l8 FIN/tNCML ORGANIZATION AND ADMINISTRATION. does not seem to have sustained itself. The exigencies which the treasury has met have proven stronger than the theory. Third. Finally, the government, contrary to the theory, has been forced to assume responsibility for the bullion re- serve of the country, and by so doing to acknowledge that a country whose commercial life rests on a highly organized system of credits requires of its government that the standard of values upon which credits are based, and in conformity with which contracts are drawn, cannot be a matter of indifference to the State. This duty of guarding the specie reserve is recognised as the most significant, if not the most impor- tant, function of a national bank like that of England, of France, or of Germany; and nothing could more clearly indicate the inadequacy of the policy of fiscal isolation than the fact that the United States Government has been forced to assume the task of protecting the bullion reserve of the country against the drains of an adverse trade. If it be impossible, as the experience of the United States seems to indicate, for a sovereign government to withdraw itself from the circle of commercial interests, it seems wise to conclude that the means for exerting this influence should be direct in order to be effective. The independence of a pub- lic treasury is a policy that cannot be maintained except in the most formal and superficial manner. This discussion has been carried on in view of the responsibilities that necessarily come to a sovereign State; with local governments the situation presents no difficulties. A municipality, a county treasury, or even a State will find that the most convenient method of transacting business will be through the agency of local banks. The experience of busi- ness corporations in the disposal of their funds may be ac- cepted as pertinent for minor public corporations. It is the broad commercial policies and monetary problems involved that make this question a serious one for national govern- ments, and with these local governments are not concerned. PART II. PUBLIC REVENUE. PRELIMINARY CHAPTER. GENERAL CONSIDERATIONS RESPECTING PUBLIC REVENUE. Classification of Public Revenue. (i) Main Divisions, (a) Comparison of Direct and Derivative Revenue. (3) Bequests and Indemnities. (4) Fees and Assessments. (5) Revenue from Expropriation, (6) The Lawyer's Classification. Comparison of Public and Private Industry. Marks of a Good Revenue System. The investigation respecting expenditures having been brought to a close, it now becomes our task to consider the nature and the sources of public income, and to search for those administrative rules and general principles by which the necessary revenue of the State may be secured in the manner most advantageous to all interests concerned. The problems of public income naturally classify themselves according to the sources from which this income flows, and on this account a consideration of the possible sources of public revenue will be the most natural and helpful introduction to the discussion of these specific problems. 37. Classification of Public Sevenue. — (i) Main Divi- sions. — ^The revenue which flows into the treasury of a State is of three sorts. It may be a direct revenue, a derivative ai9 2 20 GENER/IL CONSIDERATIONS RESPECTING REVENUE revenue, or an anticipatory revenue. By direct revenue is meant all revenue that accrues to the State from pubHc owner- ship in productive property, or pubHc management of pro- ductive industry, or which falls to it by virtue of its sovereign character or corporate personality. By derivative revenue is meant revenue which forms in the first instance a part of the income of the citizen, but which is paid by him to the State in satisfaction of some revenue law. In this instance the citizen rather than the State is the owner of the property, or the manager of the industry, or the recipient of actual benefices. The distinction between direct and derivative revenue becomes •clear when it is noted that direct revenue, so far as it is indus- trial revenue, constitutes a positive„addition to the social in- come, while derivative revenue, although it augments the in- come of the State, is in reality a transfer of a part of the earn- ings of the citizens to the State. An analysis of direct revenue leads to a consideration of Public Domain and Public Indus- tries, and of awards and gratuities ; an analysis of derivative revenue leads to a study of the nature and principles of Taxa- tion in all of its forms. In addition to direct and derivative revenues the State may secure funds through the use of its credit ; that is to say, it may borrow money. This revenue is properly characterized as an- ticipatory revenue. It is secured through the creation of a debt, and in any sound system of finance is recognised as the first step toward an increase in taxes or a higher return from public property or public industry. ^ Public credit as a source of 'income to the State cannot be understood except one is familiar with the principles that control direct and derivative "■revenue. Its legitimate use is confined to making headway against a fiscal exigency or to the providing of capital for pub- lic investment. These are both unusual conditions. The ad- vent of an expensive war may constitute a fiscal exigency and justify the use of public credit. The policy of building a great system of canals or railways may be accepted as an example of what is meant by the investment of public capital, and the capital for investment will in all probability be secured by the sale of bonds. In both classes of cases the occasion of the ex- penditure is out of the ordinary. In neither is the revenue secured a final revenue, but carries with it the necessity of se- curing an equal amount at some time in the future with which CL/ISSIFICATION OF PUBLIC REVENUE. 221 to pay back the money borrowed. It is thus evident that an- ticipatory revenue is different in its nature and its use from or- derly revenue, and that for this reason it should receive sepa- rate consideration. The advantage of a separate study of pubHc credit is em- phasized when it is seen that the principles which properly dominate the administration of public finance in ordinary times and for orderly and continuously recurring expendi- tures, are not, in all respects, the principles to which the public treasury should be adjusted in times of fiscal exigency, or when for any reason unusual expenditures are to be made. To put the case concisely, thjreis_,a, system of orderly finan- ciering and a^stem_qf exigency and investment financiering, each of which is subject to its own peculiar principles so far as income is concerned. In this fact is found a second reason for a separate treatment of public credit. The foregoing analysis shows that all questions of public income may be discussed under one of the three following heads : 1. Direct revenue, which leads to a consideration of public domains and public industries. 2. Derivative revenue, which leads to an analysis of the principles and a study of the practice of taxation. 3. Anticipatory revenue, which leads to an investigation into the principles of public credit. (2) Comparison of Direct and Derivative Revenue. — It will be of great assistance in our efifort to gain a comprehensive view of the general subject of public revenue if we inquire a little more closely respecting the character of direct and deri- vative revenue, and carry their comparison and analysis a step further. In this we shall confine ourselves in the first instance to a consideration of the regular and orderly sources of public income. Public domains and public industry are alike in that the payment made into the treasury on account of them are made in return for a definite and specific privilege or ser- vice. Where government owns land and assigns it by lease for cultivation, public revenue is a rental paid by the tenant. Where government owns and administers the forests, the revenue which it secures arises from the sale of lumber or charcoal. Where government owns and manages a system of 2 22 GENER/IL CONSIDERATIONS RESPECTING REVENUE. railways the revenue accuring is collected through sale of (/transportation. A stamp placed upon a letter is the price for carrying the letter, and the government collects its postal revenue from the sale of stamps. The significant fact in all these cases, as in others that might be mentioned, is, that the citizen presents himself before the agent of the State as a pur- chaser of some privilege or service, and the amount he pays holds some definite relation to the quantity and quality of the service rendered. The relation between the citizen and the State is the " contractual " relation. The payment is freely made at the time of purchase and the citizen knows what he gets for his money. In this regard revenue by taxation is of an entirely different sort. It arises from payments made for a general and not for a specific service, and the service sup- ported by the payment cannot be measured in any way to the citizen. The service is general in its character, and any at- tempt to measure it out to the citizen in proportion to pay- ments would result in the destruction of the service itself. Another distinction between direct and derivative revenue is that the former is voluntary while the latter is coercive. Much confusion has arisen in treatises upon finance on ac- count of the different ways in which these words are used. By some a voluntary payment is understood to be a payment no greater in amount than could be demanded for a specific ser- vice were the price of the service determined by competition. This conception of the phrase necessitates a separation of the payment made for the service from which the State hopes to se- cure a general as well as a specific revenue into two parts — the one covering cost, the other reckoned as a profit. The former is said to constitute a voluntary payment, the latter a coercive payment, and on this account the profit to government on a commercial industry is said to be a tax. This distinction, al- though plausible when presented in this manner, is of slight advantage. No important administrative rule can be based upon it,' nor is it sufficiently characteristic to be easily carried through a scientific treatise. Wherever a monopoly exists, whether public or private, an extraordinary profit is liable to make its appearance; but one would not on that account care to say that he who purchases from a monopoly is coerced to make tne payment. It is of course true that if he desires the com- modity he must meet the conditions of the only agency that CLASSIFICATION OF PUBLIC REl^ENUE 223 can supply him with it. He must pay the monopoly element as well as the cost element in the price in order to secure the goods, but one cannot say on this account that he is coerced,- in the one case more than in the other. Payment of the mo- nopoly element in a price is merely the condition of his secur- ing the commodity or service in question; but he may if he^- choose forego the purchase, and so be free from the payment of either. The point is this: Coercion which springs from one's desire to possess or enjoy a definite thing is wholly dif-^ ferent, in its origin, in its character, and in the results which follow from it, from the coercion exercised by the government when it secures revenue from taxes. The one is the coercion^ of a specific desire, the other is the coercion of a sovereign power. The one finds its compelling force in the free choice of the individual, the other in the sovereign will of the State^ A classification of revenue which fails to distinguish between commercial and political coercion can only lead to confusion. It is hoped in this treatise to avoid such confusion by refusing to acknowledge at the outset the alleged similarity betweefT profits accruing from a government industry and taxes im- posed upon private industry. -^^ It appears from the above discussion that derivative and direct revenue differ from each other in that the one is built from payments for a specific service, and is made voluntarilv by the citizen ; the other is built from periodic payments, with only the general advantages of government in mind, and is a coerced payment in the legal sense of that word.* ^ A third distinction, though it is administrative and prac- tical rather than general in character, is found in the fact that direct revenue is frequently assigned to special expenditures, - -»© while derivative revenue is commonly thrown into a general fund out of which all general appropriations for the public service are paid. The tendency is strong towards the prac- tice of a consolidated fund. (3) Bequests and Indemnities. — Besides revenue from public domain and public industry, there are two other sources of revenue which are direct in character. The State may in its-JT * In the discussion upon taxation it is shown that the justification of the coerced payment rests upon the moral sense of the community, which demands that a general service should bear with equal weight on all members of the community. 224 GENERJL CONSIDER/ITIONS RESPECTING REVENUE. corporate capacity be the recipient of gratuities either from citizens or from other States. Such, for example, is the bequest of Smithson to the Federal Government for the establishment of the Smithsonian Institution. Such also is the bequest of land from the Federal Govern- ment to the States for the support of common-school and university education. Further illustrations of public revenue by gratutities are found in the frequent gifts made by individuals to municipalities in the form of parks, or for the purchase of fountains, statuary, pictures, and the like. Com- monly, however, revenue from this source is appropriated to some specific service in the articles of bequest; and while it adds to the property of the State, and is of great significance for the development of the people, it does not in any way re- lieve the demands upon the people for the support of the or- dinary functions of government. It is referred to in this con- nection that our analysis of public revenue may be complete It is a revenue that accrues on account of the corporate character of the State by which it is enabled to become the trustee of funds designed for social benefit. Another source of unusual or accidental revenue is found in the indemnities which a conquering nation is apt to demand from a vanquished people at the close of a war, in the judg- ment of international boards of arbitration, or in the agree- ments entered into by nations in case one nation for any reason claims damages from another. After the Franco- Prussian War Germany received five milliard francs from France as a war indemnity. Japan also secured an indemnity of one billion yen from China as one of the conditions of granting peace. It may be said, indeed, to have become an established practice that the conquering nation should receive indemnity for the cost of a war. From the financial and in- dustrial point of view it is more than questionable whether the nation that receives the indemnity is thereby benefited. It is apt to induce habits of extravagance and to lead to the estab- lishment of services which, when the indemnity fund is ex- hausted, will necessitate an increase in the rate of taxation; or, should this evil be avoided, a government will find great difficulty in expending so large a sum of money without dis- turbing the orderly course of trade. On the other hand, should the government which receives the indemnity en- CLASSIFIC/ITION OF PUBLIC REI^ENUE. ^25 deavour to avoid this evil, it is likely that by withholding so considerable a sum from the ordinary circulation it will affect injuriously commercial conditions. In view of the possible difficulties which attend the receipt and expenditure of a na- tional indemnity, it is not strange that the board of directors of the Bank of Japan should have presented to the council * of the bank this question : How may the Chinese indemnity be employed to the greatest advantage and the least disadvan- tage ? There is perhaps in the entire range of financ.al problems no question more attractive because of the possi- bilities which it presents for broad generalization than this question of revenue by indemnity. It does not, however, bear that relative importance, when compared with other questions, which justifies further mention of it in this treatise. (4) Fees and Assessments. — Assuming that all revenue is either derivative or direct, where should fees and assessments be classed ? Before undertaking to answer this question it would be well to make sure that the terms themselves are un- derstood. A fee is a payment made to the State on the occa- sion of some specific service rendered by the State to the citi- zen, the service, however, being non-commercial in character. Two or three illustrations will make this clear. The payment demanded for recording a deed or mortgage, or for any legal process, is a fee; so also is the payment required to secure a passport or license (this latter, however, should not be con- founded with k license tax), or for the issue of a teacher's cer- tificate or diploma; so also is the payment for connecting with a public sewer, or for the privilege of purchasing light and water from a municipality. All these, payments and many pthers for like services, or permits, are called fees. They are, however, in no sense the price paid for the service rendered or the permit granted. While it is true that they recognise a specialization in the service, they are in no sense a quid pro quo. The amount fixed bears no relation to the importance of the service, and only in a few cases to the quantity or the quality of the service. For the most part, services which are made the • The Bank of Japan provides in its organization for a council com- posed of seven members to whom all questions of a general or public nature are referred. This council is made up of specialists in finaiic^ and political economy. The authoritative decision of course lies with the board of directors. 2 26 GENERAL CONSIDERATIONS RESPECTING REi'ENUE. occasion of a fee do not permit of quantitative assessment; nor is the purpose of the government in demanding a fee that the aggregate of moneys thus secured shall equal the expendi- ture incident to the service. As further characterizin|^ fees it may be said that the service rendered by the government for which a fee is charged is not commonly the comprehensive or fundamental service which the State has in mind in the adjustment of its governmental machinery. It is rather a service which arises incidentally in connection with some comprehensive governmental function. Thus the maintenance of foreign relations is a general govern- mental function, but the granting of a passport or the vise of an invoice is merely incidental in the administration of foreign afifairs. The maintenance of justice in the business relations of citizens is one of the fundamental aims of political organi- zation ; the recording of a deed or of a mortgage, on the other hand, is required in order to render justice in commercial deal- ings easy and sure. In the same way the fee for a diploma is incidental to the administration of public education; so also the fee for a sewer connection is incidental to the administra- tion of the health department of a municipality. In view of the above considerations it appears that a fee is more properly classed under the head of derivative revenue than of direct revenue ; that is to say, it is allied to a tax and not to a price. Although paid on the occasion of a special service, it is not paid because of that service, but rather be- cause the government selects a certain occasion in the per- formance of its general functions for the levy of a special tax, and levies that tax to the individual with whom at the time it comes in contact. A special a:sessnient is defined by Professor Seligman as " a compulsory contribution levied in proportion to special benefits designed to bear the cost of special improvements to property undertaken in the public interest." * This definition implies, first, that the improvement which is made the occasion of payment is primarily for the benefit of the public, and secondarily for the benefit of the individual on whose property the improvement abuts. The paving of a street, for example, while it adds to the value of abutting property, is usually re- * Essays in Taxation, p. 383. CLASSIFICATION OF PUBLIC REVENUE. 227 garded as a work pertaining to social rather than to private economy. In a very free sense, an assessment is in this par- ticular allied to a fee. The service rendered by government to the individual who makes the payment is of secondary im- portance as compared with the general service involved. In practice, however, the assessment dilifers from a fee in that it is attempted to assign a payment to the individual in proportion to the benefit received. The definition implies in the second ■place that a special assessment constitutes a " compulsory con- tribution " which shows that, although the payment is a quid pro quo, it is not a price for service rendered. The transaction lies within the domain of social and not of free economy. Nor is the compulsory character of the assessment confined to the fact of payment. The decision as to the character of the im- provement, as well as to the time at which it shall be under- taken, rests with the pubHc authorities. In a double sense, therefore, an assessment may be regarded as a compulsory payment. Our conclusion then is that assessments like fees are allied to taxes and are, on that account, to be classified as special forms of derivative revenue; at the same time they are in a greater or less degree adjusted to the idea of a special service, and for that reason should be granted an analysis separate from the general discussion of taxation. In this, however, we cannot go so far as do many German writers of prominence who recognise fees and assessments as a distinct source of public revenue. The classification of public revenue which gives form to the present treatise is the following : Public Revenue. Direct Revenue. Derivative Revenue. Anticipatory Revenue. a. Public Domains. i. Public Industries. c. Gratuities or Gifts, or Treasure Trove. il. Confiscations and Indemnities. a. Taxes. b. Fees. c. Assessments. d. Fines and Penalties. a. Sale of Bonds or other Formi of Commercial Credit. /'. Treasury Notes. 2 28 GENERAL CONSIDERATIONS RESPECTING REVENUE. (5) Revenue from Expropriation. — It will be observed by one familiar with the literature upon this subject that the above classification of public revenue fails to include revenue from expropriation. Under this phrase is included the process of taking property through the exercise of the right of eminent domain. The reason for declining to recognise expropriation as a phase of revenue is that the State cannot, by any con- ceivable use it may legally make of the power of eminent do- main, increase its income. The utmost it can do is to enforce an exchange of property. The government has a right under tliis sovereign power to take from a citizen whatever is ac- /counted essential for a public purpose, but it is under obliga- ytion to return to him an equivalent for what it takes. In case ' an equivalent is not given in return, the act becomes either spoliation, which is an abuse of law, and therefore not to be considered among the sources of orderly revenue, or confisca- tion, which rests upon an entirely different power than the power of eminent domain. For these reasons property ex- m»priated from private to pubHc use is not counted as a public /revenue. (6) The Lawyer's Classification. — It will be further ob- served that the classification here set forth pays no regard to the legal authority upon which the State rests its appeal for revenue, and in this respect differs from what (for want of a better name) may be termed the lawyer's classification. It is not intended to convey the impression that questions of constitutional right are of no importance in the adjust- ment of a fiscal system ; they are of the utmost importance, as was clearly pointed out when the fiscal axioms were under consideration. Especially in the United States, where the courts have the last word on the constitutionality of a law or the legality of a method adopted for its enforcement, is it es- sential that the financier have clear and distinct views upon questions of legal authority. When, however, one observes the inextricable confusion into which the courts have drawn the nomenclature of finance by endeavouring to classify public revenue according to the governmental powers brought for- ward for their legal support, he is justified in expressing a doubt as to tl)e advantage of the classification. The truth is that a given revenue may rest upon any one of several powers according to the purpose for which it is levied ; or, indeed, it PUBLIC AND PRiyATE INDUSTRY. 229 may rest on several powers at the same time. Duties on im- ports, for example, may appeal to the taxing power, to the power to regulate commerce, or to the general welfare clause of the Constitution for legal justification, or it may appeal to all of these powers which the Constitution confers on Congress; but the duty is a duty in any case. The fees imposed on hack- drivers or newsboys may rest entirely on the police power, and a lawyer might urge that power to the exclusion of all others in the defence of the ordinance ; but the fact that the fee is de- pendent on police regulation does not take it out of the cate- gory of taxes. It is right for lawyers to classify the sovereign power of the State, and to rest their arguments in support of the various forms of revenue upon one or all of those powers ; but to define revenue in the language of legal pleading must inevitably lead to confusion. The nature of revenue is one thing, the nature of legal authority to set revenue machinery in motion is quite another. It is believed that the classifica- tion of revenue according to its nature will enable the student to obviate many difiSculties that might otherwise arise. 38. Comparison of Public and Private Industry. — The foregoing analysis aims to disclose the general characteristics of public revenue. As further suggestive of the fundamen- tal conceptions involved we shall now proceed to a cursory comparison of public and private industries, and to inquire if the general attitude of government toward the public is changed in any marked degree on account of the fact that it presents itself in connection with an industrial enterprise. There are but two reasons why government should care to undertake an industrial enterprise : the one is that it may be of service to the citizen, the other that it may obtain a revenue for itself. The building and control of a railway is typical of the former; the French tobacco monopoly may be mentioned as an illustration of the latter. One must not think, however, that these two aims cannot be present in the same undertak- ^ ing. Indeed, it is the rule rather than the exception that both objects are held in mind in connection with such industries as the government chooses to undertake; and, while it may be true that this renders the administration of the public business more difficult than would otherwise be the case, it must be al- lowed that the advantage to the public is on this account greatly increased. It is certainly wise to obtain revenue in 23° GENERAL CONSIDERATIONS RESPECTING REVENUE. such a manner as to render incidental benefits whenever that is possible. Naturally the administrative rules which appeal to the financier will vary according to the purpose for which the in- ydustry is undertaken. If revenue be the chief object, the po- licy of control will tend to adjust itself to what is known as strict business methods. The principle of private financiering will be put in practice so far as that may be done in view of the sovereign character of the State. This generalization brings [O to the front a very important question : In how far is it pos- "sible for the State to divest itself of its sovereign character when it invests itself with the role of an undertaker ? Many writers assert that no essential diflference exists in ^matters of business between the State and the individual, and they proceed in their discussion of public industries as though government were at liberty to adopt as its own the business policy of a corporation or of an individual, and to adjust its charges upon strictly business considerations. One may, however, doubt the pertinency of such a conclusion. In every sphere of its activity the government stands for the whole "people. The State is obliged from the necessity of its own nature to regard the general effect, as well as the immediate result, of its acts, and on this account it is debarred from ad- Justing a business policy to the principles of private financier- ing. It cannot, for example, resort to any of those devices by which trade is enticed from a private concern performing ithe same or analogous services. This is true because the com- 'petitor of the government is a part of the State, and the State is obliged to recognise that damage to such a competitor is :; ^damage to itself. The State is as much interested in the suc- .iiCess of what its citizens undertake as in the success of its own bbusiness enterprises, and for this reason is obliged to assume "^"^ — the comprehensive or social point of view, and to consider the general and ultimate, as well as the, particular and immediate, results of its business policy. 'i,t ~ — As further illustrative of the peculiar character of a public enterprise, it may be said that a public industry cannot recog- nise the wholesale principle in dealing with its customers, since it has no right to discriminate in price in favour of the large and against the small buyer. It is a fundamental principle of democratic government that all citizens should stand as equal? PUBLIC AND PRIVATE INDUSTRY. a^l before it, and it would be as dangerous to disregard this prin- ciple in the administration of industry as in the dispensation of justice. If the distinction thus brought to notice be accepted (and it must be admitted that many writers on finance fail to recog- nise it), it follows that pubHc utility rather than industrial profit ^ must be the ruling consideration in all public industries. The State has no private interest and cannot follow, without modi- fication, the rules of a private business. The phrase " private price " or " ^wajt-private price " finds no place in discussing; f o an industry carried on by government. The private price is commonly the competitive price, and is always fixed with a view to the highest possible profit; the public price is a governmental price, and is adjusted to the idea of the highest social utility. It may be that, incidentally, the same charge will be made by government aiming to secure social utility as would be the case if the industry were ad- ministered upon a competitive basis ; but the process of get- ting at the charge is so different in the two cases that one is justified in asserting that the charges themselves stand for essentially different concepts and represent essentially dif- ferent social forces. The practical outcome of the fact that the State cannot divest itself of its sovereign character, even though it under- take a business for the purpose of securing a profit, is that public industries will, as a rule, be organized as legal and ex- clusive monopolies. In no other way can that symmetry in organization and harmony in administration be maintained which are essential to a just regard of the social interests. There are of course exceptions to this rule. The government might, for example, own and administer a railway, not for the purpose of revenue or with a view of rendering a direct com- mercial service, but in order to establish and maintain the — conditions of equity for the conduct of industries intrusted to individuals and corporations. To speak specifically, the State might choose to own a railway in order to coerce competing railways to charge a just price or to provide conditions of normal competition between merchants and manufacturers. Even in such cases, however, the industry owned by the , government does not subject itself to the law of competition ; on the contrary, it makes use of competition in order to con- 232 GENERAL CONSIDERATIONS RESPECTING REVENUE. trol competition^ In all cases it is the governmental principle, rather than the commercial principle, to which the administra- tion of a public industry looks for guidance. The difference between a public and a private industry would be yet more clearly disclosed by inquiring respecting the principles upon which the government must rely in ad- justing the price for such commercial services as it renders, but as this question is made the subject of special discussion in a subsequent chapter it will not claim our attention in this connection.* 39. Marks of a Good Revenue System. — In order to pre- pare for deciding properly the technical questions which come up in the discussion of the various sources of public revenue, it may be well at this point to consider the marks of a good revenue system. The most important of these are as follows : First. A good revenue system must be adequate to the just wants of the State. This is more than a truism. Not only must the government be able to secure such moneys as it needs, but it must be able to do this easily and without ap- parent effort. Difficulty in securing revenue acts as an obstacle to the performance of any duty which may be assigned to government ; while, on the other hand, the impression that the State is in possession of adequate funds, or may easily secure an increase in revenue, brings to it such strength and dig- nity that tasks which would otherwise be difficult in their performance are accomplished with ease. Especially is this true in the case of diplomatic negotiations. The effect of an argument depends more upon the power of the nation which asserts it than upon the reasonableness of the argument itself ; and in these days of expensive military and naval equipment national power is in large measure dependent upon money or the ability to command money. In case government desires to enter upon a contract calling for large payments, also, a full treasury will enable it to secure lower bids than might otherwise be the case. Or, suppose the currency system of the State to be in any way dependent upon the maintenance by the government of a bullion reserve, a deficit under such circumstances, or even the danger that a deficit may arise, might easily result in commercial embarrassment. Other il- * Cf. Part 11, Book I, Ch. VI, g 45. MARKS OF A GOOD SYSTEM. 235 lustrations present themselves, but the above are adequate to show the importance of a revenue system which secures an ample income without apparent effort. The first mark of a good revenue system is that it succeeds in getting the money. Second. The second mark of a good revenue organization is that the financial policy of a State presents itself as a system and not as an aggregation of independent and un- related acts. It is a fundamental principle of government that the burden of the State should rest equitably upon all citizens; but it is impossible to secure such a distribution of the burden unless all of the many ways in which revenue machinery touches the citizen are classified, compared, and reduced to a system. The persistent effort on the part of legislation to avoid " double taxation " shows the necessity of regarding every law as a part of a comprehensive whole. The suggestion here presented will meet with universal approval, though in practice it is almost as universally disregarded. The financier is not at liberty, according to the theory of equity held by democratic peoples, to judge of a law for raising revenue without considering it in its relation to the entire revenue system. A few applications of this principle will show its meaning more clearly. Should the State undertake an industry which is especially lucrative for the sake of securing revenue, thus presenting itself as a competitor to citizens engaged in the same industry, it should exercise great care lest in adjusting fts system of taxation it impose a burden upon its competitor from which it itself is free. That is to say, the taxes which it levies upon private industries must be levied in view of its own industrial undertakings. Again, some taxes which could not be justified in and of themselves are capable of easy justifi-v cation when considered as a part of a comprehensive revenue system. In 1789, for example, when the first tariff act was under discussion in Congress, the objection was urged against imposing a duty on salt that this would bear grievously upon the mountaineers of North Carolina and Virginia.' The reply to this objection was that, according to the scheme of taxa- tion under discussion, this was the only tax which would reach the citizens in question. Again, many duties are im-^ posed as compensatory duties; that is to say, duties which would be unnecessary considered by themselves, but which 234 GENERAL CONSIDER/ITIONS RESPECTING REyENUb. become necessary in order to provide the conditions under which revenue from other sources may be protected. The Federal Government, for example, imposes a duty upon the manufacturer of spirits within the United States ; it must, in order to enable this industry to bear the tax and at the same time maintain itself against foreign competition, impose a corresponding duty upon the importation of spirits. The revenue system of every country is replete with illustrations of complementary and compensatory laws, and of laws designed to avoid double taxation, all of which goes to show that a sound fiscal system will be well balanced and comprehensive. Third. The third mark of a good revenue system is one which appeals more directly to a country organized as a federation, like the United States, than to a country more highly centralized for the purpose of administration, like France. Not only should the fiscal policy of a particular grade of government present itself as a comprehensive whole, but the several corporate bodies which together make up " the State " should exercise great care lest the revenue domain of the one encroach upon the revenue domain of the other, and by so doing bring confusion and inequalities into what otherwise might be a sound financial organization. To speak specifically, the third mark of a good revenue system is harmony and balance between the central and local govern- ments, between the local governments themselves, and be- tween the several organs of local government. This point may be the best presented by considering the situation as it exists in the United States. There are in this country four grades of government, each of which has as- signed to it a certain definite set of public functions. These governments are the Federal Government, the State govern- ments, the chartered municipalities, and the local govern- ments resting on general statutes. There is at present no separation of the sources of revenue corresponding to this separation of public duties. It is true that by the Federal Constitution customs revenues are set aside for the Federal Government, and, with the exception of the State of Texas, the public domain is the property of the United States; for the rest, however, there exists the greatest confusion. The evils which follow from this unsystematic method of proce- dure present themselves at every point in the discussion of MAIU- ments that are exposed to emergencies and exigencies in the performance of their assigned functions. To speak explicitly, this means that those governments that are clothed with the power of declaring war and concluding peace are the ones for whom elasticity in revenue is of the most importance. In the United States, for example, the revenue system of the Federal Government should regard this characteristic as of very great importance. A municipal government or a county government, on the other hand, may practically ignore elas- ticity of revenue in the organization of revenue machinery. Many other qualities there are of a good revenue system, but these will come up incidentally in connection with the dis- cussion of the special questions as they present themselves. Those qualities of which mention has been made are the ones that pertain to the revenue system regarded as a comprehen- sive whole. BOOK I. DIRECT REVENUE. CHAPTER I. REVENUE FROM PUBLIC DOMAIN. Mineral Deposits and the Fiscal Policy. Surface Lands and the Fiscal Policy. (1) Shall Government Cultivate its Own Domain 7 (2) Shall Government Lease its Domain for Cultivation? (3) Shall Government Dispose of its Domain by Sale? Land Policy of the United States. (1) The Original Idea Respecting Land. (2) Use of Land for National Development (3) Use of Land for Educational and Railway Grants. Under revenue from public domain will be considered those forms of income accruing to the State on account of ownership of or interest in landed property. This phrase " landed property," however, must be interpreted very broadly. All of the so-called " extractive industries " present themselves for consideration in connection with the study of revenue from public domain, and under the extractive indus- tries are included fishing, mining, and agriculture. It is not necessary to consider at length the policy of the feudal system or of early States respecting fish. In England such fish as whale and sturgeon, called " royal fish," were the property of the crown wherever taken, but it is not known that they ever formed a considerable portion of the public revenue. At present it is the general policy of nations to consign this industry in all of its branches to private enter- prise. Indeed, during recent years the most civilized peoples have expended considerable sums of money in the develop- ment of piscatorial culture, not with a view of making the in- dustry itself a source of revenue, but for the purpose of open- ing up a new source of food-supply. In some cases, as, for example, the oyster-beds of Chesapeake Bay, the State secures 336 MINERAL DEPOSITS. 237 a revenue from the rental of the beds, agreeing on its part to protect the beds from depredations. But this is quite excep- tional. Wherever fishing preserves are maintained, whether for industry or for pleasure, they are, as a rule, the property of private persons or corporations, and as such are listed as taxable property. 40. Uineral Deposits and the Fiscal Policy. — The revenue policy respecting mineral lands cannot be so easily stated. Not only is there considerable divergence in practice among nations in regard to mines, but there continues to be con- siderable difference of opinion respecting the appropriate pol- icy. Gold and silver among minerals, like the whale and sturgeon among fish, were formerly declared to be royal property, and wherever found were appropriated by the State. In this form, however, the claim of the State upon minerals has long since been abandoned. The general argument favouring the public ownership of mines is that minerals are the free gift of nature, and should, therefore, not be made the property of any individual. Even in countries where the surface lands are assigned to indi- viduals for private cultivation, it has been proposed to re- serve the mineral deposits for the State. This suggestion is found in the land policy proposed by Turgot, the great Phy- siocrat statesman of France. The policy which has come to prevail in the United States, however, and indeed in most countries, is to give title, in case of sale, from the surface to the centre of the earth. The argument which has led to the assignment of mineral lands as private property does not disregard the fact that minerals are a gratuitous gift of na- ture, but asserts, as breaking the force of this consideration, that nature has been so bounteous in her gifts that no injury can arise to consumers as the result of such assignment. Consider, for example, the wide extent of the coal-fields in the United States, as also the great number of iron-mines and salt-wells that abound. There is nothing in the nature of the case why competition should hot determine the price of these products, and, in the absence of artificial restraints, the public finds, in the many opportunities for mining, a guarantee that mineral products of this class can be had at cost. There is, therefore, no more necessity from the ethical or commercial point of view for the government to own and administer such 838 REVENUE FROM PUBLIC DOM/1IN. mineral property than for it to take into its possession any other industrial enterprise. This being the case, the question as to whether or not mines shall be made the source of special income to the government comes to be a general and not a particular question. But this line of reasoning does not apply to minerals which are localized to such an extent that they may be accounted a natural monopoly, as for example the zinc mines in the United States; nor does it apply to a mine which like the Calumet and Hecla of Northern Michigan was for a time so far superior to other copper-bearing mines as to enable it for many years to control the output and the price. A detailed study of the mining conditions of any country shows many exceptions to the assumptions of the argument for private ownership presented above. It may be doubted, however, if the mining policy of any country has been directed by economic or ethical theories. The simple fact is that men will not enter upon the uncertain calling of a prospector unless induced thereto by the hope of great gain. This work cannot be undertaken by the govern- ment on account of its speculative character, and unless the hope of unusual returns is offered to men who by nature take a pleasure in speculation the deposits of unusual minerals will forever remain undiscovered. It thus appears that all the considerations involved in the case of mineral lands do not range themselves on the same side of the question. On the one hand it is essential, at least in a new country, to grant free play to the speculative interests of individuals in order to secure the discovery of unusual minerals or of minerals of localized deposit. On the other hand it must not be overlooked that it is an injustice to the community as well as a source of a great social danger to assign rich mineral deposits to individuals or to corporations. Mineral wealth is the gratuitous gift of nature, and it would be a mistake for any government to ignore this fact. • There are two ways of harmonizing these conflicting con- siderations. In the first place, the principle underlying the patent laws may be applied to legislation respecting mines. This would give to those who discover mining property a limited rather than a perpetual lease, and in this manner the mines would ultimately become a source of income to the State. SURFACE L/tNDS. a 39 The difficulty in applying such a principle is chiefly adminis- trative, for it is probable that a mine held under a limited lease would be worked in an uneconomical manner, so that upon the expiration of the lease the property would be com- paratively worthless. The second way of meeting the difficulty is through the machinery of taxation. There is much to be said in favour of the policy of assigning mineral lands to private ownership, a policy which has finally been accepted by the United States, provided it be supplemented by some form of special taxation upon mineral property. It would be out of place, however, to consider at this time the form of the tax appropriate to the situation. The general conclusion of the foregoing discussion respecting the relation of a financial pol- icy to mineral property is as follows : Mines that are widely spread and easily discovered may be treated like the pro- perty of ordinary industries. No special financial policy is required for minerals like coal, iron, or salt. Mines, on the other hand, which form the basis of a natural monopoly should be handed over to private enterprise for development, but they should at the same time be recognised as a fit object for special and peculiar taxation. 41. Surface Lands and the Fiscal Policy. — Private property in land among peoples whose law of real property has been influenced by the feudal organization is universally regarded as a grant or privilege from the State. In the United States, for example, a clear title commonly bears upon its face a record of the transfer back to the original grant. Even where occupancy preceded survey and sale, as in the case of mining claims staked out by gold-hunters, it was thought necessary to legalize the customs of the miners and thus secure the occupiers in their property by a title from the State. Such being the theory of proprietorship, a comprehensive analysis of the relation of surface or agricultural lands to the fiscal sys- tem may, without violence to the working hypothesis of the law of real property, start with the assumption that all lands belong to the State, and that the conditions of their use are determined entirely by expediency, or by what is regarded, all things considered, as sound policy. Surface or agricultural lands may be made to serve as a 240 REVENUE FROM PUBLIC DOMAIN. source of income to the State in either of the thfee following ways: First, the government may cultivate the lands as a public industry. Second, the government may establish a tenantry upon its lands and receive an income in the form of rent. Third, the government may dispose of its lands and secure a revenue through taxation. Each of the above suggestions will be considered by itself. The immediate purpose of our consideration will of course be to determine the most practicable policy for modern states ; at the same time, the necessity of discovering some general principles for determining those industries naturally adapted to serve as the source of direct revenue will be held constantly in view. (i) Shall Government Cultivate its Own Domain ? — ^The dependence of the Science of Finance upon the principles of Political Economy will receive especial emphasis in con- nection with questions of taxation, but economic analysis is hardly less pertinent in connection with the above question. As is well known, farming is an intensive and not an extensive industry. It depends for success upon the personal care of the farmer and attention to minute details. The principle of division of labour is applicable to agriculture only in a very limited degree, and, on this account, the normal ten- dency of agriculture as a business is toward continually smaller holdings. The product of any particular farm con- tinually must vary from year to year in order to adjust itself to the varying demands of the market, and it requires the greatest attention and care in a progressive agricultural community to adjust the output to the needs of the community. Without indulging further in comments of this sort, it will be readily seen that the business of farm- ing is not capable of an organization adapted .to govern- mental control. It cannot be subjected to general rules, nor can the workers be organized in an enduring and efficient industrial association. It would be necessary for government, should it undertake public farming, to make use of overseers and drivers, as was the custom in the days of slavery ; and for the same reason that a high state of agricul- tural development was never reached on the basis of slav» SURFACE LANDS. 241 labour, one is justified in asserting that agriculture under the direction of officers of the State would become an inadequate if not a stagnant industry. If this be true, it follows that the system of public agriculture would be detrimental to the highest industrial development, and this, even from the point of view of public income, to say nothing of the social interests involved, must be accepted as final against the suggestion that the government should secure a direct revenue from agricul- tural lands. It is possible the analysis of tne foregomg paragraph was not necessary to support the conclusion resting upon it. It is the general practice of modern peoples to refrain from undertaking directly the industry of farming. They have al- most universally assigned such lands as they possessed to tenant farmers or sold them in fee simple to the occupiers. Austria began selling aer lands in 1818; Spain since 181 1 has disposed of nearly two hundred millions of acres of land. The budget of Prussia every year contains an item of income from the sale of pubHc lands. The land policy of France in- troduced at the time of the French Revolution is familiar to all students. Some of the smaller kingdoms and principali- ties in Europe still retain their public domains, but, so far as the writer is aware, no important State at present maintains the policy of purchasing lands. Beaulieu m discussing this question presents certain facts designed to measure the relative efficiency of agriculture on the part of the State, and of the system of rentals under long leases by means of which the personal interest of the cultivator is brought to the task of cultivation. Three large domains were divided between one hundred and seven families, the average number of years covered by the leases being forty. The following is a state- ment of the results under the two systems of agriculture : * Before the After the Division. Division. Number of persons upon the domain 45 595 Number of horses • 10 124 Number of cows 16 333 Production of wheat 521 (wisp.) 1,414 (wisp. Consumption of wheat upon the place 28 " 439 " Excess wheat for sale 410 " 752 " Product of cattle, eggs, straw 7,765 (thalers) 8,226 (thalers) Total proceeds of products sold i5,537 " 22,726 " Revenue to the State 4,077 " 5,i75 " * Leroy-Beaulieu, Science de Finance, Vol. I, p. 41. It is copied by him from the fourth edition of Rau's Finanzwissenschaft, Vol. I, p. 172. 342 REyENUE FROM PUBLIC DOM/IIN. In the presence of such a comparison as the above, as- suming the figures to be in any degree typical, the policy of government agriculture cannot be defended. The apphcation of personal interest to land culture not only in- creases the number of individuals which the land supports, but increases the surplus of product for sale from the land, and the revenue to the State as well. The foregoing analysis, as also the conclusion which is drawn from it, applies to the industry of ordinary farming. It furnishes no argument, however, against the retention by the State of land for the purpose of maintaining a system of public forestry. This is true because a system of forestry holds in view the rendering of a general social service, and should not be judged by technical results. Care of forests has always been an object of governmental solicitude. In former times it was considered of the utmost importance that a nation should have in its possession the material with which to construct vessels, and the possession of forests was under these circumstances an element of national strength. At present the form of argument is somewhat changed, but it is equally strong. Forests are now generally regarded as exer- cising a salutary influence upon the rainfall, upon the general health of the community, and as a means of mitigating in some degree the evils arising from floods and droughts. It is, therefore, a matter of general interest that a proper portion of the surface of any country should be covered with forests. The only question pertains to the best means of securing this result. Both experience and analysis show that private enterprise is not capable of developing an adequate system of forestry. The time intervening between planting and harvest — at least thirty years — is too long to attract private investment. It is true that there is an increase in the value of land thus planted from year to year, so that in a sense the investor has an annual income from his investment; but the difficulty is he cannot realize upon this investment except he sell the land with the crop. For this reason, if for no other, forest culture must be undertaken by a corporation which not only repre- sents the general social interest, but which enjoys a perpetual lease of life. The State is the only corporation which meets these requirements. SURFACE LANDS. 243 Although forestry may be undertaken for the general ser- vice which the government may thereby render to a com- munity, it may become, under proper management, a source of net income to the State through the sale of wood and tim- ber, charcoal and ash products. The experience of European nations with this industry shows that it may become the source of very considerable income. In France, for example, the gross income varies from thirty-eight to forty million francs a year, while the cost of administration is from twenty- five to thirty million francs. Taking the higher figures in each case, the percentage of expenses to gross income, in this country, is 75 per cent. The corresponding percentage in Hanover is from 80 to 85 per cent; in Bavaria about 50 per cent ; in Prussia and Wiirtemberg 48 per cent ; and in Saxony 37 per cent. Should one include in his estimate the value of land assigned to forest culture, the showing might not be such as to justifv the investment. In France, for example, the net income estimated on the value of the property shows a return upon the investment of less than 2 per cent. In whatever way, then, the matter be regarded, the conclu- sion remains the same. The development of a system of forestry must be classed as one of the general governmental services, and must be advocated on the ground of its social importance. The reason why the financier is obliged to con- sider this industry is that incidentally it gives rise to certain commercial products the proceeds of the sale of which may support the expenses of the service. The propriety of public forestry is further shown when it is recognised that, as an industry; it may be subjected to simple rules of a general nature, and its administration may be carried on with more or less regard to the principles of military organization. In this respect it stands in marked contrast with the industry of farming. The principal difficulty in connection with the administra- tion of a public system of forestry arises on account of the fact that the products of this industry may come into com- petition with similar products of private enterprises. Not all the timber can be grown upon government lands. Not all the charcoal and ash products can be furnished by the public forestry departments. These products of forest culture might also come into competition with artificial commodities 244 REyENUE FROM PUBLIC DOM/11N. that serve the same general purpose, as, for example, lumber manufactured from straw ; iron, aluminum, and the like, used for building purposes ; other fuels may be substituted for charcoal ; or chemicals may serve the purpose of ash products. Agovernment cannot escape a competition with its subjects, and in the presence of such competition no government would be at liberty to administer its forestry system with a view to the high- est possible net income. It is obHged to recognise the social and industrial tendencies bound up in its policy of administra- tion, and to adjust the price of its commodities accordingly. In general it may be said that the price of the products of public forestry should be adjusted to the market price of goods with which they come into competition, the only ex- ception to this generalization being defensible when the government finds itself in competition with a private indus- try which aims to maintain an industrial monopoly, and to charge a monopoly price for its products. The policy of European states respecting forestry shows a marked degree of uniformity. At the beginning of the present century there seems to have been a tendency on the part of governments to alienate this kind of property, a tendency which perhaps may have been one of the mistaken applications of the prevalent theories respecting individual rights. From 1791 to 1795 France disposed of nearly one- half of her state forests and continued to reduce the forest area until in 1870 there remained but one-fifth of the original state holdings. Many of the German principalities also fol- lowed the same policy, selling off their forest lands which had for centuries 'been preserved as government property. They did not, however, go so far in this direction as France. During the past forty or fifty years the old policy respect- ing state forestry has been revived, and nearly all European nations evince not only a desire to hold on to such forest property as they have, but to extend its area and efficiency, and to exercise a stricter control over the use of private forest property wherever communal interests are thereby en- dangered. In France since 1870 no sales have been made, but each year shows a gradual increase in the amount of land consigned to public forestry. Since 1872 the govern- ment has spent nearly 200,000,000 francs in the reforesting of dunes and devastated mountain-sides. In Prussia the policy SURF/ICE LANDS. 2 45 of selling forest lands prevailed in the beginning of this cen- tury, but since 1831 the opposing policy has made itself apparent. Between the years 1867 and 1895 over 22,000,000 marks were spent in increasing the forest area, and the budget for 1895 contains an item of 2,000,000 marks for the purpose of purchasing additional lands for this purpose. The in- creased efficiency of forests as a source of income is shown by the fact that in 1830 the cost of administration was 61 per cent of the gross receipts ; in 1870 it was 52 per cent ; in 1893 it was 47 per cent. In other German states the same tendency may be noted. Bavaria shows a 4-per-cent increase in forest area, Wiirtemberg a 3-per-cent increase, since 1873. A small increase also may be noted for Baden and Saxony. In Aus- tria the selling of forests continued until about 1870, but at the present time the State is the only great purchaser of forest lands. In 1886 60,000 acres, in 1888 230,000 acres, and in 1891 211,000 acres were purchased for this purpose. Both Italy and Russia, while too poor to spend much money in this manner, have nevertheless made a start in this direction. Russia sells timber lands to the communes but not to private individuals, and has enacted a strict law under which the general forestry of the country is to be administered. The English Government has no considerable amount of forests, but this is not due to the fact that the English are averse to governmental management of forestry culture. In India, where there is a decided need of forests, the governrnent shows great activity. Between 1882 and 1892 the reserved forests were increased from 46,213 square miles to 59,743 square miles, while the total forest area under the control of the government increased from 71,972 square miles to 114,966 square miles. No country has greater need than the United States of a comprehensive system of forestry, and no country, except it be the South American republics, has shown greater dis- regard of this need. The land system of the Federal Govern- ment makes no distinction between forest lands and agricul- tural lands. The same laws have been followed in the survey and sale of both classes of property, and in the main the same price has been demanded. This policy has resulted in the sale of forest lands as timber property to individuals and cor- porations, whose only purpose was to realize the largest 246 REVENUE FROM PUBLIC DOM/IIN. amount of money possible from their purchase iti the least possible time — a policy which has resulted in the destruction of most of the timber lands east of the Mississippi and north of the Ohio. In the West and the Northwest very little care has been taken to conserve the public forests. Lavish grants have been made to railway corporations for the use of such timber as they needed for the construction of their lines, and no adequate provision has been made against the destruction of forests by fire. The only encouragement to tree-culture ■which Congress has seen fit to make has been in connection with its general land policy. Land- has been given to settlers on condition of their planting and caring for a certain number of trees, but this has amounted to nothing so far as the de- velopment of a system of forestry is concerned. Admitting the importance of a comprehensive system of forestry, the question naturally arises whether this should be done under the direction of the Federal Government or the State governments. Without discussing this question, the opinion may be ventured that the proper seat of authority for the administration of the forestry system is the State govern- ments. This would obviate quite a number of difficult con- stitutional questions which might embarrass the administra- tion of the Federal Government owning forests within the jurisdiction of the States. From the financial point of view, also, there is much to be said in favour of such an investment by the State governments. The chief difficulty in connection with this question of forestry has been that it has never been regarded from a comprehensive point of view, and this can never be done until it is made a part of the fiscal system of the Federal Government or of the State governments. Each year that passes renders the solution of the problem more difficult. The Federal Government should at once undertake to conserve the forests which remain in its possession, and the State governments should enter upon a policy of acquiring land for the purpose of extensive tree-culture.* Closely connected with the question of forestry, and allied to it so far as social considerations are concerned, is the problem of irrigation, Many countries have no problem of * At all events a tax ought not to be imposed on the import of lum- ber from other countries, thus encouraging the destruction of such forests as we have» SURFACE LANDS. 247 this sort, the ordinary rainfall being adequate for agricultural purposes. In other countries irrigation has existed for so long a series of years that riparian rights constitute a per- manent element in the valuation of landed property. The question, therefore, will be discussed in view of the conditions as they exist in the United States. It is estimated that there are seventy-four millions of acres of land that might be re- claimed for cultivation by means of an adequate system of irrigation.* Already certain corporations, notably the in- surance companies, have invested capital with a view to meet- ing this demand. In so doing, however, they seize upon the most generous sources of supply. The canals thus con- structed do not form a part of a general comprehensive system of irrigation, nor are they administered with a view to the highest industrial development. Already many difficulties have arisen between users of water and the corporations ■which own the water-supply. Laws have been passed regu- lating the price of water, and the courts have sustained these laws on the ground that irrigation companies are common carriers. A set of cases, for the most part unknown to the American courts, have arisen in connection with the private ownership of water-supply, and one who is familiar with the development of the law of riparian rights must recognise the difficulty of the problem which concerns this country in case the western territory is developed through private ownership of irrigating canals. In view, therefore, of the fact that a very considerable portion of the territory which needs irriga- tion will be left destitute of a water-supply if the business of rendering this supply is intrusted to corporations, and in view of the further fact that wherever private supply through cor- porations has been tried very serious difficulties have arisen as to the rights of consumers to the use of the water, it must be admitted that a strong argument is presented in favour of public ownership of ditches and canals. If such ownership be decided upon, it follows, in view of the conditions under which the industry is carried on, that the irrigation system will be made a part of the fiscal system of the State. (2) Shall Government Lease its Domain for Cultivation ? — Any discussion which involves the relative merits of sys- * This is the latest estimate of Mr. Newell, hydrographer of tha United States Geological Survey. 848 RbyENUE FROM PUBLIC DOM AM. terns of land tenure must proceed along broader lines than lie strictly within the consideration of the financier. Among the marks of a good revenue system is its adaptation to the per- manent trend of opinion upon social and industrial questions. If the public be convinced that a system of tenant-farming, in any of its various forms, is better than farmer proprietor- ship, it is quite easy for the public treasury to adjust itself to such a conviction, and to demand its income in the form of a land rental rather than in the form of a land tax. But the trend of public opinion for centuries has been in the opposite direction. The commutation of the rentals of feudal times into modern taxes is generally conceded to have been an important step in the advance of Western civilization, it being intimately connected with the rise of private property in land and the development of a higher technic in agriculture. This being the case, it may at first appear unnecessary to consider revenue from land rentals as among the possible forms of public income, or to concede to this idea the courtesy of a discussion. Against such a conclusion, however, several considerations present themselves. In the first place, there are quite a number of governments which still hold to a sys- tem of public tenantry. In the second place, among the socialistic and semi-socialistic theories that to-day agitate the public mind, will be found the claim that land cannot justly be alienated by the State. It is, in the third place, conceivable that the structural changes wrought by four centuries of pri- vate ownership in land have brought with them the necessity for more direct and positive governmental influence in matters pertaining to agriculture than can be accomplished through the medium of taxation. And lastly, much is to be learned of the relation of land to the public treasury by a dis- cussion of the state lease system. For these reasons the policy of land reivtals will be given a cursory examina- tion. At first glance, it seems that no two things could differ more widely than a society in which land is owned by the State and leased by the occupier, and a society in which the occupier is, or may become, the proprietor of the soil which he works; but a slight consideration shows that this dif- ference is not so much in the nature of the two forms of holding as in the terms of the tenant's contract. Every one SURFACE LANDS. 249 knows that the price of land is its rental value capitalized at an assumed rate of interest, due allowance being made for social and speculative interests. It is a strong statement of the case, although within hmits a correct one, that the occu- pier who owns the land is its tenant in perpetuity, while the occupier who rents the land is its owner until the expiration of the lease. Working into the question from this point of view, it appears that progress in the art of agriculture under a system of tenantry, so far as that depends upon the care and thrift of the occupier, will approximate the results that are observed to follow when the farmer is also proprietor, in pro- portion to the length of the lease and the liberality of the contract. It is, therefore, conceivable (the probabilities of the case are not here brought into question) that as good technical results may be shown under a system of tenantry with long lease as under a system of free holding. It further appears from this comparison that the rent paid by a tenant to the State approximates a tax in proportion to the length of the lease. Under a system of annual lease the payment for land will be determined by competition and will equal the full economic rent. That is to say, the government will take the total of the " excess profit " arising from the industry of farming, leaving to the farmer his wages as a labourer, and the interest on improvements, provided they represent an investment of his capital. The government might, it is true, leave a portion of this pure rent in the hands of the tenant and in this manner create a system of rent-sharing between itself and the tenant. According to modern fiscal theories by which the revenue of the State is determined according to pubHc necessities, this must be the case, since the payment by the farmer of the full economic rent to the State would result in his paying a relatively higher amount than would be paid by those engaged in commerce or manufacture. The form which this concession to equality would probably assume would be the substitution of a time lease for an annual rental. It thus becomes apparent that, in case fiscal rather than com- mercial principles determine the amount of payment, no essen- tial difference exists between a land tax and a land rent ; and the substitution of a system of tenantry for a system of free- holders, provided the tenant's lease is recognised as nego- ■a So REyENUE FROM PUBLIC DOM /I IN. tiable property, would involve no very radical change as com- pared with the present system of farmer proprietorship. What, then, it may be asked, are the considerations urged by those who favour a rental of public lands. These con- siderations are not very coherent, nor do all of them pertain directly to the Science of Finance ; but it may be well to pass them in rapid review. In the first place, quite a number of detached suggestions present themselves which rest upon the assumption that better general and technical results would follow should the industry •of agriculture be placed under the direction of government than if left to develop at the hands of a large number of in- dependent owners. It is urged, for example, that under a tenant system the contract for occupancy might be so drawn as to check undue morselization of land. A further illustra- tion is found in the suggestion that the State as a landholder would be in a position to introduce scientific methods of farming, and to so direct the cropping of land that the supply of agricultural products would meet a statistically determined demand. These are both interesting suggestions and typical of ■others of the same sort that might be made. They bring into ccmtrast the relative merits of two theories of social progress, the one of which calls upon the State to exercise direction in industrial affairs, while the other finds in the survival of the most successful among many experiments the surest path to technical progress. One who entertains the latter view cannot doubt respecting the superiority of the system of agri- culture as it exists in the main in the United States. Under no other condition except that of ownership of the soil by him who works it can the spirit of venture and invention be brought to bear upon the industry of agriculture. As has been already suggested, this business embraces too many details to flourish under the influence of administrative advice. There is, for example, no determinable size for a profitable farnl. This varies with the crops to be cultivated and. the means of cultivation. It would be much wiser to remove the social or political influences which lead to excessive subdivi- sions of land, than to enter upon an official analysis of details for determining the normal size of a holding. So far as the second of the above suggestions is concerned, SURF/ICE LANDS. 351 one may inquire if it is necessary for the State to assert its ownership in the land in order to bring to bear upon agriculture the results of scientific investigation. Education, technical as well as general, is among the recognised governmental func- tions, and it is probable that an agricultural system which rests upon the intelligence of a large number of freeholders will reahze the suggestions of scientists for the improvement in agricultural methods as rapidly as may be warranted under the circumstances. The experience of this country in the develop- ment of the agricultural industry, while by no means above criticism, nevertheless furnishes ample proof of the advantages of private ownership of land. Nor is it necessary, in order to bring the influence of the State, and through the State the influence of social interests, to bear upon agriculture, that freeholders should be supplanted by leaseholders. This ques- tion is a part of the comprehensive question of social organi- zation, and the answer which is here given to it implies confi- dence in the principle of voluntary association and a distrust of the principle of coercive association. A second consideration urged in favour of a system of public tenantry is found in the suggestion of those who as- sume that ultimately land must come under some form of communal ownership, while and at the same time they recog- nize the importance of private ownership in the present stage of industrial development. In order to harmonize these two interests it is proposed that all states which have the disposal of large tracts of uncultivated lands should grant them in lease for ninety-nine years, but not in fee simple. This suggestion, it will be observed, is neither general in its character nor does it involve any fundamental principle. It is of slight impor- tance to European peoples and is presented as a suggestion worthy the consideration of those countries only where wild lands are being brought under cultivation. The object of this proposal is to avert strife when the time shall have arrived for making lands communal property. For the time being, it will be observed, all the advantages of private ownership are to be realized. The plan does not contemplate the exer- cise of any direction by the State over agriculture on account of the fact that the title granted the occupier is a lease and not a deed. A discussion of this suggestion rests of course upon, its fundamental assumption, that all land must ultir 252 REyENUE FROM PUBLIC DOM/41N. mately become public property ; and, until there is a general sentiment in the community favouring this way of thinking, it is unnecessary for the practical financier to consider the suggestion. The third suggestion in favour of leasing rather than sell- ing the public domain presents itself as part of a general financial system. All governments must prepare for financial exigencies, and it is claimed that a retention of a considerable portion of the public domain would secure the means of making headway against an unusual demand for money in time of exigency. This might be done in either of two ways: the lands might be sold, or they might be used as security in the borrowing of money. The question thus raised as to the best means of providing against a fiscal exigency is one which will receive consideration in the discussion of Public Credit. If it be necessary, in order to provide against fiscal emergencies, that the State should retain proprietor- ship over a considerable portion of agricultural lands, the argument in favour of the tenant system of agriculture is a strong one ; but a moment's consideration will make it clear that the proposal is wholly inadequate to the end in view. In the first place, it is altogether unlikely that the land could be sold under conditions of fiscal emergency such as are assumed. Suppose, for example, that there arises an unusual demand for public revenue on account of war. Is it not cer- tain that the disturbance of industrial conditions incident to war will preclude the possibility of sale except to those who might invest for the purpose of speculation ? This means that the lands will be disposed of at low prices, and that the purchasers will be, in all probability, the most undesirable of all purchasers. In this connection, too, it should be re- membered that, in order to make of this suggestion a per- manent policy, the government would be obliged to repurchase lands when the exigency shall have passed. This policy, there- fore, forces a sale when prices must necessarily be low and forces purchase when prices will probably be high. It may, however, be urged that money to meet a fiscal exigency may be raised by a mortgage upon the land. This, it is true, avoids the criticism involved in the proposal of sale, but it overlooks the fact that a public bond issued by a sovereign State is worth no more in the SURFACE LANDS. 253 form of a mortgage than as a mere promise to pay. No tribunal can force the foreclosure of such a bond in case of default. This being the case, the price of a government bond will be higher if it rests on the general property of all industries than if based upon a particular property incident to a particular industry. A government which enjoys public credit so as to enable it to borrow money at all will find itself at a disadvantage if it encumber its loan policy with land mortgages. It therefore follows, whether one considers the sale of agricultural lands held under lease, or their mortgage as security for money borrowed, that the argument in favour of the retention by government of cultivated lands is incon- clusive. The retention of land as a fund of value to be used in case of fiscal emergency does in a very incompetent manner what may be more easily and cheaply accomplished by the direct use of public credit. One word further may be added respecting the general policy of leasing public lands. It is an exceedingly dangerous poHcy. A government which is sufficiently strong to ad- minister wisely the details arising in connection with a system of land tenure will be tempted to exercise that power in a tyrannous manner. On the other hand, a popular or demo- cratic government, which is the only one that could with safety to the liberty of its citizens be intrusted with the exer- cise of a landlord's rights, is not strong enough to administer those rights efficiently and in harmony with a systematic plan. There is something incongruous in the idea of establishing the relation of landlord and tenant between a government and its citizens where the citizens are the govern- ment. A complete analysis of the question would disclose the fact that private property in land is one of the essential conditions for the satisfactory working of popular govern- ment. This is final against the lease system, except the leases be drawn for so long a period, and in such liberal terms, as practically to amount to ownership in fee simple. Reference should be made in this connection to what is popularly known as the " single tax " theory, which from one point of view may be classed as a proposition to replace the system of free holdings by the tenant system. This plan proposes to substitute for all forms of public income an annual payment equal to the full rental value of the land. The title 2 54 REVENUE FROM PUBLIC DOMAIN. in the land will not on this account be disturbed, although all income arising from the land in excess of labourers' wages and interest on improvements, that is to say, the proprietor's income, will be transferred to the State. Under such condi- tions no motive to owr land exists, except such as arises in connection with occupancy, and the justification for classing this project as a proposition to create a tenant system with the State as a landlord is found in the fact that the amount which the land pays to the government would be determined by the competition for occupancy and not according to an estimate of public needs. If the " single tax " theory be a project for creating State tenants in disguise, it should be judged on the basis of the broad question of public versus private ownership of land. Its acceptance would be the reversal of eight centuries of the history of the English-speaking people. This is as far as it is necessary to consider the " single tax " theory in this con- nection.* (3) Shall Government Dispose of its Domain by Sale ? — It is not necessary to discuss this question at length. The considerations urged against direct farming by the State and against a system of tenantry are considerations in favour of a system of ownership by the occupiers of land. The con- clusion that the State should dispose of its domain to citizens, with the exceptions cited above of forestry, irriga- tion, and other like public services, carries with it the idea that landed property should be made a source of derivative rather than of direct revenue ; that is to say, it should be recognised in formulating a scheme of taxation. The further discussion, therefore, of the position occupied by agricultural lands in the general fiscal system will be postponed until we come to consider the general principles of taxation. Our conclusion at this point is that the revenue from real property should be in the form of a tax and not in the form of a price or a rent. * The chief argument urged by the single-taxer has nothing to do with finance. It is supposed to be the means of annihilating poverty. Its advocates form themselves into "anti-poverty societies," It assumes that the unearned increment pertains exclusively to landed property, and that the single tax on land would create " free land." This part of the argument is considered in connection with the discus* sion of land taxes. § 66, (2). Ly4ND POLICY OF THE UNITED STATES. 255 42. Land Policy of the TJnited States. — It may be in- teresting in this connection to sketch briefly the land policy of the United States. At the close of the Revolutionary War a serious embarrassment to the establishment of a central government was found in the conflicting claims of the newly created States to the lands ceded by the Treaty of Ghent. The original grants to the colonies were made at a time when little was known of the extent of the North American con- tinent, and it is not strange, in view of the loose language of those grants, that the same tracts should have been claimed by two or more States.* Moreover, some of the colonies held title to large tracts of land, while the holdings of others were small and explicitly defined. Maryland, for example, had no claim upon lands west of the Alleghenies. After con- siderable discussion it became evident that no just settlement of boundaries was possible, and, inasmuch as all had con- tributed in blood and treasure to securing the cession from Great Britain, the opinion finally prevailed that, in order to perpetuate the Union, it was essential that each colony should grant to the central government such rights as it might hold in Western lands. Omitting mention of minor exceptions, this was ultimately accomplished, and in this manner the Federal Government came into possession of an immense domain. To the lands thus ceded by England were added the Louisiana Purchase in 1803, the Spanish cession in 1819, the annexation of Texas in i845,t ^^^ ^"^^^ Mexican Purchase in 1848, the Gadsden Purchase in 1853, and the Russian cession in 1867.$ This gave to the United States an area of 2,970,000 § square miles of territory. The title of the Federal Govern- ment has never been questioned, and the title of the individual or the corporation holding from the Federal Government is superior to attack. (i) The Original Idea Respecting Land. — The first idea held by American statesmen respecting the public lands was that they should be made the basis of public financiering. Being * Cf. Maryland's Influence upon Land Cessions to the United States, by Dr. H. B. Adams, Johns Hopkins University Studies in Historical and Political Science, 3d Series, No. i. f Texas did not cede her lands to the Federal Government. ^; For map showing cessions cf. Johnston's History of the United States, p. 166. § Exclusive of Alaska, vphich has 531,000 square miles. 2S6 REVENUE FROM PUBLIC DOMAIN. a joint inheritance to all the people, it seemed proper that they should be used as a fund of wealth for the advantage of the people. It was expected that taxes would be less by vir- tue of this property. Ample evidence supporting this state- ment may be found in the expressions of the time, and in the writings, the speeches, and the proposals of early statesmen. In 1790 Alexander Hamilton wrote as follows to the House of Representatives in response to the request for a plan for the disposal of the public lands : " That in the formation of the plans for the disposal of the vacant land of the United States there appear to be two leading objects of consideration : one, the facility of advantageous sales according to the proper course of purchases; the other, the accommodation of indi- viduals now inhabiting the western country, or who may here- after migrate thither. The former, as an operation of finance, claims primary attention; the latter is important as it relates to the satisfaction of the inhabitants of the western country." * That public lands were used in the satisfaction of public ob- ligations is shown by the fact that settlements with the army were in part efifected by means of land-script, and in 1795 it was provided by law that the net proceeds of the sales of land should constitute a portion of the sinking fund for the re- demption of the public debt. The financial character of the western lands policy is further suggested by the terms of sale, which were such as to induce the purchase of large tracts of land by land companies rather than the purchase of small tracts by actual settlers. The original price was two dollars an acre, which might be paid by instalments. The result of this policy was to encourage land speculation ; it did not, however, succeed in securing any considerable funds for the public treasury, and the practice of granting credits brought with it confusion in public accounts and serious loss to the public treasury. The idea that the public lands could in a direct manner be made the basis of a financial policy, because a source of considerable revenue, was gradually aban- doned, and by 1820 it was succeeded by what may be termed the second and permanent policy respecting public lands. (2) Use of Land for Development of the Nation. — ^The idea which has controlled the administration of the Land De- * Letter of July 20, l7qo. L/tND POLICY OF THE UNITED STATES. 257 partment of the United States since 1820 seems to have been that the public domains should be placed in the hands of the occupier in allotments appropriate for cultivation. In this manner it was thought to encourage the agricultural industry and to lead to the development of national improvements. Sale for credit was abandoned, and the price was reduced to one dollar and a quarter an acre. The policy of preemption, also, had by 1830 taken definite shape. Preemption may be defined as a " premium in favour of a consideration for mak- ing permanent settlements and a home." The idea that the land belonged to the people and should be reserved for the occupier became stronger as the years went by. In 1852 it was recognised as one of the political questions of the day, and the Free-soil Democracy placed the following plank in its platform : " That the public lands of the United States belong to the people and should not be sold to individuals nor granted to corporations, but should be held as a sacred trust for the benefit of the people, and should be granted in limited quantities free of cost to the landless settlers." Congress never went so far as to attempt the extreme realization of this general policy. But when one considers the many ways by which land could be secured — by the Homestead Act, the Tree-claim Act, and other Acts of the same. sort — it must be recognised that for a series of years land was practically free to the settler. The idea of land as a basis of fiscal operations thus gave place to the idea that land was the basis of industrial development. The amount of money which the government has secured from the sale of its public lands has been very small as compared with its total expenditures. Thus the aggregate income of the Federal Government during the first century of its life was $11,684,208,247, while the aggregate income from the sale of public lands during the same period was $276,476,106, or less than two and one-half per cent of the total. (3) Use of Land for Educational and Railway Grants. — While it is true that the land policy of the United States since 1820 has been shaped almost entirely by the interests of the settlers, it is also true that this great property has been used as a fund for the encouragement of education and the develop- ment of commerce. By the ordinance of 1775 it was pro- vided that section number sixteen of each township should 258 REl^ENUE FROM PUBLIC DOM/1!N. be reserved for the support of schools, that is to say, 640 acres out of every township, or an amount of land equal to one thirty-sixth of the entire area. This provision was reenacted in 1787 and has continued in force from that time to the present. Since 1848 section number thirty-six was also granted for public-school purposes, making 1280 acres out of each township, or one-eighteenth of the aggregate area devoted to this purpose. In 1787 provision was made also for university education by granting to each State an amount of land not less than two townships. It is upon this grant that the State universities of the Western States rest; and although in many cases the land has been dissipated by unwise administration, it never- theless remains true that this provision is responsible for the establishment and, in large measure, for the perpetuation and success of university public education. "In 1866 what is known as the Morrill Bill was passed for the establishment of agricultural and industrial education. By this Act an amount of land was granted to each State equal to 30,000 acres for each senator and representative. It is upon the basis of this law that the agricultural colleges rest. The amount of land granted for common-school purposes has been 67,893,919 acres. The amount of land granted by the Federal Govern- ment for the support of State universities has been 1,165,520 acres, for agricultural colleges 9,600,000 acres. This is one way in which the Federal Government has performed its trust of administrating the fund of wealth ceded to it by the original States.* Public lands have also been freely used for the encourage- ment of inland transportation. During the period in which the State governments were endeavouring to provide canals and railways, many bills were introduced into Congress for the transfer of the proceeds of the public lands to the several States ; but with the failure of this experiment, and the con- sequent rise of private corporations, this thought seems to have been dropped from view. The assistance rendered by the Federal Government in the development of means of trans- portation has been through the granting of public lands to * These figures do not include grants since i8So. The statement Is arrested with that year in order to enable a comparison between educational prfints and grants made to corporations. LAND POLICY OF THE UNITED STATES. ^59 private corporations.* The amount of land appropriated for canals has been 4,424,073 acres ; the amount appropriated for wagon-roads has been 1,301,040 acres; and the amount granted for railroads has been 215,000,000 acres. This does not mean that these amounts have been actually transferred with a clear title to individuals and corporations, since in most cases grants were made upon condition that the im- provement in question should be completed within a certain specified time. The policy of making grants for railways was discontinued in 1880, since which time the idea that public domains should be reserved for settlement may be accepted as the established land policy of the United States. The manner in which grants were made to canals and rail- ways shows that the government did not lose sight entirely of its own fiscal interest in the public domain. Almost universally the practice has been followed of granting alter- nate sections for a given distance on either side of the public highway. The first important grant for railroads was by the Act of September 20, 1850, which gave to the State of Illinois alternate sections of land for six sections in width on either side of the road or its branches. f The third section of this Act provided that the lands of the United States within the grant limits should not be sold for less than $2.50 an acre, the object of this provision being that the government might recoup itself for the lands granted by the increased value of the lands which it retained. | In concluding this brief sketch of the land policy of the United States it may be remarked that the original policy was one which could not, from the nature of the case, succeed. * No distinction is here made between grants which went to States in trust for private corporations and grants which were made directly to such corporations . \ The most important railroad constructed under this Act was the Illinois Central, which was incorporated by an Act of the Legislature of Illinois, February 10, 1851. The fifteenth section of this Act gave land ceded to the State for railroad purposes to this company, tlie governor of the State being authorized to make a deed or fee therefor to the corporation. X A complete statement of the land grants for railroads may be found in chapter 20 of History of Public Lands in the United Slates, published as Executive Document 47, Part IV, Forty-sixth Congress, 3d Session. s6o REVENUE FROM PUBLIC DOM /I IN. Land does not become a source of revenue until it is brought under cultivation. It has no value and can give rise to no proceeds until it is demanded for occupation. A speculator's money makes poor public income. Even from the point of view of fiscal advantage to the State the policy of sale at low prices to actual settlers is capable of defence. This is the policy which has resulted in the creation of that immense property now the basis of taxation. Out of the aggregate value of tangible property in the United States in 1890, which according to the United States Census estimate amounted to $65,037,091,197, real estate with the improvements thereon amounted to $39,544,544,333, and the valuation of railroads and equipment, including $389,357,289 for street railways, is given as $8,685,407,323.* This value is the result of a cen- tury of industrial progress. Without the land to serve as a basis of industry it would have been impossible ; without the land policy it would have been delayed. There is no way of making land a source of public income so quickly as by its sale for actual settlement. The fact that the Federal Govern- ment which owns the lands does not use them as the basis for its fiscal system, but grants this source of revenue to the States and minor civil divisions, is no consideration against the po- licy adopted. To urge this would be to take a contracted view of the situation. The government of these United States includes the State and local governments as well as the Federal Government, and the successful adjustment of the finances of the State and local civil divisions is of as grea^ importance to the Federal Government as to the local govern- ments themselves. The land came originally from the States ; it has been returned to the States by the policy which the Federal Government has adopted. It is quite possible that the grants for public improvements were at one time made in too reckless a manner, but when one appreciates that the problem that presented itself to Congress during the first century of the nation's life was the settlement and cultivation of a vast area of wild lands, the use which has been made of the public domain cannot be severely criticised. It at least has the merit of having brought about the desired result. * Eleventh Census of the United States, volume on Valuation and Taxation, being Part II of Wealth, Debt, and Taxation. CHAPTER II. REVENUE FROM PUBLIC INDUSTRIES. Choice of Industries for Public Administration. Si'EciAL Consideration of Public Industries (i) Industries Undertaken Primarily for Revenue. (2) Industries in which Revenue is Incidental. (3) Industries Undertaken Primarily for Service. Theory of Charges for Public Industries. (i) Rule for Revenue-bearing Industries. (2) Rule for Industries bearing an Incidental Revenue. a. The Post-ofBce. b. Territorial Railways. c. Municipal Railways. (3) Rule for Industries Undertaken for Service. In considering public industries in their relation to public finances we shall confine ourselves to those practical ques- tions that arise when the subject presents itself to the finan- cier. The first, and perhaps the most important, of these questions pertains to the choice of an industry when a govern- ment assumes the role of an industrial capitalist or of a busi- ness undertaker. 43. Choice of Industries for Public Administration. — Assuming revenue to be the object held in view, the indus- try naturally selected for public administration should be simple in its organization, and the commodity or service re- sulting from it should be such as is commonly regarded as a fit subject of taxation. It is somewhat difficult to discover industries that meet equally well these requirements. The mining of salt as it is carried on in Saxony is perhaps as good an illustration of a public industry of this class as can be obtained, although these salt-mines are in fact a part of the public domain, and the propriety of imposing any considerable 261 a62 REy'ENUE FROM PUBLIC INDUSTRIES. payment upon the consumers of salt is perhaps open to ques- tion. Tobacco, spirits, and malt liquors are universally re- garded as fit subjects for heavy payments. Their growth and manufacture, however, are not sufficiently simple to meet perfectly the requirements of a public business. It may be claimed, also, that these (.ommodities, regarded as articles of consumption, address themselves to the tastes of those who purchase them, and should on this account admit of variety and of high specialization of peculiar qualities. This can only come as the result of experiment and venture, and on this account, unless it be assumed that the consumption of these commodities is in every way to be discouraged, the manufacture of tobacco, spirits, and malt liquors may be more properly left to private undertaking. Or, if this be too strong a conclusion, it at least is true that the superiority of public manufacture of these commodities from the point of view of revenue must be so marked as to set aside objections from the point of view of manufacture. The financier is not at liberty, however, to determine the question of public industry solely as a question of pubUc revenue. There are many industries which if left to pri- vate enterprise would 'become the occasion of serious social and commercial evils, and it is manifestly proper that the thought of exercising a beneficial control over industries of an evil trend should be held in mind by the government when- ever it considers the general question of public undertaking. Mention of a few industries of this class will show clearly the ;,point in mind. The business of coining money used in trade and com- merce, while not universally a public industry, is at present generally recognised as properly assigned to the State. There is no other agency capable of securing to the commercial Tworld a uniform standard of value. Moreover, a sound •monetary system requires efficient regulations for the pre- vention of counterfeiting, a task which pertains naturally to [he police. Originally a seigniorage, or toll, was charged for coinage, but at present it is the common practice of com- mercial states to render this service without special compen- sation. The service is acknowledged to be a governmental rather than a special service, and is mentioned in this connec- tion as suggesting an industry assumed by the State because of CHOICE OF INDUSTRIES. «63 the evils which would inevitably result from its consignment to private control. For analogous reasons the issue of paper money is also universally recognised as a prerogative of the State, although in this case it is a very common practice for governments to avail themselves of the agency of private corporations. Where money is directly issued by government, as, for example, in the case of the three hundred and forty-six millions of treasury notes now outstanding in the United States, the government receives the profit which accrues to the business of issuing notes. On the other hand, where banking institutions are made the agency for the issues of paper money the revenue derived by the State must come in the form of a tax on the basis of note circulation. In either case, however, the function of issuing notes to be used as money is acknowledged as a governmental function because of the evils that would follow its assignment to private control. Of more significance to the question under discussion are those industries which tend naturally toward monopoly. The financier must of course rely upon the analysis of the econo- mist for determining what particular lines of business are included in this category, and the reply of economic analysis to this question is that industries which are extensive in character — that is to say, which are subject to the " law of increasing returns " — ^tend inevitably to monopolistic condi- tions. While this fact is not final in favour of public owner- ship and government administration, it does indicate the di- rection in which government should move in case it is regarded as wise policy to increase its direct revenue. The standard illustration of a business subject to the law of in- creasing returns is the business of transportation. The rail- way industry, for example, depends for success upon density of traffic rather than upon attention to details. Its expenses of operation do not increase proportionally with volume of traffic. For these reasons, as would be shown by a careful analysis of the situation, the railway industry takes upon itself the character of a monopoly, and would, on this account, be- come the source of serious social, industrial, and political evils if left to its normal development. Assuming that these evils would be set aside through government ownership and ad- ministration, and, further, that other evils of a different sort would not be introduced by the change, an argument can be 264 REyENUE FROM PUBLIC INDUSTRIES. easily framed, quite independently of financial considerations, in favour of a system of State railways. A similar line of argument, also, may be presented in connection with the business of transmitting news by telegraph, with tHe express busines'^ and others of like nature. Analogous arguments, also, though soniewhat different in their state- ment on account of the different social and political con- ditions of the services in question, might be made with re- gard to municipal railwayc, lighting companies, and water companies. These are all, for one cause or another, of a monopolistic character. The pubHc enjoys no guarantee of fair treatment on account of any competition that can affect them. This of itself is adequate justification for some sort of supervision by the State, and may be urged as a reason for the assumption of these businesses by the appropriate grade of government. Mention of industries that may be selected by the State as a source of revenue, largely on account of the evils which spring from their private management, would not be complete without reference to the manufacture and sale of spirituous and malt liquors. Assuming it to be capable of proof that the liquor problem could be solved along the line of the " Gothenburg System," * few would deny the appropriateness of extending the functions of municipal government to at least the sale of intoxicants. Whether or not this would increase the revenue to the government above what is now derived from this busi- ness in the form of special taxes and licenses may, however, be doubted. Indeed, it is the object of this plan for solving the problem to decrease the industry rather than to increase the revenue, and the financial interests are of such relatively slight account in the discussion of the problem that the ques- tion will not claim our further attention in this treatise. Another reason besides the one given above why indus- tries subject to the law of increasing returns are well adapted to governmental administration is found in the fact that such industries are capable of a high degree of organization, and of control through general rules and comprehensive prin- ciples. Their administration is analogous to the adminis- tration of a military establishment, in which authority is centralized and orders are executed without question by sub- * Cf. treatise by Dr. E. R. L. Gould. CHOICE OF INDUSTRIES. 265 ordinate officials. Such an industry is free from confusing details, so far as the rank and file of officers and employes are concerned. Moreover, the questions that present themselves to the administration are not peculiar to the conditions under v^rhich they arise, and on this account the answers to such questions will not be restricted in their application. On the contrary, it is likely that the decisions of such questions will be of such a sort that they can be promulgated in the form of general rules, and that the principles underlying them may be used as precedents for subsequent decisions. To put this in another way, the administration of industries which, for the reasons given, tend towards monopoly will naturally crystal- lize itself into a body of rules, and on this account the extent of the organization or the magnitude of the operations will be no barrier to success. If, now, to these considerations there be added the fact that development in technic rests upon scientific attainment it is evident that we have discovered a class of business undertakings that adapts itself readily to the limitations of the political organization. It is further desirable that the business selected for govern- ment ownership and administration should hold some peculiar and direct relation to the life and development of society. It should pertain to the social utilities or to the collective in- terests of the people rather than to the appetites and ambitions of the individual. It is admitted that these phrases are some- what loose and indefinite, but the point is that the business to which the State can with dignity and propriety address itself must be able to trace its results to the civilizing process at the time going on. It must pertain to the conditions under which people live rather than to the process of making a living. One or two illustrations will make this point clear. The post-office, by which provision is made for the trans- mission of news and for private communication, is one of the essential conditions of a highly organized society, a fact that receives ample proof by glancing at the following table, which shows the use made of postal facilities by the peoples of a few selected nations. The data are presented upon the au- thority of von Neumann-Spallart in Ueberschriften der W eltwirtschaft for 1880, and although the figures pertain to a date some time past the comparison which they present is still pertinent. 366 REyENUE FROM PUBLIC INDUSTRIES. TABLE SHOWING USE MADE OF POSTAL FACILITIES BY THE PEOPLES NAMED. Country. Great Britain . . France Germany Italy Spain Russia The United States. Canada Chile Brazil Peru Australia Letteis per Printed Matter Inhabitant. per Inhabitant. 37.2 21.0 14. 1 15.4 15.9 12.8 7-3 6.1 4-3 2.8 1-5 I.I 24-5 23.1 14.5 4.2 2-3 2.4 1.6 .91 •4 13.6 13-6 Most industries known as municipal monopolies, such as water-works, lighting-works, and street railways, are of the same class. Their social or condition-making significance in- vites in a peculiar manner the attention of government. It is not enough that serious abuses should be avoided in their management, but they should be administered "in view of the positive social utilities which from tlieir nature they are able to contribute. The social function of the municipal railway, for example, is to overcome the social evils that result from congested population, which, in its turn, is one of the unfor- tunate characteristics of modern industrial organization. Equally significant are the social services bound up in muni- cipal lighting and water-supply. To give these industries over to private gain, or to confine public control to the exact- ing of a fair price for such services as the commercial interest may induce a private company to render, fails to appreciate their social or developmental significance. Railways also are not only essential to a high state of civilization, but the pecu- liar means of transportation which they afford is a funda- mental fact in determining the form of that civilization.* These suggestions are perhaps adequate to make clear what is meant by saying that an industry which from its nature is public in character is one that contributes to the social utilities or the collective interests of a State. Another mark of a public industry is that the interest • Of. C. H. Cooley, The Theory of Transportation, In publications o{ the American Economic Associ.uion, Vol. IX. CHOICE OF INDUSTRIES. 267 involved pertains to all citizens without regard to location or to class. This must be the case, since, according to the governmental conception of constitutional peoples, no portion of the machinery of the State should be set in motion except the advantages to accrue therefrom are general in character. In applying this thought to the conditions of modern states there emerges a distinction of great importance. Assuming that the interest involved in a business enterprise undertaken by the government should be as extensive as the jurisdiction of the government itself, it follows that many industrial func- tions may be assumed by a government of restricted jurisdic- tion, or by a State of even and uniform industrial development, which are forbidden to governments of more widely extended jurisdiction or to states of a more uneven development. The line of argument thus presented might justify, for example, the advocacy of the ownership and administration of street rail- ways by a municipality, while at the same time one refuses to advocate the ownership and administration of a general railway system by the central government. The interest of the municipality for rapid, safe, and cheap transit is a compact interest, a fact whch does not pertain to a national govern- ment like that of the United States, with its broad territory and diverse industrial conditions. The rules for adjusting rates in local transit are in no sense complex, since they do not involve in any great degree the relative claims of com- peting industries. The distinction thus brought to notice is capable of wide application, and is reHed upon for the support of many conclusions in municipal finance which may not be tenable in the case of the financial system of the States on the one hand, or of the central government on the other. A further application of the principle of public financiering requires that the government should avoid those industries which invite favouritism on the part of officials, or in which the charge of favouritism from customers will naturally arise. In England and the United States, for example, there is a division of banking functions ; and while the business of issuing notes to be used as money is brought under the strict , supervision of the State, the loan and discount business con- tinues to be a purely private affair. This must be recognised as a sound rule where government rests on popular suffrage, because the business of lending money or of discounting com- 268 REVENUE FROM PUBLIC INDUSTRIES. mercial paper calls for the exercise of careful discrimination. Many other applications of the principle might be referred to, but the above is adequate to show clearly what is meant by the use of the phrase in this connection. The conclusion of the analysis, then, is that industries adapted to public control from which the financier must select in case he deems it wise to extend the direct revenue of the State must meet the three following requirements: first, they must be simple in themselves and capable of adminis- tration by comprehensive rules ; second, they must be indus- tries in which social evils arise as a result of unregulated private administration ; and third, they must involve some comprehen- sive social interest. There is no single business which pre- sents all of these marks of a public industry except that which has to do with the machinery of commercial exchanges. There is a sense in which all transportation industries, using that phrase in its comprehensive sense so as to include the machinery for transferring values as well as the means for transmitting news or transporting freight and persons, are from their nature public industries. 44. Special Consideration of Public Industries. — Having thus gone over the ground in a general way, it may be well to speak a little more specifically respecting certain of the pos- sible sources of direct revenue to the State, and in doing this we shall give our attention first to those industries which are undertaken primarily," or exclusively for the purpose of secur- ing revenue ; second, to those which are undertaken primarily for the purpose of exercising control over them, but from which it is deemed wise at the same time to secure revenue; and third, to those industries which are undertaken pri- marily for the service which the State may thereby render to its citizens, but in the administration of which the thought of revenue and control may or may not be present. The classification upon the lines thus suggested will not be the same for all peoples. The use made of it in this analysis holds primarily in mind the social, political, and industrial conditions of the United States. (i) Industries Undertaken Primarily for Revenue. — The most satisfactory illustration of an industry undertaken by the State for a purely fiscal purpose is that of the manufac- ture and sale of tobacco. What is known as the tobacco SPECIAL CONSIDERATION OF INDUSTRIES. 269 monopoly was established in France by Colbert in 1674, and has been maintained by all the successive governments in France, with the exception of the governments of the Revolu- tion and of the first empire until 1810. Many other states, among them Austria, Switzerland, and Italy, follow in this regard the policy of France. In Germany there is a strong sentiment in favour of a tobacco monopoly, but it may be doubted if it will ever be substituted for the present system of taxation. Before arriving at any conclusion respecting the wisdom of obtaining public revenue in this manner it will be well to consider briefly the administration of a tobacco mo- nopoly, and to compare it with the other methods of securing an income from the manufacture and sale of this commodity, which universally is conceded to be a fit object for heavy pay- ments. The present tobacco monopoly in France was established and organized by an Act of December 29, 1810, and, although extended and revised by subsequent Acts, remains in its general features the same as when established. This mo- nopoly extends to cultivation, manufacture, and sale. The first step in working out the programme is for the proper officers to estimate the amount of tobacco of French growth which will be needed during the year under consideration. The monopoly is permitted to purchase foreign tobaccoes for the purpose of mixture or of manufacture, but is obliged to procure not less than one^fifteenth of its supply of raw tobacco from the home-grown product. As a matter of fact nearly one-third of the tobacco consumed in France is of home growth. The amount of tobacco to be grown is appor- tioned to the several tobacco-growing provinces, and any one who desires to cultivate this crop must give notice of his intention to the maire of the commune before the 1st of March, and a permit will be granted for such cultivation; but the aggregate of these permits must not exceed the amount ap- portioned to the province. The growing crop is placed under careful supervision in order to make sure that no tobacco is taken for private use or disposed of at private sale. The price to be paid for the crop is determined at the time the assignment for cultivation is made, so that the grower knows before he plants the crop the price he is to receive. For the collection of the crop the government has established a suffi- S70 REVENUE FROM PUBLIC INDUSTRIES. cient number of warehouses, so that the grower need not transport his product more than twenty-five kilometres. Such, in brief, are the conditions under which tobacco is grown. The manufacture of tobacco is likewise a close monopoly. The State owns nineteen manufactories, which give employ- ment to sixteen or seventeen hundred workmen. The process of manufacture does not of course differ from that of a privately administered industry. It is claimed by French writers that State manufacture guarantees a pure article and of good quality ; but quality is of course a matter of taste. Indeed, it is possible, the use of tobacco being an acquired habit, that the taste of a people can be cultivated to whatever grade of commodity the govern- ment sees fit to furnish, a consideration which is commonly omitted when the French tobacco monopoly is discussed by American writers. The sale of tobacco is carried on by many agents. It may take place in the first instance at the manu- factories themselves, or it may be through the means of cer- tain intermediaries. The retail dealers are named by the pre- fect of the commune where the sales amount to ten thousand francs or less, and by the Minister of Finance if the proceeds exceed ten thousand francs. These permits to sell are ac- corded by preference to persons to whom the State is in some way indebted, as wounded soldiers or the widows and daugh- ters of soldiers. In this manner it gives to these persons suitable occupation and partially relieves the pension-rolls. Since the tobacco monopoly is advocated as a means of raising revenue, the student of finance is led to inquire what amount of tobacco is consumed and what amount of money is secured to the State from this consumption. Kaufmann in his treatise upon French finances gives a taible which shows in detail the operations of this monopoly from i8ii to 1877.* During this period the excess of receipts over ex- penditures amounted to 6,362,964,765 francs. At the present time the net proceeds range between 320,000,000 and 400,000,000 francs a year. The general expenses of manu- facture and sale amount to aibout 20 per cent of the gross proceeds, thus giving to the State a profit of 80 per cent upon sales. It is with some difficulty that this method of securing * Kaufmann, /.es Finances de la France, pp. 388-393. SPECUL CONSIDERylTlON OF INDUSTRIES. 271 revenue from the manufacture and sale of tobacco is com- pared with the policy of other countries. In England, where the net income 'from the tobacco tax amounts to between £9,000,000 and £10,000,000 a year, the growth of tdbacco and its manufacture are strictly prohibited, and the government secures its revenue by imposing a duty upon its importation. It does not require any special machinery for the collection of the tax, inasmuch as the duty on tobacco comes to be a part of the general revenue system. The insular position of England renders enforcement of regulations relative to manu- facture comparatively easy, and so marked are the fiscal ad- vantages that no serious complaint is heard respecting the prohibition of growth or manufacture within the country. The position of the United States with regard to this in- dustry is different from that of either England or France, since this country is a grower of tobacco for export. The policy adopted is to impose an excise upon the manufacture of tobacco, and to collect that tax from the sale of revenue stamps. No package can be offered for sale without the attachment of such a stamp. Both the growth of the raw material and its manufacture are recognised as private indus- tries. In addition to the stamp duty a license tax is charged for the privilege of exposing tobaccoes for sale. The amount accruing to the Federal Government on account of this tax is about $30,000,000 ai year. The stamp duties together with the license fees are a part of the general scheme of internal revenue. Besides these taxes there is imposed a customs duty upon imported tobaccoes. The prime dbject of this duty is to act as a compensation for the excise duty imposed upon tobaccoes manufactured within the country. But the duty becomes a source of considerable revenue on account of the fact that other grades of tobacco than those of home growth are used by the manufacturers for mixing with domestic to- baccoes and are demanded by many consumers. In both England and the United States, therefore, it appears that there is nothing pecuHar in the method of securing revenue from tobacco. The tobacco tax is a part of the general tax- ing scheme. Should one confine his discussion to purely fiscal con- siderations it would seem that the French method of obtain- ing revenue from tobacco is preferable to either the English a? 2 REVENUE FROM PUBLIC INDUSTRIES. or the American method; that is to say, more money is col- lected from the industry, and a monopoly does not seem to impinge upon the prejudices of the people. Such a plan, however, would scarcely be possible in the United States; for, to say nothing of the, broad extent of territory and sparse population to which the monopoly must be adjusted, this country does not possess a peasantry of such docile character as that of the Latin-speaking peoples ; nor does it have such a considerable number of dependents in whose hands the sale of tobacco could be placed with economy and confidence. The controlling consideration, however, from the point of view of finance would seem to be that, for the United States at least, a tobacco monopoly would be strange to the established and familiar fiscal practices of the people, and on this account would require a separate organiza- tion and the drafting of unusual rules of administration. There are many advantages in securing revenue from tobacco by methods followed in other branches of the revenue system. Other commodities there are besides tobacco which have been made the subject of government monopoly. Thus salt has been a favourite article for monopolization. In Rome the salt monopoly was introduced during the early years of the republic, although the purpose of this seems to have been primarily to protect the consumer rather than to secure a revenue. One of the curious features of the salt monopoly presents itself in the practice of Prussia during the eighteenth century. There was no adequate means of preventing the purchase of foreign salt by the consumer, and, in order to protect revenue, the government determined the amount of salt which each taxpayer ought to consume, and at the close of the year a fine was collected for such portion of the amount as was shown by the public accounts not to have been pur- chased.* This " salt conscription " was not abolished until 1816. Without entering into any extended consideration of this subject, it is sufficient to say that the general trend of fiscal reform during the nineteenth century has been to- ward the substitution of taxation of salt for the maintenance of a salt monopoly, except in the case of mines owned by the government regarded as a part of the public domain, or in * Each person was supposed to consume five pecks of salt, with two additional pecks for each cow. SPECIAL CONSIDERATION OF INDUSTRIES. 273 the event of the abandonment of salt as a proper object of taxation. Another form of monopoly made the basis of pubHc revenue by European states is the public lottery. This has been practised in the past even more than at the present time. According to Cohn, the lottery made its appearance as a fiscal expedient in Florence in the year 1530, and in 1539 Francis I. gave permission for the establishment of a lottery on condition of the payment of a bonus to the king. Perhaps the best organized of European lotteries is that of Prussia. In the estimates of the year 1889-90 the sum of 8,287,500 marks was set down as the probable income from the lotteries. The revenue accruing to the State arises from a deduction of 13.75 per cent from all prizes, together with a deduction of 2 per cent for the lottery collectors. The purchasers of the tickets pay also 5 per cent as a stamp duty, together with a clerk's fee. In England the lottery was abolished in 1826 and in France in 1836. The question is subject to constant discussion in Prussia, but thus far the lottery system has been successfully defended.* The ques- tion whether or not a lottery should be established is not a fiscal question; its decision turns upon the moral sense of the community respecting this species of gambhng. It is a significant fact that so few purely fiscal monopolies exist at the present time. In the sixteenth century, before taxation was well established, it was a common practice for sovereigns to obtain revenue from royalties upon monopolies. Especially in England under Queen Elizabeth was this fiscal expedient resorted to. Partly on account of the manifest evils of exclusive privileges of all sorts, and partly as a result of the liberal philosophy of the eighteenth century. State fiscal monopolies, either direct or indirect, have been almost en- tirely abandoned, the tobacco monopoly being the only one of any considerable importance which has held its own. It is beheved that this trend of events merits approval. The pre- sumption of modern political philosophy lies against public industries or legal monopolies for revenue and revenue only. (2) Industries in which Revenue is Incidental. — ^While it is true that modern peoples do not look with favour upon public * For a description of the Prussian lottery cf. Cohn, Tie Science of Finance, §§ 2go, 291. 8 74 REVENUE FROM PUBLIC INDUSTRIES. industries regarded solely as a means of procuring revenue, it is also true that the budgets of modern states, and more especially of municipal governments, show a decided increase in this class of revenue. As already remarked, however, the industries from which this revenue accrues are such as de- mand the attention of government for other than fiscal reasons. The controlling consideration is not revenue, but is found rather in the social evils that follow private manage- ment, or in the social advantages that follow public manage- ment; and the argument seems to be that, inasmuch as the industry must be placed under some form of governmental control, the financier may as well take advantage of the situa- tion and secure from it a portion of the needed revenue. The character of the industries to which this consideration applies has also been determined, but it may now be added that, with few exceptions, these industries pertain to the busi- ness of transportation. To make this statement true, how- ever, it is necessary to use the word transportation in a broad and comprehensive sense, so as to include the delivery of values and the transmission of intelligence as well as the transportation of persons, goods, commodities, or power. The lines of business thus embraced are the following : 1. Transfer of values: (i) Coinage; (2) Issue of notes; (3) Banks of issue ; (4) Banks of exchange. 2. Transmission of intelligence : (i) Post-office ; (2) Tele- graph ; (3) Telephone. 3. Transmission of commodities and power: (i) Irriga- tion and power canals ; (2) Muncipal water-works ; (3) Muni- cipal lighting companies; (4) Electric-power companies. 4. Transportation of goods and persons : (i) Commercial railways ; (2) Water transportation companies ; (3) Municipal railways ; (4) Express companies. It is not claimed that the decision respecting the public administration of one of these industries carries with it a like decision for all the others. Transportation by water, for example, does not seem to be attended by the same evils arising on account of discriminations in rates as railway trans- portation. The telephone industry, so at least it has been claimed, is a monopoly because of the patents upon which it rests, and of the organization which during the continuance of those patents it has created, not because of its character SPECIAL COmiDERATtON OF INDUSTRIES. 275 as an industry. If it be true, as has been argued in the courts, that an increase in the volume of the telephone business be- yond a certain point necessitates a corresponding increase in expenses, this fact exckides the telephone industry from the class of industries industrially monopolistic. We must, how- ever, in this treatise avoid such technical discussion, and content ourselves with pointing out the line of analysis by which an industry which invites public control may be dis- covei^ed. A further distinction also must be allowed. In the prac- tice of modern states some of the industries named above are carried on at an expense to the State, as, for example, the coinage of money; for some of them the government aims to impose such charges as will just cover operating ex- penses, as is the case in the United States with the transmis- sion of letters ; while other industries there are from which the government aims to secure a net income available for general expenditures, as, for example, commercial and muni- cipal railways. The principle according to which this line is drawn is not an industrial but a social principle. The character of the service rather than the character of the busi- ness determines whether it shall be freely rendered or charged with its own operating expenses, or made the source of a net revenue. The administrative rules which give expression to this principle may vary from time to time, as also for different peoples, but the principle itself abides. The statesman must recognise in it the controlling consideration in formulating a policy for the administration of public industries. A third generalization may be submitted in this connec- tion. A business which, from its industrial character, or in view of the social services which it renders, might perhaps be intrusted to private administration, may be brought under the administration of the State by virtue of the relation which it holds to other industries. It is natural, for example, that the transmission of intelligence by wire should follow the rule adopted by the transmission of intelligence by letter. The post-office and the telegraph play into each other's hands in such a way that the two businesses ought to be merged into one. Such at least is the opinion of the great majority of the nations. Another illustration of the same point is furnished by the relation which exists between commercial railways and the aj6 REVENUE FROM PUBLIC INDUSTRIES. express business. Where the former are under the manage- ment of the government the business of the latter is divided between the freight department of the railways and the post- office department. Where the former are owned and adminis- tered by private corporations the express business .likewise is a private industry. Other illustrations might be given were the point a difficult one to understand. (3) Industries Undertaken Primarily for Service. — In this category there falls a considerable number of public under- takings, but the subject is so closely interwoven with the general theory of governmental functions that it can with difficulty be separated for purpose of financial discussion. The most important of these services, whether regarded from the point of view of social significance or from that of the amount of money which it demands, is that of education. In Michigan from 60 to 70 per cent of local taxes is for the support of the public schools. There is here no thought of a special service, and there is no effort made to assign the cost to the individuals who receive the benefit. Only in the case of students who reside outside the district taxed for support of the schools is there any thought of a tuition charge. This at least is the general practice in the United States so far as common-school education is concerned. With the higher grades of education the custom is not uniform. In some communities a charge is made for students who enter the high schools, or, if not for all students, for such of them as select to follow the less frequented branches of instruction. Latin and Greek, for example, are sometimes made the sub- ject of a special charge, on the ground that their study is a personal and not a general concern. The State universities, also, in one way or another, secure payment from the students who attend them, and thus relieve, in part, the public treasury from the full maintenance of this grade of education. The principle that runs through all this is easily determined: what is conceived to be of general interest is paid for out of taxes ; what is conceived to be of personal interest is paid for by the individual; what is conceived to be of mixed interest is supported by contribution from both the public and the private purse. The discussion forces its way back to the character of the service ; the financial organization can easily adjust itself to whatever view prevails respecting the service. THEORY OF CHARGES. 277 What we have said of education is true of a considerable class of public undertakings, and no new principle would emerge as compensation for our labour were we to consider each of these in detail. The truth seems to be that industries undertaken for service possess no financial character when regarded from the point of view of income. If the financier is to have any voice respecting them it must be because these services are the occasion of expenditures to be met out of the proceeds of general taxes. As a topic for discussion in the theory of expenditures they are most significant, but they possess no independent standing in a theory of income. The revenue to which they give rise, in case any charges are preferred, must be justified as an exception to the rule that general services should be assigned for their support to the proceeds of general taxes. Certain industries undertaken for service differ in one particular from education, which we have accepted as in the main typical of this class. Reference is here had to those uridertakings, such as forestry, that give rise to a by-product that may be sold ; or to those, such as irrigation, that neces- sitate a commercial transaction in order that the service may be performed equitably as between citizens. In those cases there must be a price, and the question of revenue comes to be a matter of direct fiscal importance. The fiscal interests in such undertakings, or, better, the limitation upon the fiscal interest imposed by other considerations, will emerge as we consider the theory of public charges. 45. Theory of Charges for Public Industries. — In discuss- ing this question the student must bear in mind that the charge for a public service is neither a tax nor a competitive price. Nor can it be regarded as a combination of a tax and a price. It is rather a charge made in view of the purpose for which the industry in question is undertaken, and must be determined by all those considerations that present them- selves under the phrase " public utility." So divergent are the conditions under which industries are assumed by the State that charges may vary in their character all the way from a fee, the object of which is to facilitate some branch of the administration, to a price that imposes all that the service or traffic is able to bear. Indeed, the question of price for a public service plays over the entire gamut of social 278 REyENUE FROM PUBLIC INDUSTRIES. and political considerations, ranging from the conception of a gratuity to that of a charge designed to destroy certain activities regarded as socially injurious. The outlook from this question presents a philosophy of its own, but in this elementary treatise it will not be possible to grant it the con- sideration which either its interest or its importance demands. We shall content ourselves with presenting in outline a theory of public charges. The three classes of public industries recognised by our analysis are those undertaken for revenue, those in which revenue is incidental, and those undertaken for service. To each cpf these classes of industries there pertains a rule for the adjustment of prices. (i) Rule for Revenue-bearing Industries. — So far as industries undertaken for revenue are concerned, as, for example, the tobacco monopoly, the rule to be followed is that of a monopolistic adjustment of the price, and the actual ^^jjrice charged will be the maximum commercial price modi- x" fied by such social considerations as pertain to the case. Greater difficulty inheres in the selection of an industry to be made the source of revenue than to the adjustment of charges after the industry is selected, for the adjustment of charges is largely a matter of experiment, and must be determined in view of the recorded results of a range of prices over a series of years. In the application of this rule, how- ever, many of the considerations which control the assess- ment of taxes must be acknowledged as pertinent in the arrangement of a schedule of prices. Tobacco, for example, is of many grades, and each grade may be regarded as as- signed to a definite class of incomes. Now as in the case of income taxes the rate of payment mai^y vary for the several grades of income, so in the adjustment of prices some re- gard may be had to the ratio of the price to the size of the income from which it is likely to be paid. But in practice this consideration cannot be pressed very far, since the higher range of payments can be easily evaded by those for whom they are intended through the purchase by them of goods of inferior quality. Theoretically, however, it is necessary to recognise that the rule of charging what the traffic will bear may be modified by considerations of public utility. (2) Rule for Industries Bearing an Incidental THEORY OF CHARGES. 279 Revenue. — The more difficult analysis respecting a schedule of charges for a public industry presents itself in connection with those industries in which revenue is more or less inci- dental to service. These industries, it will be remembered, are such as determine in large measure the conditions of living for the great body of the people. The post-office, for example, while properly classed as an industry undertaken for the service which it renders, is nevertheless administered with a careful regard for revenue. Public railways, also, both territorial and municipal, while they may permit more freedom to the desire for a commercial profit, are acknowl- edged to be industries in which social considerations properly influence all questions of development and administration. (a) The Post-office. — The rule for regulating postal rates seems to be pretty well established, and, allowance being made for slight modifications to meet the variety of social and political opinions entertained, to be generally followed by civilized nations. It may be expressed as follows : the aggre- gate of receipts must cover the aggregate of cost ; but in the attainment of this result greater regard should be had to volume of service rendered than to the charge upon the unit of service. Postal charges present three peculiarities: In the first place, rates are remarkably low ; two cents, for example, for the collection, transportation, and delivery of a letter. In the second place, the charge is uniform irrespective of dis- tance ; in the United States, for example, two cents is asked whether a letter is carried three miles or three thousand miles. Involved in this uniformity of price is the significant result that the profit accruing to the service in a densely populated portion of the country is used to cover the deficit which arises on account of rendering a similar service in portions of the country more sparsely settled. Thus the excess over cost in New York and Ohio goes to pay part of the cost for Kansas and Colorado. The third peculiarity in postal chafges is that the classification of packages to which the schedule of uniform rates is applied is determined rather with a view to protect the ser- vice against unduly heavy packages than for the purpose of harmonizing the charge with the cost. Not only is the postal service an exclusive monopoly within the limits of the pack- ages it chooses to handle, but it adjusts its charges so as to make careful selection of the packages to be handled. There aSo REVENUE FROM PUBLIC INDUSTRIES. is perhaps no better illustration of a social solution of a finan- cial problem than the one presented by the postal service. The familiar history of the postal reform which began in England in 1840, and which subsequently spread to all civilized peoples, need not be here repeated.* The reduction in charges to a uniform penny postage payable in advance was followed by a corresponding expansion in the ser- vice ; and while the financial results did not during the first years ■\ conform to the expectations of the extreme advocates of the measure, the many incidental advan- tages of a highly organized and comprehensive postal _,system are so marked that the wisdom of the measure is no longer questioned. One point only respecting it de- mands attention : What, it may be asked, is the secret of the success of a uniform rate irrespective of distance ? The signi- ficance of this query lies in the fact that many writers, interpreting the success of this rule when applied to the transmission of letters to mean that an industrial service can be rendered without regard to specific cost, have argfued for —•its application to all sorts of communal or social services.^ ^ The mistake involved in such a generalization lies in the assumption that the postal charge is determined without regard to cost. The fact is that the cost incident to the postal industry consists in collection and delivery at terminal points, the expense of transportation being in the United States less than one-third of total expenditures. It is the pecu- liarity of the industry rather than of the rule of charges which warrants a uniform rate irrespective of distance. So long as this is held in mind there is no danger of a false ap- plication of the principle. {b) Territorial Railways. — The problem of railway rates has not, like that of postal charges, passed beyond the domain of current discussion. This is in part due to the fact that rail- ways are universally regarded as a source of profit, to com- panies when privately owned, to the State when public property ; but it is in larger measure due to the fact that the social significance of railways is not yet clearly under- • For convenient references compare Bastable, Public FSnance, pp. 190-197. f Cf. McCulloch, Taxation and the Funding System, p. 330. XCl. Cowles, A Gtnrral Freight and Passenger Post, THEORY OF CHyiRGES. 281 stood. The problem of railway rates is a problem by itself, and stands as one of the most important of the unsettled problems, of the day. Of the many questions that arise there seems to be harmony of opinion respecting two only. It seems to be universally conceded that the first step in drawing a schedule of rates lies in an appropriate classification of the services ren- dered, and it seems to be equally well established that no in- vidious discrimination can be allowed between individuals or places in the transportation of goods or persons. Beyond this the practice of states shows little that is clear, definite, and systematic. The Germans have perhaps proceeded farther in the direc- tion of a scientific solution of this problem than any other people, and this they have done, not so much by a study of rates as by an attempt to organize the interests that are in- volved in the adjustment of rates.* We shall not undertake to characterize this organization, but venture the remark that the relation of the railway itself to the clients whom the railway serves must be clearly appreciated before the es- sential relations and social principlds can be discovered upon which to base a schedule of railway rates. Assuming railways to constitute a public property, rates should be proposed by the shippers and accepted or rejected by the government. In the proposals submitted by the ship- pers (we assume the shippers to be properly organized) the primary isocial interests will find adequate expression ; in the acceptance or rejection of the proposals by the government not only will the general social interests be guarded, but the financier also will be enabled to provide for such income over and above operating expenses as it may seem proper that the business of inland transportation should contribute to general revenues. It thus appears that the problem of railway rates on State railways, so far from leading to a dis- cussion of an appropriate price to be adjusted by commercial rules, comes to be a question of the organization of com- mercial interests by means of which a just schedule of charges shall emerge, and with this suggestion we drop the question. • A concise and fairly accurate account of the German organization will be found in Meyer's monograph The Adjustment of Railroad Rates in Prussia, Vol. XI, Transactions of the IVisconsin Academy of Sciences. a82 REVENUE FROM PUBLIC INDUSTRIES. Sufficient has been said to suggest that the public ownership of railways opens up a domain of industrial integration and governmental administration with which English-speaking people are not familiar. (c) Municipal Railways. — A municipal railway or tramway is peculiar in the character of the traffic which it carries. The social results of a passenger traffic, especially if confined to the limits of a municipality, are easily traced and may be statistically measured. Moreover, this traffic, inasmuch as it involves few terminal expenses, and is entirely free from the cost of loading anji unloading, is a most remunerative one, and the returns from it increase enormously in proportion to density of traffic. Under such circumstances there is no reason why the rate, should not be adjusted with some regard to the revenue that may be derived from it. For it is a well- known fact that a price which becomes a burden to any class in the community, the importance of the service being taken into the accourtt, will tend to deplete revenue by cur- tailing use, while the price at which cars are used to their full capacity will probably yield a large return upon the cost of construction. Now it is evident that, under such conditions, the financier is furnished with ample lati- tude for harmonizing the social and the financial interest. -Indeed, it is scarcely conceivable that the financial interest, which looks to street railways and analogous industries for a very considerable portion of its general . revenue, can be jeopardized by th6 adjustment of rates in harmony with the social function which such railways perform. Not, only may the price for transportation be low, but it may discriminate ^>n favour of long-distance travel, for only under such condi- tions can the demand of industry for a high degree of centrali- zation and the demand of healthful living for room, light, and air be harmonized. We may then conclude that the process of determining the price to be charged for industries in which revenue is more or less incidental consists in adjusting the financial purpose to the social end for which the industry is under- taken. This is neither very definite nor conclusive, but it i ' at least has the merit of providing the proper approach to the question in hand. (3) Rule for Industries Undertaken for Servici;.— THEORY OF CHARGES. 283 It remains to consider the determination of price for indus- tries undertaken primarily for service. With industries of this class it is rather as a factor in administration than as an assertion of either a primary or incidental financial interest that the financier contemplates the adjustment of a price. For the purpose of illustrating this point of view we shall refer again to public forestry and public irrigation. The es- tablishment and maintenance of a system of forestry is de- signed to render a general and not a particular service, and there can from the nature of the case be no personalization of the price. That which bears the price is the by-product of the .industry, and not the main service. It is this fact which distinguishes forestry and analogous undertakings from industries like the railway and the post-office, and an appreciation of the situation suggests at once the rule for the adjustment of the price of such products as fall into the hands of the government for sale in connedtion with its administration of the main service. The lumber, char- coal, and ash products which the forestry division sells is not all the lumfcer, charcoal, and ash products placed upon the market for sale. This being the case, to dispose of the forestry by-products gratuitously, or to place them on the market at less than their commercial price, would subject private dealers to a competition they could not well sustain. The government must demand the ordinary commercial price, but in determining that price it must reckon its own output as a part of, and not as supplemental to, the regular orderly supply. So far as principle is con- cerned this is all there is to the question. This rule applies to prison-made goods, which are to be regarded as a by- product of a reformed prison administration. Indeed, it is of general application to all cases where the government is in receipt of a product of value and yet does not see fit to monopolize the process of production. The rental to be charged for the use of water from a public system of irrigation presents a slightly different case. The water-supply is limited when compared with the uses to w'hich it may be put. Moreover, for the cultivator the rental forms an element in the cost of cultivation. There are the controlling facts for determining the water rate. In the first place the rate must be such as to charge the cost of con- 284 REyENUE FROM PUBLIC INDUSTRIES. struction, maintenance, and administration to the industry created by the system of irrigation ; while in the second place the rate must be so adjusted as to permit a free use, while guarding against a lavish use, of water. This is a case in which the price comes to be the determining factor in administration. It is the means by which the service is fairly apportioned to those for whom it is rendered. This rule of price is the one that should be followed by municipalities when they undertake the supply of water or light. All that the municipal government need trouble itself about, at least in ordinary cases, is that the service does not become a permanent burden upon general taxes, and that, while encouraging a generous use, the facilities which the city provides should not be wastefully employed. In a rough way one may say that the price varies with the natural supply, from which one may see how useless is the rule that the price for water or light shall be adjusted to the average price of cities of the same size. Each city has a problem of its own that must be solved in view of the engineering elements which it presents. The price charged for the service rendered is an element in administration and has primarily nothing to do with the financial organization of the municipality. The administrative price may, or it may not, procure a clear revenue for the treasury ; the test of its proper adjustment is found in the manner in which the citizens make use of the service rendered. Our conclusion, then, respecting the price of industries undertaken by the State is as follows : Industries undertaken primarily for revenue will adjust their prices according to the rule of commercial monopolies; industries in which revenue is incidental to service will seek for a schedule of prices in which the social and financial interests involved are har- monized ; industries undertaken primarily for service will recognise the price either as an incident in administration, when commercial considerations must control, or as a factor in administration, when commercial considerations may be ignored. BOOK II. TAXA TION CHAPTER I. GENERAL CONSIDERATIONS RESPECTING TAXES. Concerning the Method of Treatment. Concerning the General Natuke of a Tax. Definition of a Tax from the Lawyer's Point of View. (1) Must be for a Public Purpose. (2) Must be Levied in a Spirit of Equity. (3) Must Conform to Established Rules. Definition of a Tax from the Theorist's Point of View. (1) The Purchase Theory of a Tax. (2) The Benefit Theory of a Tax. (3) The Contributory Theory of a Tax. Analysis of the Taxing Power. (i) Character of the Power. (2) Grants Bestowing the Power. (3) Limitation upon the Power. Concerning the Duty to Pay Taxes. (i) Difficulties of Administration due to Foreign Residence. (2) Difficulties of Administration due to Difference of Business Interests. Principles of Tax Exemption. The chief source of revenue for modern states is found in taxation, and this will continue to be the chief source of revenue as long as the institution of private property in productive agencies receives the approval of mankind. It is on this account that a istudy of the principles of taxation, and of the rules of the apportionment, the levy, and the collection of taxes, consti- tutes the most important part of the Science of Finance. It would be a mistake, however, to so emphasize the importance of taxation that its relation to the other parts of the fiscal system is lost to view. Not only would this lead to an 285 286 GENER/tL CONSIDERATIONS RESPECTING TAXES. imperfect conception of the financial organization of modem states, but it would render a study of taxation itself unneces- sarily difficult, since that study would then be deprived of the broad basis upon which certain of the most important prin- ciples of taxation rest. Taxation is undoubtedly the most comprehensive problem in the Science of Finance, but it does not fill the domain of that science. 46. Concerning the Method of Treatment. — One ac- quainted with the general literature of the subject is familiar with the different methods adopted by English and Continental writers in their treatment of the problem of taxation. Most English writers include what they have to say on this subject in their treatises upon Political Economy. John Stuart Mill, for example, after bringing his system of private economy to a logical close, adds a fifth book which he entitles On the Influence of Government. Taxation is in- cluded in this book as one among several ways in which the action of government may interfere or possibly modify the working of economic law.* There are, it is true, a few * "Some observations, however, may be usefully bestowed on the nature of the considerations on which the question of government inter- ference is most lilcely to turn, and on the mode of estimating the com- parative magnitude of the expediences involved. This will form the last of the three parts into which our discussion of the principles and effects of government interference may conveniently be divided. The following will be our division of the subject. "We shall first consider the economical effects arising from the manner in which governments perform their necessary and acltnowl- edged functions. "We shall then pass to certain governmental interferences of what I have termed the optional kind (i.e., overstepping the boundaries of the universally acknowledged functions) which have heretofore taken place, and in some cases still take place, under the influence of false general theories. " It will lastly remain to inquire whether, independently of any false theory, and consistently with a correct view of the laws which regulate human affairs, there be any cases of the optional class in which govern- mental interference is really advisable, and what are those cases. " The first of these divisions is of an extremely miscellaneous char- acter : since the necessary functions of government, and those which are so manifestly expedient that they have never or very rarely been objected to, are, as already pointed out, too various to be brought under any very simple classification. Those, however, which are of principal Importance, which alone it is necessary here to consider, may be reduced to the following general heads. THE METHOD OF TREATMENT. 287 separate treatises on financial questions, such as McCulloch's Taxation and the Funding System; Pete's Taxation: Its Levy and Expenditure, Past and Future; Levi's On Taxation: Horn ii is Raised and How it is Expended; but these works are separate in form only and do not recognise the existence of a Science of Finance as an independent study. Mention should be made also in this connection of Bastable's Public Finance. This work, which appeared in 1892, is the first com- prehensive treatise in the English language which follows the Continental form of treatment, but it fails to impress upon the student that sense of solidarity which alone may be urged as an apology for an independent treatment of financial ques- tions. Inasmuch as our own treatise adjusts itself in the main to the social organization developed under the influence of English common law, and is in harmony with what the author believes to be the conception of liberty in process of realization by the English-speakingpeoples, it may be well to explain why, in so significant a matter as the classification of the sciences which deal with social relations, approval is granted to the Continental rather than to the English method of treatment. Not only will this explanation lead to an interesting analysis considered by itself, but by means of it the point of view from which our discussion is undertaken, and which is be- lieved to be the point of view to which all modern nations are arriving in their social and political development, will be yet more clearly apprehended. What is technically known as English political economy, being the system of thought which regards taxation as an interference by government with the normal working of economic forces, reached its highest possible development in the treatise of John Stuart Mill. The assumption of laissez- faire as the general principle for the guidance of public policy served as an obstruction to further development, since it did " First, the means adopted by governments to raise the revenue which is the condition of their existence. " Secondly, the nature of the laws which they prescribe on the two great subjects of Property and Contracts. "Thirdly, the excellences or defects of the system of means by which they enforce generally the execution of their laws, namely, their iudicature and police." (Mill, Principles of Political Economy, Book V, Chapter I, § 3.) «88 GENEIUL CONSIDER/1TIONS RESPECTING T/tXES. not allow candid inquiry into the rational form of commercial and industrial organization. Under the influence of this doc- trine it was difficult to perceive that a normally adjusted society could make demands on government beyond a demand for the protection of person and of property. The placing of the State within the domain of industry for the purpose of ren- dering a direct service, or, what is more to the point, of main- taining those conditions in which voluntary association can work to the advantage of the community, was not regarded as worth the serious consideration of the classical school of economists. It is not strange that this should have been the case when one notices the conditions under which the classical econo- mists produced their works. Adam Smith, the first great master, wrote prior to 1776. The work of Malthus and of Ricardo was done under the influence of the narrow con- ception of the first quarter of the nineteenth century. Senior, who gave form to the tenets of the school, did his thinking before 1830 and was strongly impressed by the individualistic claims of the possessing class. Even Mill, who reduced the economic thought of the previous hundred years to systematic form, and whose book appeared in 1846, wrote before ma- chinery had achieved its final victory, and before corporations had exposed their true significance. It thus appears that the social and industrial conditions which presented themselves to the minds of the classical writers of English poHtical economy were in many respects different from those wliich emerged subsequent to 1850. The problems to be solved were different, and the evils against which it was thought necessary to guard society were different. These writers did not, and indeed could not, adequately appreciate the centraliz- ing tendencies of machinery ; nor could they perceive that great industries, unless subjected to proper control, might come to exercise a tyranny as baneful as political tyranny. It was reasonable, therefore, for these writers to support the theory of restricted governmental functions. To advocate the doctrine of laissca-fairc at the present time in the same way as it was advocated by English econo- mists would, to express it mildly, be an anachronism, and the reason why modern writers have undertaken to reconstruct economics is that reconstruction is necessary in order to ad- THE NATURE OF A TAX. 289 just the science to the requirements of modern conditions. The process of reconstructing a system of thought is neces- sarily a difficult one, and it would be entirely out of place to suggest the many lines along which this process is taking place. Suffice it to say that the separation of Finance from Economy, and the development of the former as an inde- pendent though coordinate science, is a part of that recon- struction. The thought seems to be gaining ground that a State has certain permanent industrial functions, and that, as society develops through the differentiation of social activities, the appearance of common needs which the State alone can satisfy is a normal occurrence. It would be manifestly improper, therefore, to regard any of the established functions of government as an encroach- ment upon private rights ; they are rather conditions essential for the enjoyment of those rights. Nor can the best results be expected when the study of any of the lines of govern- mental activity proceeds exclusively from the point of view of the individual; it is equally important that the common interests of all should be regarded as a unified and compact collective interest. This is what is meant by ihe phrase " organic conception of society." The collective interest is not merely the aggregate of those interests which the indi- vidual members of the community may have in common; it is, as an intellectual concept, a different thing and possesses a character distinctively its own. This is the thought to which modern ideas of political economy are gradually ad- justing themselves, and it is easy to see that a reorganization of the science under such guidance would not consent to the negative treatment of so important a problem as that of an appropriate provision by the State for its own existence. The recognition of the Science of Finance, therefore, as an independent study is one step in the reorganization of economic science, and results from a change in the point of view from which all social sciences are coming to be regarded. 47. Concerning the Nature of a Tax. — In endeavouring to formulate a clear statement respecting the nature of a tax it will be of assistance to note that the conception suggested by the word is older than the word" itself, or, to put this thought in another way, that many words have been used by different peoples at different times to serve the general pur- 29° GENER/tL CONSIDERATIONS RESPECTING TAXES. pose now served by the term taxation. This being the case, the essential characteristic of a tax may be discovered by observing what is common to all the words which have been pressed into service by successive fiscal administrations. Professor Seligman has made an admirable collection and classification of these terms. His presentation of the subject is as follows : " This historical process is well illustrated by etymology. If we look at the various terms applied to what we to-day call a tax we shall find every shade of the development re- flected not only in the words used in former centuries, but in those still employed to-day. There are no less than seven different stages in this etymological growth. " The original idea was that of gift. The individual made a present to the government. We see this in the mediaeval Latin term donum and in the English benevolence, which was used far into the middle ages. The second stage was reached when the government humbly implored or prayed the people for support. This is the meaning of the Latin precarium, used for many centuries on the Continent, as well as of the German Bede (from heten, to pray). The Landbede was the term ap- plied to the land tax in the German states until quite re- cently. With the third stage we come to the idea of assistance to the State. The individual felt that, if not making a gift, he was at least doing the government a favour. This idea is expressed in the Latin adjutorium, the English aid, and the French aide, which was at one time used for all kinds of taxes. The same idea is discernible in the English subsidy and contribution. It has survived in the German term for a tax, Steur (steuern, to help), and in the Scandinavian hjclp. In France contribution is even to-day commonly used as synony- mous with tax. " The fourth stage of development brings out the idea of sacrifice by the individual in the interest of the State. He now surrenders something for the public good. This is seen in the old French gabelle, in the modern German Abgabe, and in the familiar Italian dasio. In each case the citizen gives or sacrifices something. With the fifth stage the feeling of obligation develops in the taxpayer. The English duty was not originally restricted to its present narrow meaning in the United States. Here it is usually applied to import taxes THE NATURE OF A TAX. 291 and sometimes to the internal revenue taxes. But even to- day in England the term includes some of the most important so-called direct taxes, like the inheritance tax and the income tax. It is not until the sixth stage is reached that we meet the idea of compulsion on the part of the State. We see this in our impost or imposition, as well as in the French impdt and the Italian imposta. Although we limit the term to a certain kind of tax, the French use it as the generic epithet par excellence. The same idea is seen in the German AuHage (something ' laid on ') and Aufschlag (something ' clapped on '), fre- quently used at present for certain indirect charges on com- modities. " With the seventh and final stage we reach the idea of a rate or assessment, fixed or estimated by the government without any reference to the volition of the taxpayer. We see this in the mediaeval English scot (to be ' at scot and lot '), which is nothing but the German Schoss or the Scandi- navian skatt. It is seen in the German Schatzing (or esti- mate), which was used in the early part of the century. Above all, it is recognised in our tax {taxare, to fix, to esti- mate), the French taxe, the Italian tassa, and the English rate. It is worthy of note that in the middle ages ' tax ' always meant a direct tax, for which a regular assessment list or schedule was made." * The only conception which all the terms named above hold in common is that revenue from taxation forms a deriva- tive and not a direct revenue to the State. The significance of this phrase has already been considered in connection with the classification of public revenues. It means that the fund to which the State appeals through taxes is the income of persons or of associations of persons, and is by this means to be distinguished from the income of the State conceived as a proprietor or as a corporation engaged in some indus- trial pursuit. A system of taxation, therefore, implies the institution of private property; it presumes prosecution of private industry ; and the tax, this being the word now most commonly employed, comprises that portion of private in- come given over to the State for expenditure. The manner of securing the payment, the rules according to which the payment is assessed to persons or to associations of persons, * Seligman, Essays in Taxation, pp. 5, 6, 7. 2^2 GENERAL CONSIDERATIONS RESPECTING TAXES. the argument relied upon for justifying the payment, or, in deed, any of the considerations or attendant circumstances pecuhar to time, place, or stage of development, are not es- sential to the conception of a tax. It is true one cannot proceed very far in an analysis of any question of taxation, or in a discussion of administrative or financial adjustments, without being forced to recognise many qualifying ideas; but this does not modify in the least the conclusion that the essential characteristic of a tax, the only one, indeed, of uni- versal application, is that it forms a derivative revenue to the State. Modern definitions of a tax almost universally insert the statement that the payment from a subject to a sovereign :» a coercive and not a free-will payment, and, according to modern theories of political science, such a qualification is eminently proper. By the phrase coercion, however, should be understood legal coercion, and not the coercion which results from the recognition by an individual of definite wants, or from the pressure of public opinion, or from the sense of duty, which in a loose use of language might be included under that term. Much confusion has been introduced into the . subject by the loose use of this word coercion. Professor Seligman would hardly care to be understood, when he says that the " idea of compulsion on the part of the State " was not introduced until what he terms " the sixth stage " was reached in the development of the idea of a tax, as implying that before this time governments exercised no pressure upon citizens in securing from them payments. Such a statement would be manifestly untrue. His meaning undoubtedly is that it was necessary for private rights in productive property to have been fairly well developed before a sovereign govern- ment could 'be safely intrusted wi'th the public right of making compulsory demands upon its subjects. The legal concep- tion, therefore, which is an essential quality of modern taxa- tion, implies the development of certain restraming principles in the exercise by the State of the taxing power. The full significance of taxation as a compulson,' payment will not be apparent so long as the only relation held in mind is that which exists between the subject and the sovereign. The justification of the compulsory payment is not so much to enable the State to secure adequate revenue as that the THE LAIVYERS DEFINITION OF A TAX. 293 State in securing its revenue may deal equitably between its subjects. The service of the State is a common service and contributions for its support must in justice be made by all. Were the sense of social obligations sufficiently developed to insure a universal contribution, and one which the sense of justice would acknowledge to be relatively equitable between citizens, it would not be necessary for the State to employ coercion. It is because this is not the case that a tax comes to be a coercive payment; and it adds much to our concep- tion of a tax, and suggests the spirit in which all questions relative to taxation should be discussed, to recognise that the exercise of coercive power by the State in the matter of public revenue is in response to the ethical sense of the com- munity, which demands equitable payment from all citizens. The coercion to which reference is made in defining a tax is the legalized coercion of constitutional peoples, and in this sense is of relatively modern development. 48. Definition of a Tax from the Lawyer's Point of View. — Pressing now our inquiry beyond the conception of a tax approved by all writers on finance, it will be found that the diversity of opinion respecting the nature of a tax arises from the fact that the definitions which present them- selves are either adjusted to some peculiar legal code, or they are coloured by some peculiar rule of apportionment or special theory of social organization. It may be well to con- sider separately these two classes of variations in the con- ception of a tax, for each bears with it certain qualifying ideas or social and political tendencies necessary to a full under- standing of the nature of a tax as that word is used by modern peoples. The legal definition of a tax is the first which claims attention. Confining our analysis to the accepted principles of Ameri- can law, it is observed that a coerced payment from the subject to the sovereign must- meet three conditions in order to be recognised as a tax. These are as follows : 1 (j) This payment must, in the first place, be for some public purpose. This requirement rests upon the very nature of the modern State, which, if it be not government by the people, is universally government for the people. This has been clearly shown in connection with the discussion of budgets and budgetary legislation. The assessment and col- 894 GENERAL CONSIDERATIONS RESPECTING TAXES. lection of moneys for private ends is a tyrannical act not contemplated by the constitutional organization of the State. The law goes even further in the application of this principle. Not only would a demand for money for private purposes be an abuse of the taxing power, and so, technically, no tax, but a demand for money for public purposes in excess of a just demand would be accounted a robbery under the form of law.* It is one thing, however, to lay down a legal principle, and quite another to provide for the enforcement of that principle; and the nature of this right of the citizen against the State will not be seen until one inquires what remedy is open to the citizen in case a government make improper and excessive demands. This question leads to an important distinction. Although fundamental law may recognise a compulsory demand for revenue to be an encroachment upon the rights conferred upon citizens by the institution of pri- vate property, it does not provide, except in extreme cases, for legal redress in case of a wrong ; that is to say, the courts, speaking generally, are powerless in the premises. The de- cision as to what constitutes a public purpose is intrusted to the legislature, and the courts universally assume that any law which the legislature may pass is passed in the interest of the public. The remedy provided for the redress of a wrong of this sort committed by the legislature is the political and not the legal remedy. It is at the polls and before the tribunal of the people, and not in the courts and before a jury, that such cases are tried. This distinction between the -political and the legal remedy must be held constantly in mind. (2) A coerced payment from the State to the sovereign must, in the second place, be levied in a spirit of equity and justice as between the subjects in order to conform to the modern legal conception of a tax. This, it is true, is nothing -peculiar to taxation; it is rather an application to taxation of a general governmental principle. The government should * The distinction between a tax and a tribute is that the former col- lected by a government from its own subjects is limited to carefully defined needs of the State, while the latter collected by a conquering people from a subjected nation bears no relation to the amount of justifiable public expenditures. When a government abuses its taxing power by excessive demands it treats its subjects as a conquered de- pendency. THE LAIVYERS DEFINITION OF A TAX. 295 have regard to equity as between citizens in the matter of taxes for the same reason that all of its dealings should be conducted in the spirit of fairness and justice. This neces- sity, as has already been pointed out, is the apology which the State offers for the exercise of coercive power in the matter of taxation, from which it follows that should the State levy or collect an unjust or an inequable tax it betrays the trust which has been reposed in it. Equity of payment as between citizens is a fundamental characteristic of taxation among constitutional peoples. It is on this account that so large a share of the study bestowed upon this subject in- quires respecting principles of equity and justice. This legal quality, however, like the one mentioned above, must rely for its realization upon the political rather than upon the legal remedy. Courts have sometimes ventured to express an opinion as to whether or not a tax is levied for a public purpose, but should a court undertake to say that a particular system of taxation is without the warrant of law because it fails to realize equity as between citizens, ex- cept, indeed, this opinion rest upon some explicit expression in the fundamental law of the State, it would be guilty of an encroachment upon the reserved functions of the legisla- ture. The remedy for the inequable tax lies in the political organization of the State, and for this reason is it especially important that public opinion should be intelligent and sensi- tive to moral considerations in all matters pertaining to taxation. (3) The demand of a State for money in order to be rightly accounted a tax must, in the third place, be made according to established legal rules. This legal characteris- tic of a tax has nothing to do with general principles, but its recognition is nevertheless of great importance. Among the marks of a good revenue system to which attention has been called mention was made of the necessity of harmony in all its parts. The laws out of which a revenue system is constructed are enacted by many different legislative bodies, at many different times, and with the stress of argument placed upon some peculiar interest which at the time happens to present itself. Should the vote of the legislative body be alone adequate to insure the legality of such law confusion of statement and contradiction of principle would surely re- 296 GENERAL CONSIDERATIONS RESPECTING TAXES. suit. For this reason the duty is imposed upon the courts in the United States of interpreting the phraseology of laws, and of denying the name of a tax to a levy which has not been made according to established legal requirements. This third legal characteristic of a tax has a yet broader application. There is perhaps no other constantly recurring public act which lies so closely to the interests of the people as the levy and collection of taxes, and, notwithstanding the political remedy against the abuse of the taxing power pro- vided in the organization of popular government, private industry would not feel that safety essential to a healthy and active life were no other safeguard against the arbitrary acts of government provided. No power or right can be properly understood without recognising that it is limited in its exer- cise by corresponding rights which in a sense stand opposed to it. This statement applies equally to public and 'to private rights, and is of especial pertinence to problems in taxation. It is undoubtedly true that a tax is a coercive abstraction of private property, but this statement itself implies the institu- tion of private property, and the general right of the State in matters of taxation rnust be interpreted in the light of the fundamental privileges which the law of private property guarantees the citizen. When, therefore, it is said that a tax must be levied according to legal requirements there is im- plied by the statement, not only a code of parliamentary procedure, but a system of well-defined private rights. Still another application of this third characteristic of a tax presents itself, which, however, is of more direct applica- tion to a federated union like the United States than to a centralized government. According to American law, each grade of government enjoys a definite though restricted jurisdiction, and in framing tax laws it is necessary that these several jurisdictions be strictly conformed to. Failure to observe this rule would give rise to no difficulty should all industries from which citizens derive an income be confined in their commercial relations to the political jurisdiction of the government to which they make payment. But this is not the case. The development of inland transportation has destroyed the local market for large numbers of industries, so that there is no identity between the political jurisdiction of States and what perhaps may by analogy be termed the THE THEORISTS DEFINITION OF A TAX. 297 commercial jurisdiction of industries. An insurance com- pany, for example, having its headquarters in one State secures revenue from policies sold in other States. A manu- facturing corporation also sells goods to the citizens of other commonwealths than the one which grants it a charter. These are but illustrations of the complexity which must necessarily arise when the several States undertake to secure revenue from the industries lying within their respective juris- dictions. There must be of course some fundamental law respecting the relative rights of the several centres of taxing authority, and no better way has as yet been devised than laying down certain fundamental principles or -rules to which all laws levying taxes must conform, and of granting to the courts the right of determining whether or not such rules are conformed to. From the above it appears that there is ample room for controversy respecting the legal characteristics of a tax, as also for the development of the law of taxation. There will of course arise dififerences of opinion between the theorist and the publicist, but it is essential that one who undertakes a theoretical treatment of the problems of taxation should do so with the full appreciation of the limitations which the established body of law imposes upon any suggestions w'hich he may have to make. From the standpoint of law a tax may be defined as an enforced payment levied by government for public purposes and levied according to established legal requirements. 49. Definition of a Tax from the Theorist's Point of View. — The assistance to be derived from a study of the nature of a tax as reflected in definitions of theorists is of an entirely different sort. Such definitions of theorists do not exhibit the facts of social conditions during the period in which they claim the attention of publicists, but rather the ideals and purposes of the times in which they were made the subject of controversy. They have on this account an important historic significance and, like all material of his- tory, assist the student by rendering possible a comparative analysis. From the point of view of strict logic all these definitions are open to the criticism that they include in their statements some assumption respecting the theory of apportionment, that is to say, respecting the principles ac- 298 GENER/IL CONSIDERATIONS RESPECTING TAXES. cording to which the duty of payment should be assigned to citizens. The controversies which at different times in the past have been carried on by students of taxation have cen- tred about the rules of apportionment and of assessment. In case the controversy resulted in the acceptance of the idea urged by the theorists, it came to be a part of the estab- lished system of taxation, and for this reason it is possible to trace every qualifying attribute of the legal definition of a tax back to some controversy which has marked an epoch in the development of political liberty and property rights. Current controversies are not less significant. Two advan- tages, therefore, may be expected from a study of the defi- nitions which theorists have from time to time presented. Such a study will, in the first place, impress the fact that the idea of taxation has passed through a development corre- sponding to the development of government itself, and it will, in the second place, lead to an appreciation of the fact that current controversies pertain to undeveloped or unsettled rights. The definitions which we are now about to consider will bear upon the fundamental principles entertained respect- ing the nature of society, the character of government, and the rights of citizens. It would carry us too far from our purpose to apply the foregoing suggestions for study to all the definitions of a tax which have from time to time been presented. Confining our analysis to comparatively modern times, there are three conceptions of a tax that may with advantage claim attention. These are : First. That a tax is a price paid for a service rendered. Second. That a tax is a payment in proportion to benefits received. Third. That a tax is a contribution of citizens to a com- mon end. (i) The Purchase Theory of a Tax. — The most general of the theoretic definitions of a tax is the one which conceives of a tax as a payment to the government for service ren- dered, and a payment equal to the cost of the service.* This conception is not open to serious criticism so long as the question of payment is regarded as lying between the State * In the foregoing book the Idea that a price is a tax was refused recognition ; yie now refuse to recognise the idea that a tax is a price. THE THEORISTS DEFINITION OF A TAX. 299 and the taxpayers as a body; it is not satisfactory, however, Yvhen one holds in mind a general payment and a specific service rendered to him who makes the payment. The idea of purchase and sale as between the citizen and the State cannot be entertained without leading to untenable conclu- ' sions respecting the nature of the State, and, also, respecting the relations that exist between citizens and the State or j between various classes of citizens. It implies, for example, that the State is something separate from the body of citizens, and does not fit itself easily to the conception that the State is the body of the people organized for governmental pur- poses. It implies, in the second place, that the citizen is at liberty to refuse the services offered by the government, and by refusing is able to escape the necessity of making pay- ments. It implies, in the third place, that the relative duty of citizens to make payment for the support of government is in proportion to the expense which they occasion. All of these implications, for reasons that were suggested when the functions of government were under consideration, or which will be made clear when the theory of apportionment of taxes shall claim attention, must be regarded as unsound, and on this account the purchase theory of a tax abandoned. (2) The Benefit Theory of a Tax. — The second theoretical definition of a tax suggested above is that a tax is a payment by citizens to the State on account of and in proportion to the benefit received. This leads to what is commonly called the benefit theory of taxation. It is also termed the in- surance theory or the quid pro quo theory of taxation; but however characterized the underlying thought is the same. The idea embodied in this theory of a tax is that, inasmuch as individuals receive benefits from the State, a payment should be made on account of and in proportion to those benefits. Like the purchase theory of taxation, it rests upon the individualistic conception of society. The two definitions are coloured by the same idea, the chief difference being that the one regards a tax from the point of view of cost to the State, the other from the point of view of advantage to the citizen. All of the considerations, therefore, which were ' urged against the conception that a tax is a payment to cover the cost of a service rendered applies with equal force to the idea that a tax is the equivalent of a benefit received. 300 GENERAL CONSIDERATIONS RESPECTING TAXES. It may be stated further that they who accept the benefit theory of taxation are thereby committed to the restrictive theory of government which prevailed in the early portion of the present century. Were the functions of government rightly restricted to the protection of life and property there would be some reason in saying that payment to the State should be equal to all citizens so far as expenditures for the protection of life are concerned, and in proportion to property so far as the activities of the State are devoted to the pro- tection of property. The modern State, however, assumes duties far beyond the primitive functions of protection to life and property. Government is subject to a development pari passu with the development of society itself. If the analysis presented in connection with the Theory of Public Expendi- tures be accepted as correct, expenditures incident to the protective functions of the State, as compared with those that arise in connection with the developmental functions, tend to become less as civilization advances. While, there- fore, the quid pro quo theory of taxation may have served fairly well under conceptions of governmental activity held in the early part of this century, it must be regarded at present as somewhat antiquated. That phase of the benefit theory which has exerted the greatest influence upon the literature of taxation is the one which regards a tax as an insurance premium. Montesquieu, for example, says that " the public revenues are a portion which each subject gives of his property in order to secure and enjoy the remainder," and many writers there are who make this definition the basis of their analysis. Thiers states baldly that a tax is an insurance premium. This method of presentation suggests yet another criticism. Not only does it entertain an erroneous idea of the nature of government, and rest upon an inadequate conception of the functions of the State: it presents also a false idea of property and of proprietary rights. It is logical for Thiers, who believes all property to be the result of individual effort, and who asserts that the defence of private property is found in the fact of individual production, to conceive of a government as a great insurance company, accepting from citizens an annual pre- mium as a guarantee against loss by theft or dishonest treat- ment. According to this idea the annual payment would not THE THEORIST'S DEFINITION OF A TAX. 30 ^ necessarily be in proportion to the amount of property, which has been the commonly accepted idea of apportionment, but in proportion to the risk which the nature of the property entails. It is not necessary, however, to discuss at length the insurance theory of taxation, inasmuch as the defence of property upon which it rests has been for the most part abandoned. Few writers at the present time would care to assert that property is wholly an individual product, and still fewer there are who would care to deny that social utility is at once the basis and the defence of individual ownership. With such an idea the insurance theory of taxation is wholly at variance. The above considerations respecting the purchase theory and the benefit theory of taxation are fundamental. They pertain to the nature of the State, to the relationship between citizens, to the character of government, and to the basis of" property. They do not bring to notice the practical diffi- culties whic'h would arise were it attempted to determine the cost of specific services or to measure the relative benefits of government to citizens. The administrative criticisms upon these theories of taxation will claim attention when the theory of apportionment in harmony with them is submit- ted for discussion. It is desired for the present to hold our analysis strictly to fundamental ideas. (3) The Contributory Theory of a Tax. — The third defini- tion which presents itself in this connection conceives of a tax as a contribution from citizens for the support of the State. Several ideas are implied by the use of the word con- tribution. In the first place a contribution implies solidarity of social interest, or, to put this thought in another way, it implies that all the functions undertaken by the State are such as minister to common wants, and in large measure to wants which cannot be segregated or specialized to indi- viduals or to classes. A sense of organic unity and of inter- dependence, and a consciousness of common rights and common duties, go along with the idea of contribution. The social concept with which this idea is in harmony does not permit of a separation between the State and the indi- vidual, as is the case with the social theories which conclude that a tax covers the cost of specific service, or that it is a payment for benefits received. The contributory theory of a tax concedes rather that the individual is a part of the 302 GENERAL CONSIDERATIONS RESPECTING TAXES. State and that he realizes his individuaHty, in some degree at least, because the State exists. All of these conclusions, as well as others familiar to modern political philosophy that logically follow from this general point of view, are bound up in the assumption that a tax is a contribution from the citizen to the support of the State, and not a price paid by him for specific service rendered or a compensation allowed by him for benefits received. This theory of a tax rests upon that phase of Greek philosophy which asserts that society is organic in structure. It may further be added that this word contribution, when used to characterize the non-commercial payments from a citizen to the State, implies certain established relations be- tween citizens who together make up the State. Since government is the agency of the whole people, and is estab- lished for the purpose of rendering a common service, it follows that a payment from a citizen to its support must be in proportion to some accepted rule of equity and justice; and it consequently lies in the contributory theory of a tax to assert that this payment should be made in proportion to the respective abilities of citizens to pay. Conclusions. — The results of the foregoing analysis, not alone in this chapter, but in the previous chapters as well, may be summarized in the four following statements: First. From the point of view of the State a tax is a source of derivative revenue. Second. From the point of view of the citizen a tax is a coerced payment. Third. From the point of view of administration a tax is a demand for money by the State in conformity to established legal rules. Fourth. From the point of view of theory a tax is a con- tribution from individuals for common expenditure. 50. Analysis of the Taxing Power. — It was the purpose of the foregoing analysis to discover the true nature of a tax, and to arrive at a definition of use to the practical financier, because it fits into the legal conditions and social structure of the modern State. It is the intent of the present para- graph, which is devoted to a consideration of the residence and employment of the taxing power, to carry this general inquiry yet a step further. AN/ILYSIS OF THE TAXING POWER. 303 (i) Character of the Power. — By the phrase taxing power is to be understood the legal right which a government en- joys of determining the amount which each citizen shall pay for the support of the State, and of forcibly collecting that amount if necessary. It is a sovereign power, and is so recog- nised, whether exercised by a monarch or by a government resting on popular suffrage. This must be the case since the payment in question is a coerced payment. Private property is taken for public ends, and none but a sovereign could consistently exercise such an unusual power. It is not enough, however, to know that the taxing power is sovereign in character and that its exercise is the exercise of sovereign authority; it is equally necessary to learn with which of the three great departments of government — the executive, the legislative, or the judicial — this power resides. If the above question be confined to those peoples whose political ideas are coloured by the development of popular government, the answer is a very simple one. A tax must always be promulgated in the form of a law, and a law comes into existence only as the exercise of legislative authority. From our knowledge of the constitutional history of Eng- land we are acquainted with the struggle of the English people against the arbitrary exercise of the power of taxa- tion, and from our study of rules and methods of budgets we have come to appreciate how firmly is this principle established. So important is it conceived that the taxing power shall reside in the legislative body that the legislative body itself is enjoined from delegating that power, either to the court or a corporate body of any sort ; nor is it possible for a court to assume the exercise of this power; nor can the legislative body itself diminish by one iota its authority over the question of taxation, it being a fundamental principle of constitutional law that each legislature should hand down to the legislature which succeeds it all the rights, powers, and privileges which it received from the preceding legisla- ture. Without further comment, therefore, it may be stated that whenever one reasons about the power to levy and collect taxes he is dealing with a sovereign power and with a power which is legislative in character. Although the power to tax is a sovereign power, it is not necessarily superior to regulation and control. Especially is 304 GENER/IL CONSIDERATIONS RESPECTING TAXES. this true in the United States, where the courts are given the authority to pronounce upon the constitutionaHty of legis- lative acts. This does not mean that the court is in any sense a law-making body, its chief social function being rather to preserve harmony in the development of legal prin- ciples and to maintain symmetry in the body of legislative enactments. There is nothing inconsistent in the statement that the taxing power is sovereign in character and to add, at the same time, that its exercise must conform to established rules. These rules respecting the employment of the taxing power are suggested by the two following questions: First. To what specific grant of sovereign power may the exercise of the taxing power be credited ? Second. What are the specific limitations to fhe exercise of the taxing power ? (2) Grants bestowing the Power. — The meaning of the first of the above questions is that, although the general grant to tax resides in sovereignty, and, indeed, is essential in order that the State may maintain its dignity and perform effectively the functions assigned to it, still every specific exercise of that 4 power must be referred to some specific grant, or to some general principle established as the result of a past contro- versy. Confining our analysis to the situation as it exists in the United States, the authority to levy and collect taxes, if it exist at all, must be found either in the Constitution of the Federal State, in the Constitution of a given State, in the charter of a municipality, or in the general laws passed by State legislatures conferring the exercise of the taxing power on the minor civil divisions. Each of these grades of govern- ment must have its legislative body ; and from the above it appears that fundamental law prescribes the character of thr taxing power consigned to each grade of government, and the extent to which and the conditions under which it may be exercised. This fact has a very practical bearing, for it shows that if harmony in methods of taxation is ever to be realized in this country the basis of that harmony must be laid in fundamental law or in inter-governmental agreement. Another service is rendered by a study of the specific grants for the exercise of the taxing power. The simple rule of law respecting the employment of this power is that ANALYSIS OF THE TAXING POfVER. 305 it can never be employed except for the purpose of procuring revenue. The principle to which this rule gives expression is bound up in the very nature of a tax. When " the power which only exists for the purpose of procuring revenue for the needs of government," says Judge Cooley, " is used for some wholly different purpose, and no revenue is expected or desired from the employment, it is misused, and the misuse is usurpation." * Proceeding from this principle of law many writers have urged the conclusion that the protective tariff, for example, is without legal authority. This would doubt- less be true if the taxing power were the only power granted to the State. A duty imposed on the importation of goods which is prohibitory, and which on that account can give no revenue whatever, is not a legitimate exercise of the taxing power; this, however, is quite different from the conclusion that a system of protective duties is without legal warrant. Two remarks may be made upon this point. In the first place, it should be noted that while the taxing power is granted for the purpose of raising revenue, the legislature is not prohibited from employing it in such a way as to pro- cure incidental benefits; that is to say, given the necessity for revenue, the legislature is in duty bound to choose the method the least detrimental to the public, and is at liberty to employ a method which may bring with it incidental ad- vantages. Thus, while the prohibitory duty based on the taxing power would be illegal, a duty on imports which has for its chief purpose the securing of revenue, and which is incidentally protective, would be judged no abuse of that power. This may, perhaps, be a dangerous doctrine, but it is the position assumed by the courts upon this question. „,». There is yet another way in which this matter may be presented. A distinction must be made between the employment of the taxing power and the employment of taxing machinery. Thus taxes may be levied, and constitutionally justified, without any reference whatever to the power granted to the State to raise revenue. A protective duty, or, indeed, a prohibitive duty, may be referred to some other grant of power than that of taxation. It may, for * Principles that should Govern in the Framing of Tax Lams. An address by Judge Thomas M. Cooley before the American Social Science Association, April 22, 1878. 3o6 GENERAL CONSIDERATIONS RESPECTING TAXES. example, be referred to the power of regulating commercr> and in reality this is the basis on which the whole protective system as practised in the United States rests. Or, again, a tax on hack-drivers, or bootblacks, or newsboys, a special license imposed on peddlers, auctioneers, etc., is not justified as a simple exercise of the taxing power. The purpose of these impositions is police regulation, and not revenue, and such an employment of taxing machinery must find its justifi- cation in the police power; it cannot rest upon the taxing power. The distinction here drawn may be seen yet more clearly should it be applied to the levy and collection of special licenses for the manufacture and sale of liquors. The rule of constitutionality, then, is quite plain. The taxing power is a special power granted to raise revenue, but the taxing machinery, which is something quite different, may be set in motion on the authority of various powers for various purposes. (3) Limitations upon the Power. — The second of the ques- tions presented above inquires what specific limitations upon the exercise of the taxing power are made by fundamental law. There are five points which present themselves in mak- ing reply to this question : (a) Such limitations as exist pertain to the method of tax- ing, and do not inhere in the nature of the power to tax. There is no limit to the exercise of the power when properly applied. This principle seems to lie in the nature of sovereignty, and to be essential for the preservation of the permanency of a government intrusted with jurisdiction over war and peace, or which, indeed, in the exercise of its func- tions, is liable to be called upon as the final arbitrator respecting any public question. This at least is the position assumed by the Supreme Court of the United States as declared in the familiar case of McCulloch V. Maryland. In rendering the decision in this case Mr. Justice Marshall said, " The power to tax is the power to destroy." And again, " If the right to tax exist, it is a right which in its nature acknowledges no limits. It may be carried to any extent within the jurisdiction of the State or corporation which imposes it which the will of such State or corporation prescribes." It is true that the point in this case pertained to the right of the State of ANALYSIS OF THE TAXING POIVER. 30? Maryland to tax the notes of the Federal bank, and that the object of Maryland in imposing such a tax was to drive these notes out of the State so as to make room for the circulation of the notes of State banks. Thus the point at issue did not pertain to the use of the taxing power for raising revenue, but to the use of the taxing machinery for a purpose other than that of securing revenue. It has, however, been gener- ally accepted that the principle laid down above is of univer- sal applicatioHj and it has been followed quite closely in the subsequent development of American law. In applying the rule that the power to tax " acknowledges no limits " it is necessary to distinguish between its exercise by a government recognised as sovereign, even though it be within a restricted jurisdiction, and a government which is the representative of or the agent of a sovereign govern- ment. A county, a township, or a school district, for example, is, strictly speaking, no government at all, but an administra- tive unit acting for a government for certain specified ends; and there is no inconsistency in limiting these minor civil divisions in their exercise of the power of taxation. This, however, according to the theory of American law, must find expression in the fundamental law of the State itself. (&) The general rule respecting the employment of the tax- ing power is that it should be used only to procure revenue for public purposes. As has been already pointed out, this / follows logically from the fact that the power of taxation is a sovereign power, amd the limitation imposed on govern- ment is a Umitation bound up in the nature of the tax itself. It will be remembered that in considering the legal definition of a tax this point was dwelt upon at some length, and it was shown that the remedy against the abuse of the taxing power was political and not legal in character. In the main such a statement is correct, but it should not be pressed so far as to lead to the conclusion that the courts, in this country at least, are not at liberty to express themselves respecting the pur- pose for which a tax is levied. The first decision respecting what is or is not a public service lies undoubtedly with the legislature, and it may be added that the existence of a law duly sanctioned by the legislative body is accepted as pre- sumptive evidence that the purpose for which a tax is levied is a public purpose. The evidence, however, is presumptive 3o8 GENER/1L CONSIDER/ITIONS RESPECTING T^XES. and not final, and in extreme cases the question may be pre- sented to a court for adjudication. This whole question is a very difficult one and has given rise to a long line of cases. In general the courts refuse to lay down any definite rule, but insist on deciding every case which comes before them upon its own merits, having regard, of course, to previous decisions in analogous cases. The following quotation taken from a decision in one of these cases may serve to illus- trate the general point of view : " A tax must be con- sidered valid unless it is for a purpose for which the com- munity has no interest ; when it is apparent that the burden imposed is for the benefit of others and where it will be pro- nounced so at first blush." A case presented itself in Maine where the council of a town imposed a tax the proceeds of which were to be again distributed among the people of the town, a case which was promptly decided as illegal. Taxes, also, the proceeds of which are paid as a bonus to some manufacturing company as an inducement to locate in one place rather than another would seem to lie outside an appropriate exercise of the taxing power; but in making statements of this sort respecting American law one should remember that he is dealing with a large number of independent sovereignties. He should also recognise that the legality of a tax, so far as it is affected by the purpose for which it is levied, depends upon the accepted ideas respecting the proper functions of government, and on this account may vary from time to time. The courts are obliged to take into considera- tion the new ideals entertained by the people as well as the precedents from previous decisions. The limitation in ques- tion, therefore, is upon analysis found to be nothing more • than a guarantee that the taxing power shall not be employed for any purpose except one of common interest, and to which .the body of the people has fully and finally committed itself; land the service rendered by courts in assuming to check the action of legislative bodies in extreme cases is, in reality, nothing more than the protection of the public against its own enthusiasms. It was never intended that the legal prin- ciple which asserts that the taxing power should be employed only to procure revenue for public purposes should act as an obstacle to changes in the social and industrial structure of society. ANALYSIS OF THE TAXING POlVER. 309 (c) The taxing power is further limited by the claim that its exercise must pertain to the grade of government by which or for which it is put into operation. This principle has no very definite meaning except it be applied to some particular State. In the United States, as has been already remarked, the governmental functions are divided between the Federal State, the commonwealths, the municipalities, and the minor civil divisions. To each of these is assigned a definite set of functions, and the idea underlying the limitation of the exer- cise of the taxing power above stated is that each grade of government has the right to exercise the taxing power in such form and to such extent as may be necessary for the satisfactory performance of public functions assigned. The reverse of this statement is also true, that each grade of government should be protected in the exercise of its taxing power against the encroachments of the other grades of gov- ernment. The practical application of this principle has not, as yet, been very fully developed, but, as will be made clear when the existing system of local taxation in the United States is subjected to critical analysis, it is a principle upon which continually increasing reliance must be placed. Harmony and symmetry in the taxing policy considered as a whole are essential to a sound fiscal system, but there is no possibility of attaining such harmony and symmetry until the respective rights of the various grades of government in matters of taxation are more perfectly worked out. (rf) The taxing power cannot be exercised, in the fourth place, so as to encroach upon the established rights and privi- leges of citizens. The chief effect of this principle is to re- strain the commonwealths from imposing burdens or restric- tions upon the citizens of neighbouring States which they do not impose upon their own citizens. The depository of this right is the Federal Constitution, and it is to the Federal courts that any State must look for protection against the improper use of the taxing power by another State. Its necessity and its sanction is the fact that it is essential to the existence of the national government. Thus the Federal Constitution guarantees the citizens of each State the privi- leges and amenities of the citizens of every other State. No discrimination can be made in the framing of tax laws unless it can be clearly shown that, as a result of a formal dis- 310 GENER/IL CONSlDER/tTIONS RESPECTING TAXES. crimination, greater equity is secured as between those who are called upon to make payment than would otherwise be the case. A discriminating license tax, for example, upon the citizens of other States, or of other localities within the State, is not permitted, for these are assumed to have paid taxes where they live; special taxes upon peddlers, on the other hand, not living in the State are regarded as lawful, since otherwise these citizens might be free from the payment of any tax whatever. The purpose of the principle under con- sideration is to maintain equality of opportunity without regard to residence or occupation, and any apparent discrimi- nation necessary to the attainment of this end is not conceived as contravening the principle enunciated. The Hmitation upon the exercise of the taxing power here laid down is coming to be an increasingly important one in view of the development of interstate commerce. The truth is that com- mercial relations no longer have regard to political jurisdic- tion, and on this account the framing of a satisfactory system of local taxation is exceedingly difficult. This legal principle, like the one just referred to, will be held constantly in mind when the existing system is subjected to critical and, we trust, constructive examination. (e) It is further stated as a hmitation of the taxing power that it cannot be exercised so as to impair the obligation of contracts. This is simply a special apphcation of the general law as found in the Constitution of the Federal Government and of the several States. An exhaustive discussion of this principle will be found in all the text-books upon the law of taxation. It is of too technical a character to receive con- sideration in this treatise, and on that account we must rest satisfied with the mere statement of the principle itself. 51. Concerning the Duty to Pay Taxes. — The duty to pay taxes is one that is owed by the citizen to his sovereign. This is the fiscal expression of a fundamental political relation, and the first conclusion to be drawn from it is that no sovereign is at liberty to look to a foreign people for any por- tion of orderly revenue. The purpose of charging the cost of the home government upon the subjects of a foreign State is not only immoral in itself, but it is contrary to the spirit of international comity, which at the present is about all the " cosmopolitan State " has to rest upon. Moreover, it is bad DUTY TO PAY TAXES. 3TI international policy, for it overlooks the fact that good govern- ment in a neighbouring State is one of the essential conditions for the enjoyment of good government at cheap cost in the home State, a fact which leads to the conclusion that the money which a foreigner can justly be called upon to pay for the support of government is most judiciously expended when paid for the support of an efficient administration in his own State. Yet a further consideration may be urged against the purpose of attempting to throw the burden of the home government upon the subjects of a foreign State. Such a purpose would uridoulbtedly lead to retaliatory laws. The evils and bitterness of feeling which would be sure to arise from such a state of affairs far outweigh any fiscal ad- vantage to either party; and, in case the laws of each nation are equally effective, it is clear that neither party would be permanently benefited. We may, therefore, conclude, without discussing the conditions under which it is possible for a government to obtain revenue from the subjects of a foreign State, that the duty to pay taxes exists solely between a citi- zen and the State to which he owes allegiance, and that the endeavour to collect revenue from a foreign country not only rests upon an immoral purpose, but it is unsound from the point of view of international comity and incapable of success as a fiscal poHcy. The fact that the financier must look to persons and pro- perty within the jurisdiction of the government whose affairs he administers presents one of the most difficult of the formal questions that arise in connection with the general subject of taxation. Were it true that all subjects lived within the juris- diction of the government which grants them citizenship, and that all of the commercial relations from which men draw an income were limited to the jurisdiction of a single sovereignty, there would be no reason, so far as residence or the situation of property is concerned, why the theory of taxation which levies payments upon persons and property could not be easily realized. But such is not the fact. Citizens pass freely from one jurisdiction to another, and it cannot be as- sumed that the income which they enjoy accrues from a business or from property lying wholly within the jurisdiction of a single sovereignty. The difficulties to which this situa- tion has given rise are, first, the evasion of a duty to pay 312 GENERAL CONSIDERATIONS RESPECTING TAXES. taxes by virtue of a foreign residence, and, second, the dupli- cation in the levy and assessment of taxes by virtue of the fact that a citizen may be called upon to make payment where he lives, while his property is assessed for payment where his property exists. It will add to our appreciation of the con- ditions under which a successful revenue system must be administered if we consider for a moment these two classes of difficulties. (i) Difficulties of Administration due to Foreign Residence. — The simpler of these questions pertains to the various rela- tions existing between the subject and the sovereign on account of residence. These relations are three in number and are as follows : (o) A citizen may have his domicile within the State to which he owes allegiance and draw his income from a property or from a business within the same jurisdiction. This is the simplest of all relations and in theory at least presents no difficulties. Under such circumstances a citizen must pay whatever personal tax is levied ; he must also pay all taxes imposed upon his property. There is here no possibility of evasion or duplication, except of course it be traceable to the bad intent of the citizen in declaring his property, or to the negligence or ignorance of officers in administering the laws. Any evasion or duplication under the conditions as- sumed cannot be charged to the system. (fc) The subject of the State may, in the second place, live outside the jurisdiction of the State to which he owes allegiance. A citizen of the United States, for example, may live abroad, or an individual who has proi>erty in one State may be a citizen of a neighbouring State. In this case the duty to pay taxes according to the established rule depends upon the kind of property from which the citizen in question derives an income. The rule is that personal property follows the domicile of the owner, and no tax can be imposed by the home government so long as the citizen maintains a foreign residence. This, however, is the formal statement of a general practice. Quite a number of modifications have been intro- duced in order to prevent the evasion of the duty of paying taxes by the judicious selectiori of residence. If the property from which a citizen secures an income is real rather than personal, it will be taxed at its situs regardless of the residence DUTY TO PAY TAXES. Z^Z of its proprietor. If the income arises on account of a busi- ness that has a legal situs, as, for example, a corporation, the State levies its tax directly upon the corporation. The form which the corporation tax assumes is of no importance. It may be upon the capital stock outstanding, it may be upon gross earnings, or it may be in the form of a franchise tax; in any case the theory is that he who has invested his money in a corporation is taxed in the tax to the corporation. It may be that the business from which a foreign resident se- cures an income exists within the jurisdiction of the State in the person of a trustee or an agent, in which case the tax upon the business is left against the legal representative of the proprietor. Or, finally, it may be that the income en- joyed by the foreign resident accrues to him as interest from investments in government bonds, in which case the tax, or an equivalent for the tax, was taken at the time the govern- ment sold its bonds, since, on account of the clause which exempts such obligations from tax, the price paid was higher than the commercial capitalization of the income. It thus appears that, in theory at least, a citizen cannot evade the duty to pay a tax on account of the fact that he resides either temporarily or permanently in a foreign country. (c) The third relation which the subject may hold to the sovereign in the matter of taxation presents itself when the subject of a foreign State, living outside the jurisdiction of the home government, may have availed himself of some of the public agencies of the home government. For example, a foreign subject living abroad may be a party to a suit in the courts of the home government. In this case he is charged the fees and expenses which are properly rega;-ded as a form of public revenue. Or the subject of a foreign government living abroad may fall heir to property which makes part of the wealth of the home State. Under such circumstances it is not at all uncommon for the govern- ment to impose a special inheritance tax upon property pass- ing out of the jurisdiction of the State. The defence of such a tax is that, by the transfer of property to the subject of a foreign State living abroad, the taxable basis of property is reduced, and the orderly income of the State is thereby decreased. In order to make good this loss the government feels justified in imposing a tax upon the legacy equal to the 314 GENERAL CONSIDER/I T/ONS RESPECTING TAXES. capitalization at tlie current rate otinterest of the annual- tax- proceeds of the property. The relationships here portrayed might be increas^ in number by assuming the reverse conditions of the different cases. But it is not necessary to present in detail such cases. A fundamental principle is involved, namely, the principle of international comity. For all practical purposes it may be assumed that the ordinary governmental services rendered by one State to the citizens of another for which no direct payment is demanded will be balanced by analogous services rendered by a foreign State to the citizens of the home State. In so far as property is the object of taxation rather than persons it may be said that the citizen residing abroad who receives benefits from the foreign State for whi^h l;ie does not make explicit payment, has placed the property ^m which he derives an income at the disposal for taxing purposes of the home government in order that the foreign citizen may receive corresponding services from his own government. Moreover, the personal and property taxes do not exhaust the list of possible taxes. Besides these there exist those taxes which find their way into the price of consumable com- modities, and these are paid by him who consumes them, regardless of his domicile or the situs of his property. It thus appears that the duty to pay taxes is universal, that it is a duty imposed upon him who receives the benefits of government, but that in order to secure this payment it is not always necessary to follow the individual from whom finally the payment comes. Certain modern governments do attempt to tax foreign subjects residing within their jurisdic- tion, but such attempts can only be successful so long as they are followed by insignificant results. Indeed, the theory of securing payment immediately from individuals is one that, in the complex condition of modern society, and in view of the free migration among modern peoples, is impossible of realization. (2) Difficulties of Administration due to Diffusion of Busi- ness Interests. — The other side of this difficulty presents itself when one considers the fact that commercial relations extend beyond the jurisdiction of the taxing body. This is one of the incidental results of the development of a world's market, of the rise of corporate enterprises, and of the tendency to- DUTY TO PAY TAXES. 315 ward the establishment of great industries. An illustration will make this matter plain, which, for purpose of explicit statement, we confine to the political organization of the United States. A railway in this country may extend through several States, and even within the boundaries of a single State it may come under the fiscal jurisdiction of a con- siderable number of minor civil divisions. Now it is clear that much confusion may arise on this account, and that evasion of payment as well as duplication of assessment may result from such lack of organization. An insurance company also, to cite another illustration, may have its local residence within the jurisdiction of one State, and it will probably write policies in many neighbour- ing States. In this case, as in the case of interstate com- merce, the income is due to transactions which the cor- poration has with citizens of a 'foreign jurisdiction. Should, now, the home jurisdiction impose a tax upon the franchise to its full value, and the neighbouring States impose a tax upon the earnings of the corporation arising from business relations with their citizens, it is clear that the corporation in question would be subject to double taxation. Without inquiring as to whether this is just or not it is a sufficient cri'ticism that in this manner the revenue system as a whole is seriously embarrassed. Yet another illustration of confusion and possible dupli- cation in the application of taxing laws under the conditions described is found in the debit and credit relations existing between subjects of the several States. A citizen of one State may, for example, loan money to a citizen of another State, and secure the loan by taking a mortgage upon property. If, now, he is taxed upon the mortgage as personal property by the government to which he owes allegiance on account of residence, and the borrower of the money is taxed upon the value of the land mortgaged without deduction for the debt, it is clear that the property, that is to say, the land mortgaged, is taxed at a figure in excess of its true valuation. It is not designed at this time to discuss the question of corporation taxes or of duplicate taxation arising on account of mortgages. Sufficient has been said to make clear the fact that modern industrial conditions have outgrown the old revenue system which rested upon the assumption that both 3i6 GENERAL CONSIDERATIONS RESPECTING TAXES. persons and property are confined to the jurisdiction of the government to which they owe the duty of payment. Our general conclusion, however, will not be modified by the con- sideration of these questions. The duty to pay taxes is one that the citizen owes to his own government, but it is not neces- sary for the government, in securing the fulfilment of this duty, to follow the citizen in residence or the property in its situs. It is likely that the future revenue laws will consider the commercial activity of property rather than its situs as the basis of payment. 62. Principles of Tax Exemption. — Closely connected with the question of the duty to pay taxes is the question of tax exemptions. There is one fact respecting this question which may be stated without fear of contradiction : it does not lie within the idea of constitutional government that any citizen should be exempt from the duty of contri- buting to the support of the State on personal or class considerations. In this regard the conditions which existed in France previous to the French Revolution, when all taxes were imposed upon the third estate, the clergy and nobility being exempt, have entirely passed away. Such exemptions as exist at the present time must rest on grounds of general expediency, and be capable of expression in some rule of general application. No question respecting taxation has been the subject of fiercer controversy than this one of exemp- tions, a fact which in itself shows how clearly public opinion recognises that the duty to support the State is universal, and that government is not at liberty to show favours in the levy of taxes. Tax exemption must apply to some condition or quality of property, and not to individuals or classes. Looking at matters as they exist at the present time, it appears that tax exemptions rest upon one of three con- siderations. A mere statement of these considerations will probably secure for them general approval They are as follows : First. The State should not tax itself. It has no reason to tax itself, nor could such a procedure influence in any way its real financial standing. The apparent income might, it is true, be increased by this means, but the real income would in no manner be afifected. All property belonging to the State, therefore, as well as all instruments or agencies em- PRINCIPLES OF TAX EXEMPTION. 317 ployed exclusively by the State in the performance of its delegated functions, should be exempt from taxation. The above rule does not require that salaries of public oflficers should be excluded from the rolls of an income tax. Thus the Federal income tax of 1861, as also the income tax of 1894, recognised no difference between the salaries of Federal officers and the earnings of the professional man or the profits of the business man as a basis for imposing the tax; and the laws referred to followed in this regard the general practice of European states. The reason for making a distinction between public property and the salaries of pub- lic officials lies wholly upon the surface. The property is for the use of the pubHc and discharges its duty to the public by being used for a public purpose; the salary of an official, on the other hand, is for his private expenditure as a citizen. The fact that a salary is compensation for a public service does not change its private character. Like the fee of a doctor or lawyer, or the profits of a merchant or manufacturer, it constitutes a fund for domestic expenditure. A further consideration in support of this conclusion may be added besides the one which arises from an analysis of the nature of the income. Assuming the salaries of public offi- cials and the incomes of citizens engaged in private pursuits to have been properly adjusted prior to the tax, the exemption of officials from the rolls of an income tax would tend to disturb established relation between the various classes of income. It would be equivalent to a rise in the salaries of pubHc officials. It is of course true that were the tax in question permanent, so as to be rightly considered a fixed charge on income, an exemption of public officials might ultimately result in a relative decrease of public salaries; that is to say, the tax would be borne by this class of citizens, although their earnings would not be listed among taxable incomes. As the income tax is used by modern States, however, it cannot become a permanent charge at a fixed rate, and on this account it has come to be the general practice of nations to refuse to exempt the salaries of paid officials from taxation. A curious case arises in the United States in connection with the taxation of salaries of public officials on account of the peculiar relation which exists between the Federal Govern- 3i8 GENERAL CONSIDERATIONS RESPECTING TAXES. ment and the State governments. It is very properly as- sumed by the courts that neither grade of government should be jeopardized by any act of the other. Each is sovereign within its own jurisdiction, and the integrity of the State as constituted demands the continued exercise by each grade of government of all powers and privileges with which it has been intrusted. Reasoning from this premise, it has been held that the salaries of ofiQcials paid by one grade of govern- ment cannot be taxed by the other, since, in view of the fact that " the power to tax is the power to destroy," this would give to either government the power to destroy the agencies by which the other is alone capable of performing its public duties or of continuing its active existence. With this ex- ception, however, salaries of public officers are subject to taxation. The query may arise, in case a government is engaged in an industry which competes with a private industry, if it would be just to a private industry to impose a tax upon it, while the public industry is exempt from taxation. Such an exemption would without doubt be unjust were the State to administer the industry in all respects as it would be ad- ministered by the private corporation. But, as has already been pointed out, it is impossible for the State to ignore the fact that it is the depository of the sovereign power, and that it stands for the common interest of all the people, even when it undertakes the management and the control of the indus- try. The competing industry under private management, therefore, need not fear the competition of the State, even though public capital be exempt from taxation, provided only that the principles laid down for the conduct of a public business be conformed to. There is no necessity, therefore, for the purpose of securing equity between the State and its competitors in a business that the former should tax its own instruments of production. It is common for States to exempt from taxation the bonds which they issue, the exemption being made a part of the contract between themselves and the public creditors. This provision has been subject to much criticism. Its defence, however, lies in the fact that a bond which guarantees per- petual exemption from taxation will bear a much higher price than a bond subject to the uncertainties of subsequent taxa- PRINCIPLES OF TAX EXEMPTION. 319 tion. It is usually the case when bonds are issued that the government is in pressing need of funds, and on this account it is deemed wise to draw the contract in such a manner that the bonds will sell for the highest possible price. Second. The second consideration asserts that property which is believed to assist the State in the fulfilment of its public functions should be exempt from taxation. There is here introduced for the first time a very im- portant consideration. In matters of taxation the financier is obliged to recognise the actual condition of public opinion. This opinion may rest upon a satisfactory basis or it may not. The fact of its existence is for some purposes sufficient to control the judgment of the financier; for it must be remembered that he desires, next to the at- tainment of a system of equitable taxes, a system that will work smoothly and efficiently, and on this account the deep- seated prejudices for or against any particular suggestion will ever remain an important consideration in the drafting of tax laws. Applying this principle to the case in hand, it follows that church property, property of educational institutions and in general of all corporations or associations which are engaged in religious, educational, or philanthropic enterprises, should be exempt from taxation. There is, however, this limitation, which is manifestly just, that the exemption attaches only to such property as is strictly used for the purposes named. In case of a church society, for example, its house of worship would be exempt from taxation ; but if the society in its cor- porate capacity own productive property from which it derives a revenue, such property would be subject to taxation. Third. The State should not tax capital regarded as es- sential for ejftending the source of future income. It will be remembered by referring to the Introductory Chapter of this treatise that one of the fiscal axioms laid down asserts that a sound revenue system will not impair the patrimony of the State. This third class of exemptions is but an appli- cation of this general principle. The duty of the financier is not limited to the getting of revenue, but he is obliged to get revenue in such a manner that the source from which it is derived shall never be exhausted. He must hold in mind the needs of the future as well as of the present, and 320 GENERAL CONSIDERATIONS RESPECTING TAXES. is therefore debarred from employing the taxing power iu such a manner as to dry up the springs of present revenue or to hinder the development of an enlarged supply. One of the most common facts in connection with modern systems of taxation is the exemption of incomes and property below a certain amount, and many financiers justify this exemption on social considerations. It is not right, they say, to call upon a"citizen to contribute to the budget of the State until the necessary domestic budget has been provided for. Without admitting any man's right to live in the modern State without contributing to its support, a modified appU- cation of this principle may be defended on purely fiscal grounds. The surest source of public wealth is a lively hope and a healthy expectation on the part of the great body of citizens, and in so far as exemption of low incomes and small salaries from taxation induces to the conditions from which this hope springs such exemptions will tend to the expansion of a nation's wealth. If this be true the exemption of small incomes from direct taxation, as also of the property of those who relatively are poorly able to pay for the support of the State, must ultimately result in the development of a source of wealth from which the State may expect to derive an increased revenue. Another application of this same principle is found in the exemption from taxation of mechanics' tools. These are not only the means of his livelihood, but they are the means by which he secures funds to pay his share for the support of the State. Their possession is an essential part of the ability of the workman to gain a livelihood, and for that reason are exempt from all ordinary liens and attachments. These two illustrations indicate the reason for this third class of exemptions. It is not conceived that the needs of a govern- ment can ever become so pressing as to warrant the levy of a tax that will depress the wealth of the nation or impair the ability of citizens to secure, an income. CHAPTER II. CONCERNING THE PRINCIPLE OF APPORTIONMENT. Special Reasons for Equitable Apportionment. Analysis of the Rules of Apportionment. (i) Apportionment and the Cost Theory of Taxation. (2) Apportionment and the Benefit Theory of Taxation. (3) Apportionment and the Contiibutory Theory of Taxation. Respecting the Fund from which Taxes are Paid. (i) Characterization of Income. (2) Relation of Property to Income. Characterization of Proportional and Progressive Taxation. Arguments for and against Progressive Taxation. (i) The So-called Socialistic Argument. (2) Progressive Taxation and Equality of Sacrifice. (3) Progressive Taxation and Industrial Development. (4) Conclusion. The question of apportionment of taxes leads to a con- sideration of the relative duty of citizens to pay for the sup- port of the State. The student is not left entirely to speculation respecting this subject. As has been already pointed out, it lies in the nature of a tax, and of the political conditions in which taxation presents itself as an important public problem, that payments for support of the State should be equitable as between citizens. The principle of apportion- ment, therefore, according to which this duty is assigned, must recognise all those complex relationships which modern philosophy finds in the phrase political equity. 53. Special Reasons for Equitable Apportionment. — No argument is needed to enforce the conviction that taxes should be apportioned on the basis of equity, but a few words may be added to render yet clearer the nature of this necessity. The power to tax is a sovereign power, and its exercise should be equitable for the same reason that every 321 3*2 THE PRINCIPLE OF APPORTIONMENT. act of government should conform to what is fair and just.* Now that the personal sovereign is no longer a menace to the rights of the people, the importance of relative justice as between citizens is the strongest apology for popular government. This demand for equity, therefore, finds its ultimate sanction in the structure of the State itself, and when used in connection with taxation it is merely an application to a specific case of a fundamental conception respecting popular government. It is possible, however, to discover a more commonplace reason for an equitable distribution of payments. Taxes are frequently spoken of as burdens, and there is no objection to such a use of language, provided the phrase is employed in the same sense as when speaking of any of the necessary items of expenditure in the domestic budget. If the payment of a coal bill or the quarter's rent be a burden, then is the pay- ment of a tax a burden. Using the phrase in this sense it is clear that the payment of any definite amount, the various expectations from life due to a customary standard of living being for the moment dropped from view, is felt to be a burden in proportion to the size of the fund from which it is made. The burden of a payment is measured by what is left after the payment, rather than by the amount paid. It is the surplus over the necessary expenditures of life which minister to the developing, and therefore the most keenly sensitive, wants. This is the explanation of the universal opinion that where fortunes vary equal payments would not be equitable as between citizens ; and the commonplace argu- ment for equity in matters of taxation, to which reference was made, rests upon the assumption that the relief to him who fails to pay his just share is not as great as the burden which this relief imposes on some other member of the community who on this account pays more. Equity in the apportionment of taxes, therefore, reduces the burden for the support of the State to its minimum, just as a scientific adjustment of straps and buckles by which a knapsack is slung to a soldier's back makes the load carried as though It were light.f It thus appears that a just system of taxation is equivalent to economy of social energy, from which it fol- * The student of course recognises this as coming; from Mill. ■(■ A common simile of German writers. j1N/1 LYSIS OF THE RULES. 323 lows that the principle according to which taxes are appor- tioned may have a very direct bearing upon the rate of social development. The above thought may be pressed yet a step further by showing more specifically how equity in the levy of taxes bears upon the development of a nation's industries. A payment of any sort works its way into industrial conduct through the incentives to industry resulting from the satisfaction which follows the payment in question. The labour which will be undertaken in the future depends in large measure upon the degree of satisfaction resulting from the labour of the past. This, tempered, perhaps, by the instinctive hopefulness of mankind, is the fundamental law of industrial conduct. Is it not, then, clear that an inequitable apportionment of taxes, which deprives him who pays too much of more satisfaction in the expenditure of his income than it adds to that of him who pays too little, results in weakening the aggregate of the motives to industrial activity ? Thus the universal ex- perience of nations, that one of the surest ways to encourage industry is to adjust the fiscal system to the demands of equity as between citizens, finds upon analysis ,a psycho- logical basis. There are, then, three reasons why equity should control apportionment. It is demanded by the accepted govern- mental principles of free states ; it is essential to the economy of social energy; and it is important as a means of present- ing motives to industry in the most eiifective manner. 54. Analysis of the Rules of Apportionment. — It is one thing to conclude that equity should give character to apportionment; it is quite another to discover an intelligent and at the same a workable rule for the attainment of this end. Some progress in this direction was made when con- sidering the theorist's definition of a tax, since it was there shown that a tax could be considered neither as the price charged for public service nor as an equivalent paid for value received. On the other hand, it was concluded that a tax is a contribution to a common fund designed for a common end. Manifestly, the principle of apportionment adopted will ally itself to the accepted conception of a tax ; and we might, therefore, in strict logic, proceed at once to inquire what theory of apportionment is bound up in the statement that 324 THE PRINCIPLE OF /tPPORTIONMENT. a tax is a contribution. This, however, would exclude cer- tain considerations capable of throwing considerable light upon a difficult problem. It would also result in an opinion arrived at from theory alone, ignoring those practical con- siderations which so largely control in matters of finance, and which do not present themselves until one begins to trace the consequences that follow the application of the prin- ciples adopted. (i) Apportionment and the Cost Theory of Taxation. — A moment's consideration is adequate to show that the duty to pay for the support of the State cannot be assigned to citizens according to the cost to government of the service rendered. The fact that this cost cannot be specialized is of itself final against such a rule. Protection, for example, consists in creating and maintaining a condition of security in society, and its cost cannot be divided up and parcelled out. The law undertakes to arrest and punish every criminal, no matter what the cost may be, neither as an act of retribution nor to enable him who suffered the wrong to enjoy revenge, but because every miscarriage of the law tends to destroy the conditions under which life is secure. " The value of government to any man is proportioned to the completeness of the protection it extends to all men. If it undertook to protect only those who contribute to its cost, it would thereby breed lawlessness and invite anarchy." * The error underlying the rule that taxes should be appor- tioned to cost is further shown by applying it to the protec- tion of property. All property is not of the same sort in that its protection does not occasion the same expenditure. More litigation, for example, arises respecting property that exists in the form of a patent privilege, a franchise, or any sort of a grant whatever, than is the case respecting property open for investment to all who possess free capital. The State could not, however, on this account impose heavier burdens upon it than upon ordinary property. A better illus- tration may be given : Security of property depends in large measure upon the enlightened self-interest and moral sense of the community in which it exists. Where the grade of intelli- gence is low the cost of protection is high ; where the grade of * Cooley, Principles that should Govtrn in the Framing of Tax laws, p. S. ANALYSIS OF THE RULES. 32 5 intelligence is high the cost of protection is low ; but, provided two such communities have intercourse with each other, it is of as much importance to the community where property is secure that property be protected in the community where it is exposed to danger, as that its own property should be guarded. Here, again, as in the case of protection to life and limb, the end of government is to maintain a condition of security, and it is easy to see that the protection of property on the borderland of attack is essential to the security of that which on account of its situation is relatively less exposed. The rule of apportioning taxes according to cost is not