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In its judgement, fulfillment of the order would involve violation of the copyright law. Author: Secrist, Horace Title: An economic analysis of the constitutional... Place: [Madison, Wis.] Date: 1914 •t rtm -BJ^naxwji spjf MU i — ^ ^ ■ ■- .A MASTER NEGATIVE # COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD ' 330.6 V/76 ' V.8 ■ D 530,7^ Secrist, Horace, IBOl-l^'^o, ... An economic analysis of the constitutional restric- tions upon public indebtedness in the United States, by Horace Secrist ... [Madison, Wis.] 1914. 131 p. tables (1 fold.) diagr. 23^". (Bulletin of the University of Wisconsin, no. 637. Economics and political science series, v. 8, no. 1) Thesis (ph. d.) — University of Wisconsin, 1911. Bibliography: p. 127-131. ^opy- in C iocial G o -ie^^e^-ReadJng -Hoom. !. Debts, Public— U. S. 2. Municipal finance— U. S. 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Vol. a. No. i. pp. 1-132 \. \ AN ECONOMIC ANALYSIS OF THE CONSTITUTIONAL RESTRICTIONS UPON PUBLIC INDEBTEDNESS IN THE UNITED STATES BY HORACE SECRIST, Ph. D. Assistant Professor of Economics Northwestern University Sometime Instructor in Political Economy The University of Wisconsin LIBRARY SCHOOL OF BUSINESS A THESIS SUBMITTED FOE THE DEGREE OF DOCTOR OF PHILOSOPHY THE UNIVERSITY OF WISCONSIN \ APRIL, 1914 i**i 1 J> G5 ^ s: TABLE OF CONTENTS ^■^^■^ ^- ■oi^^S^'^NO'^IC ANALYSIS OF THE CONSTlTTTTinNAT RESTRICTIONS UPON STATE INDEBTEDNESS IntBODUCTION ' PAGE Chapteb 1 The General Environment which Produced the Con stitutional Restrictions upon State InSedness . f 13 Chapteb 2 The Immediate Causes of Constitutional Restrictions t?Mo^*vV^^^'5*^^^^«^' ^it^ ParticularReferen?! to New York and Pennsylvania .?. !. ! . ^f 21 Chapteb 3 The Nature and Significance of Constitutionai Restric- tions upon State Indebtedness ..!T. !..... 32 Chapteb 4 The Use of Borrowing by the Modern State. .....'.' .' ." .' .' 45 Chapteb 3 A Criticism of the Policy of Restricting Municipal" in debtedness by the Present Constitutional MethSd. 84 Chapter 4 The Economic Problems in Municipal Indebtedness and Suggestions for their Solution. . . . ...?;:. ."f.ff io4 Appendices I, II, III, IV Bibliography • 127 [3] m>\ PREFACE The recent change in attitude respecting the proper sphere of the state, together with the services expected of and the duties imposed upon our municipalities under modern economic condi- tions seem adequate justification for an economic analysis of the limitations upon public indebtedness in the United States. It has seemed wise, however, to confine such analysis to the restric- tions found in the state constitutions. The Introduction contains a brief statement of the argument and main topics discussed and the nature of treatment. The author wishes to express his appreciation of the untiring services and constant encouragement which he has received from his wife in the preparation of this study. Madison, Wisconsin, July, 1911. [5] INTRODUCTION This study is divided into two parts : first, an analysis of the constitutional restrictions on state debt ; and second, an analysis of the constitutional restrictions on local or municipal debt. Part I, is both historical and analytical. The historical part is treated in the first two chapters. In the first chapter a descrip- tion is given of the general environment out of which state bor- rowing took its rise. In giving this description, attention is di- rected toward the composite of forces, economic, political, and social, which preceded the crisis of 1837. Mention is made of the insecurity in state and national banking, of westward expan- sion, of the need for improved communication, of the inflation of the currency, of the rush for internal improvements, of the ex- alted position given to the functions of the state, of the unsettled land policy, of the market for American securities, etc. An ex- planation is also ventured as to why internal improvements were not left to private capital. The chapter closes with a contem- poraneous description of the period by Judge B. R. Curtis, and this is followed by a brief summary. Part I, Chapter 2, is also historical. It treats of the imme- diate causes of the constitutional restrictions in New York and Pennsylvania, and centers about their financial policy, and the steps leading to the final settlement of the struggle for the cur- tailment of their borrowing powers by constitutional means. The point of view taken in this chapter is that the extent of debt, the aversion to direct taxation in any form, the vascillating atti- tude toward payment of debt, the crisis of 1837 and the conse- quent loss of foreign and domestic markets in 1839, together with the presence of the policy of repudiation, forced public opinion to revolt against further state borrowing. No extended explana- • [7] 8 BULLETIN OF THE UNIVERSITY OF WISCONSIN SECRI ST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 9 1 1 tion is given of the immediate causes for constitutional restric- tions in other states. The purpose in mind is not primarily ta explain the causes for restrictions but to analyse their effect from the point of view of public finance. We are interested in this background only because it is necessary to the analytical and crit- ical part of the thesis. Part I, Chapter 3, treats of the nature of the constitutional re- strictions on state indebtedness. It deals specifically with the principles involved and with the restrictions themselves, touching such points as the amounts that can be borrowed (a) for tem- porary purposes, (b) for suppressing insurrections, etc. (c) for additional purposes and the safeguards in the forms of popular or legislative approval that are set up, (d) of the prohibitions against assuming any municipal or private debt, (e) of the pro- hibitions against subsidies to private companies either by direct aid or by subscription to their stock, etc. These points are treated analytically, explanations being given why varying pol- icies were pursued by the different states. The variations in most of the important states from what can be considered the norm are also given attention. This chapter with Appendix I cover the leading constitutional restrictions for all the states of the Union. Part I, Chapter 4, treats of public borrowing as a financial de- vice of the modern state. The point of view maintained is that public debt is neither a blessing nor an evil per se but only one method of securing control over public funds. The thesis is sup- ported that with increasing public expenditure, and the neces- sary part which the state plays in the life of the individual, bor- rowing, if necessary to the proper administration of the state, may be legitimately used. It is shown that the influences which produced the restrictions on debt also resulted in the introduc- tion of a philosophy of laissez faire : that public debt and state activity were condemned together. This was a confusion of is- sues. The reasons for this confusion are treated at some length. It is also shown that the prohibition against snhsidies to private capital are necessary and their effect wholesome ; but it is main- tained as a final conclusion that borrowing from the point of view of state dynamics is a legitimate means of securing control [8] over funds necessary for the highest development of the state and for the most complete execution of its functions. Part II is concerned with an analysis of the constitutional re- strictions on municipal indebtedness. It is also part historical, part analytical and part critical. Part II, Chapter 1, describes the environment which produced these restrictions. It is shown to be essentially the same which produced the crisis of 1873. The distinguishing characteristic, from the standpoint of municipal finance, was the enormous sub- sidies given to private capital, particularly to capital for railroad building. Against this practice people revolted in the 70s ; first prohibiting it or conditioning its use; and later, to escape the burden which the guaranty of interest involved, limiting the debt to a certain percentage of the assessed value of property. The movement against the abuse of credit was general. This fact is emphasized, and the experience in New York in passing her con- stitutional restrictions, and the attitude of the courts in Michi- gan, Wisconsin, and Iowa on the lending of credit given in some detail. The chapter closes with a general summary of the peo- ple 's attitude toward municipal debt and with a statement of the shape it assumed in constitutional restrictions. Part II, Chapter 2, deals with the nature of the constitutional restrictions on municipal indebtedness, and centers about the dis- cussion of (a) prohibitions against subsidizing private capital, (b) the limiting of the debt to certain percentage of the assessed value of property, (e) the requirements for referendum votes for bonded debt, (d) the requirements that debt shall be paid within a certain period, and that an annual direct tax shall be levied to pay the interest as it accrues and the principal at ma- turity, (e) the omission of debt for certain purposes from the constitutional limit, -and (f) the expansion of the limit for debt for certain purposes. Each of these topics is treated from the point of view of the restrictions in the different states, and espe- cial attention is given to the definitions of debt and the meaning of the constitutional limits in Oklahoma, New York, and Vir- ginia. An attempt is made in this chapter to state the principles involved and not to make a complete catalogue of the restrictions themselves. [9] ■IMita 10 BULLETIN OF THE UNIVERSITY OF WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS u 1 Part II, Chapter 3, is almost wholly critical. It is concerned with the practice of limiting municipal debt by the present con- stitutional method. It begins by distinguishing the character and functions of the different municipal corporations which as a rule have borrowing powers, and concludes in this connection that the powers of borrowing given to them should vary according to their character and function. It therefore criticizes the consti- tutional provisions which place municipal corporations in the same category and treat them all alike. The chapter then deals with the principles involved in the restrictions, including among others the following general topics: (A) The prohibitions against municipalities lending their credit. The value of such prohibitions is acknowledged and the belief expressed that they should be general and absolute. (B) (a) Basing the borrowing power of municipalities upon the assessed value of property. This is objected to : (1) because the assessment of property is imperfectly made, thus aUowmg discriminations between political units similarly situated and similarly able to borrow; (2) because borrowing may be and is indulged in too freely by increasing the assessed value of prop- erty, and taxes too sparingly used by lowering the tax rate; (3) because these regulations make the need for borrowed funds proportional to the value of property; (4) because they take no Account of city properties which are not found on the tax roU. (b) Fixing the borrowing power at a certain percentage of the assessed value of property presupposes a definite relation between private and public income, and fails, therefore, to adequately provide for constantly expanding public needs. (c) From the ability to issue bonds for all purposes up to the maximum period allowed in the constitutions the canon of equal- ity in taxation between the present and the future is violated. (d) The extension of the maximum amount of debt accorded to some localities, as for instance, counties, has generally no regu- lating force because it is too high. (e) The sinking funds required extend to productive and un- productive properties alike, and in both cases, almost without ex- ception, are supported by taxation. [10] (f ) The grant of borrowing powers to all independent corpora- tions results in over-lapping of powers and compounding of debt. (g) The omission of temporary loans from the debt limit seems unwarranted as it works out in practice, as does also the omission of debt for certain purposes which are supposed to be revenue bearing, when the bonds issued therefore are secured by taxation. The general conclusion is that the constitutional restrictions are open to severe criticism from the point of view of fundamen- tals and from the practices that occur under them, that they mis- interpret the functions of municipal credit and absolutely fail as adequate controlling provisions. Part II, Chapter 4, is concerned with a statement and discus- sion of the problems in municipal indebtedness and with a short discussion of a possible solution for them. The point of view taken is as follows : Public borrowing is a necessity for most poli- tical units and the only way to adequately control its use is by administrative means. Debt is related not to a certain percent- age of the assessed value of property, but to the needs of the communities which employ it. These needs vary according to the functions which the communities perform, to their age, to the disposition of the people to make improvements, etc. Given a certain need for public income, it may be acquired by taxation or by borrowing. How much should be borrowed will depend upon the uses to which the funds are put. Borrowing is related to the burdens it brings through interest charges and to the re- turns which follow its utilization. Its relation to property value is only secondary. Value of property gives ability to bear tax burden, but it does not tell how much should be borne in the form of taxes and how much in the form of interest charges on bonded debt. Moreover, borrowing involves a contact with the money market in making loans, and difficult problems are associated with it with respect to the appropriate time for debt payment. In this problem the debtors— most generally the taxpayers— are also vitally interested. The fundamental problems in municipal debt are : first, to borrow to advantage, and this can be done only by making the credit instruments that are sold as acceptable as possible ; second, to pay the amount borrowed at the appropriate time in order to conserve the interest of the present and future [11] I 12 BULLETIN OF THE UNIVERSITY OF WISCONSIN taxpayers. Both problems are difficult ones and call for expert administrative service which addresses itself both to the tech- nique of debt creation and to the technique of debt payment. Such a solution is outlined in the following pages. The general conclusion of Part II is : Municipal debt is neither an absolute evil nor an absolute good. Rightly used it is a legiti- mate financial device, but left uncontrolled under the present constitutional restrictions it is most generally abused, and the only solution for this abuse, like many other questions of local finance, is in expert administrative control. AN ECONOMIC ANALYSIS OF THE CONSTITUTIONAL RESTRICTIONS UPON PUBLIC INDEBTEDNESS IN THE UNITED STATES CHAPTER 1 THE GENERAL ENVIRONMENT WHICH PRODUCED THE CONSTITUTIONAL RESTRICTIONS ON STATE INDEBTEDNESS T^ie several states had played a minor role in a financial way before about 1830.^ Some of them had inherited large war debts but these were assumed by the Federal government, and notwithstanding that the War of 1812 drew heavily upon their financial resources, their combined debt was not more than $13,- 000,000^ at the beginning of 1830. About this time, however, various causes and conditions contributed toward their financial development. The national government had changed its early policy with respect to internal improvements. The country had recovered from the effects of the War of 1812; the period of suspension of specie payments had passed ; and the number of banks, particularly between the periods of the First and of the Second United States Bank, had grown enormously.* More- over, the agricultural possibilities of the country began to make themselves felt and their development seemed to depend almost wholly upon the adequacy of transportation facilities and the ex- istence of markets.* , Both of these were in process of realiza- [12] ' Valuation, Taxation and Indebtedness, 1880, p. 523. Washington, D. C. » "The Debts of the States." Curtis, B. R., Writings, vol. 2, p. 94. • 89, in 1811 ; 246, in 1816. Hunt's, Merchant Magazine, vol. 5, pp. 186-7. •Message of Dewltt Clinton, Governor of New York. Lincoln, C. Z., Me9- tagesj etc. vol. 2, pp. 899-900. [13] u BULLETIN OF THE UNIVERSITY OF WISCONSIN SECRI ST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 15 tion. The national government had paid its debt in 1834, and American credit in foreign countries was at a premium.* This fact was strongly emphasized by the press and served to stimu- late foreign investments in the United States and to incite Americans to engage in the most speculative enterprises.^ Po- litical philosophy was ripe for increased state activity, espe- cially in New York, where Governor Clinton had declared it to be one of the first duties of the state to facilitate and perfect means of transportation,^ and to secure through government the greatest good to the greatest number.® The interests of the manufacturer, the trader, the man of commerce were all one to him, and their combined welfare most completely assured when people were buying in the cheapest and selling in the dearest markets. It was the business of the government to see that such was actually the case.** This could be done only by the existence of an adequate system of transportation. Here was a definite statement of the necessity of canals, roads, etc., in the economy of the state. Moreover, trade rivalry between New York, Pennsylvania, and Maryland was keen because of the de- sire of each to make its respective eastern port the gateway to the interior.^** It was this particular fact as much as any other which explains the beginning of internal improvements in Pennsylvania. The success of the Erie canal on the north in di- verting western trade to New York City was used as a cudgel to force the legislature to fall in line.^^ " Bourne, E. G,, History of the Surplus Revenue, 1837, p. 14. • Curtis, B. R., Writings, Vol. 2, p. 95 ; Message of Governor Thomas of Maryland, 1842, in Niles, H., Register, vol. 63, p. 315. 'Message of 1818. Lincoln, C. Z., Messages, etc., vol. 2, p. 899. " Message of 1825, ibid. Vol. 3, p. 63. In his annual message of 1819, Gov- ernor Clinton said : "Character is as important to states as to individuals, and the glory of a republic founded on the promotion of the general good, Is the common property of all its citizens." Ibid., vol. 2, p. 967. » Message of 1819, Ibid., 2, p. 965. " Vide, Senate Report : "The Pennsylvania and Ohio Canal." December 31, 1834, p. 4, in Reports, Messages and Other Communications made to the Thir- ty-third General Assembly of the State of Ohio, I8S4. Vide, also, "Report of Committee on Roads and Bridges," January 17, 1829, In Hazard, Register of Pennsylvania, vol. 3, p. 66. " Even as late as 1838, at the time of the Constitutional Convention of Pennsylvania, it was brought out in the debates that it would be unwise to put Pennsylvania at a disadvantage with her rival New York by limiting her debt In any way. Pennsylvania Constitutional Debates, 1838, Vol. xii, p. 119. [14] As early as 1829, the constitutionality of the Second United States Bank had been questioned, and by 1833 the government deposits were withdrawn and placed among the several state banks. A great impetus was given to the founding of these in- stitutions and their number increased rapidly." Banking capi- tal for the ten years ending 1830, had increased but $8,100,000 ; but for the six years ending 1836, it increased $181,050,000.^' Prices due to the inflated condition of the currency had risen rapidly,^* credit was easy to get and speculation rife in the whole industrial field. Moreover, the surplus revenue under the adjusted tariff of 1828 poured into the Treasury, and an outlet was sought for it after the payment of the national debt in 1834.^^ The disposition of this surplus among the states in 1837 only added to the financial confusion, and inclined some of the states not only to look upon the ** deposit'' as a perma- nent gift,^^ but to expect further gifts.^^ Speculations in land were demoralizing and were only temporarily checked by the issue of the ** Specie Circular" of President Jackson. Land in the most favored western territory was sold not for money alone but in the majority of eases for individual and bank notes,^® and became a staple article of exchange. **The habitudes of thought connected with the constantly advancing value of real property; the custom of dickering makes almost every individ- Clrculatlon I 61,323,898 94,839,570 103,692,495 140,301,038 . - 149,185.890 Hunt's Merchant Magazine, Vol. 5, pp. 186-187. " Niles, H., Register, vol. 51, p. 162. "Curtis, B. R., "The Debts of the States." WHtings, etc., vol. 2, p. 97. ""The liquidation of the public debt and the disturbed situation of affairs In Europe are throwing back upon capitalists a large portion of their funds, and filling the vaults of our banks with a redundancy of the precious metal." "Reports on Railroads," 1831, Senate Report, 29th Assembly, 1st Session, Ohio, p. 7. "Mr. Hilster in the Pennsylvania Constitutional Convention. Debates, vol. xii. p. iii. " Pennsylvania's share of the possible five to ten millions of deposit was looked forward to as equivalent to the interest on a twenty-four million stat^i debt. "Report on Railroads and Canals to the House of Representatives." Pennsyl- vania, Feb. 26, 1829. Hazard, Register of Pennsylvania, vol. 3, pp. 150-151. " Hunt's, Merchant Magazine, vol. xi, pp. 119-120. [15] " Year Number of State Banks 1830 330 1834 506 1835 558 with branches, 704 1836 567 with branches, 713 1837 634 with branches, 788 16 BULLETIN OF THE UNIVERSITY OF WISCONSIN ual a speculator.''" The whole temper of the time fostered a reliance on the future and engendered a willingness to enter upon the most daring financial projects. In this environment of wild-cat banking, credit, speculation and faith in the outcome of things, the value of inland naviga- tion was demonstrated by the Erie canal, which was finished in 1825. With this project completed, the movement for internal improvements spread with renewed vigor. Pennsylvania and Ohio began their activities in 1825, and although the debt of the former in 1830, was only $6,300,000,=^^ it was $24,329,004 in 1837 ; while that of the latter was $400,000, in 1825, and $5,500,- 000 in 1836. By 1835, Maine had 50 miles of completed canals ; Massachusetts had 47 ; Massachusetts and Rhode Island had 45 ; Connecticut had 58 ; New York, 678 ; New York and Pennsyl- vania, 36 ; New Jersey, 101 ; Pennsylvania, 857 ; Delaware and Maryland, 14 ; Maryland, 10 ; Maryland and Pennsylvania, 341 ; Ohio, 571 ; Virginia, 30 ; Virginia and North Carolina, 22 ; Geor- gia, 66 and Louisiana, 100.^^ The aggregate state debt in 1835 was $60,000,000 ; from 1835 to 1838, $108,423,808 was added to this, and by 1839 it exceeded $183,000,000." Indiana, Illinois, Michigan, Arkansas, Florida and Mississippi had no debt in 1830 ; in 1840, their combined debt was more than $44,000,000." The question naturally arises why did not the states leave the development of transportation to private initiative. The an- swer to this is found not necessarily in any aversion toward cor- porations per se, but in the service which it was hoped the im- provements would perform. Their purpose, theoretically at least, was general welfare — as it turned out it was in many cases private welfare primarily with only incidental public benefit — for they were intended to be the sources of enormous revenues to the states, and the cause of untold increase in private and pub- lic wealth. It is not natural, therefore, that such a field of ac- "Lauman, J. H., History of Michigan, 1839, p. 297. » House Document, 296, nth Congress, Srd Session. Report on "Relief of the States" by Johnson, W. C, p. 47. » Nlles, H., Register, vol. 50, p. 265. *• Trotter, Alexander, Observations on the Financial Position of the States of North America, etc. London (1839), p. 350. * House Document 296, 27th Congress, Srd Session. Report by Johnson, W. C, p. 47. [16] SECRI ST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 17 tivity should be thrown open to private exploitation without at least a trial of state ownership and management. This was par- ticularly so as there seemed to be no prejudice toward state ac- tivity of this nature before 1840.^* The hopes of revenue to be derived from these ventures served effectively to quiet most of the adverse criticism during the early period, and the argument of the influence of transportation upon private wealth was like- wise effectively used as an offset to failures following the gen- eral crisis of 1837.25 Moreover the accumulation of private capi- tal was insignificant before about 1815,2« and did not satisfy the demand which public and private undertakings created. For- eign investors were accustomed to buying national bonds, and when the supply of these was cut off by the payment of the national debt, a corresponding demand for state bonds devel- oped—the distinction between the two not at all times being clearly recognized. =^^ Besides, the financial affair.^ of private companies were not so well known as were those of the states, and of course their credit suffered on ^hat account. This is one of the reasons for the scramble for state aid on the part of private capital. Indeed, the credit which private companies had in for- eign countries is directly attributable to the guarantee of the state which their bonds received.-^ In addition to the difficulty private individuals would have experienced in getting control of the requisite capital, there was a pretty well defined feeling that these public improvements, since they were expected to be « Adams, H. C, "Introduction" In Dixon. F. H.. State Railroad Control, p 5 On the expectations of revenue, see the Messages of Governor Clinton of ivew lork, in Lincoln, C. Z., Messages, etc. vol. 2, pp. 908-909, 965: "Legis- lative Report on the Columbia Railroad" in Hazard, Register of Pennsylvania, 1800 ^' "Legislative Report of the Committee on Ways and Means" 1829, /Wrf., vol. 3, p. 191 ; Lincoln, C. Z., Constitutional History of Neic York iT* of; ^^^' ^^^^^P' ^- ^' '^^^ ^***^ ^^'■*« 0/ PennsylvaMa. Appendix 2«CalIendar, G. S., "State Enterprise and Corporations." The Quarterly Journal of Economics, vol. xvil, p. 131. "Some confusion Is shown in a letter from Baring Brothers,— an English ranking firm— addressed to Daniel Webster asking, "Whether the Legislature or one of the States nas legal and constitutional power to contract loans at home and abroad." This is quoted from Nlles, H.. Register, vol. 57. p 273 December 28, 1839. . f *io. *» Trotter, Alexander, op. cit, pp. 87-88 ; American Quarterly Review, vol 8. P. 310 December, 1830. "Petition of the President and the Directors of the StaT ^nl Company. " 1834, p. 3, In Reports to the General Assembly of the [17] Ig BULLETIN OF THE UNIVERSITY OF WISCONSIN revenue bearing and to express the general desire of the people should be undertaken by the states themselves and not by private individuals or incorporated companies. The reason for this is obvious The legislature being the representative of the people is supposed to consult the public welfare, while a private com- pany is supposed to consult its own pecuniary interests, and these do not always accord with the best commercial and agricultural interests of the country. Road building was held to be the particular province of the state and canal building was regarded as an equally legitimate state function. , • ^ v^ The period 1830-1837 has been admirably characterized by Judge B. R. Curtis from whom we cannot do better than to quote at some length. After speaking of the effects of the ^iist-bu- tion of the surplus among the states, of the deposit of the United States^ funds with the state banks, of the rapid increase in their number, and of the growth of population of agncuUure and manufacturing enterprises, etc., he says: If we add all these circumstances together, we shall have little cause to wonder that the American people were brought into that most extra- ordinary condition in which their public debts were contracted. Former times may have exhibited as great madness, but it reached fewer persons. ... At this time . . . wealth had been both accumulated and diffused to an extent unknown. Wonderful improvements in the means of communication across wide seas and through great continents had brought all civilized and especially all commercial men within one common atmos- phere of settlement and opinion. A long and unbroken peace, in whose sunshine population had increased and production been stimulated, and private enterprise suffered to act freely, inclined men to large undertakings. . . . M.n acted as if a short and secure road to wealth had been discovered, on which all might travel, and he who went the fastest would be the first to reach the desired end. The result was such a morbid tendency to excess in financial affairs as had never before been witnessed. In those countries where the currency was bank paper, the quan- tity of money in circulation was enormously increased. Partly in consequence of the increase, and partly on account of the sanguine hopes of men, prices continued to rise. All uses of [18] SECRI ST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 19 capital seemed to be followed by certain and large returns, and men were therefore eager to borrow. All pursuits appeared to be safe and prosperous, and therefore those who had money were desirous to lend it. So much security was felt, that little se- curity was asked ; and, to obtain money nothing more was neces- sary than to show the lender that it was to be employed in some magnificent scheme, which stood well with the large expectations of the times, and was in season with the glorious summer of men's hopes. "At this period and partly in consequence of this extraordi- nary state of things, there arose in this country, a vehement de- sire to construct great public works chiefly such as facilitate and promote internal improvements. We do not mean to say that this desire was then new. The people of this country are far too sagacious not to have discovered before that time the great value of such works. . . . They have not much taste for cathedrals and palaces, but Hhe useful magnificence of roads and bridges', excites their admiration. They knew well enough that a canal or a railroad, piercing a great tract of country was of immense importance to them. They quite comprehended its ob- ject, and did not underestimate its effect ; and when their hopes had been raised, and their judgment somewhat distorted by the fever in their veins, and they saw the means of accomplishing these great objects not only within reach, but almost thrust into their hands, it is not strange that they seized upon them with in- cautious eagerness, and expended them with a prodigality some- what in proportion to the ease with which they were obtained. "^^ Mr. Curtis has been quoted at length because he has attempted to enterpret these times so as not to excuse the folly but to do justice to the people under their peculiar environment. To summarize : The newness of the country, its expanse and industrial possibilities, the need for easy and cheap means of communication, the lack of private capital, and the rivalry of the eastern seaboard cities for the trade of the west started the states on a campaign of internal improvements. Some of the states caught the spirit early. The Erie canal was begun in "Curtis, B. E., "The Debts of the States," 1844, Writings, Tol. 2, pp. 9T-99. . [19] I ! .20 BULLETIN OF THE UNIVERSITY OF WISCONSIN 1817 and completed in 1825. Its success was a signal for the race which was to end in disaster. With the change m the national financial policy-the downfaU of the Second Umted States Bank, the -deposit- of public money in state rnstitu- lions, and finally the distribution of the Surplus-the Period ^^ state banking was ushered in, and the ^credit system^ started on the way for permanent establishment. State activity showed itself in two ways: the construction of works of mternal im- provement by the states themselves or by subsidized private com. panics, and the establishment of credit-manufacturing institu- tions or the chartering of them by private persons w^^h lucrative privileges. Public sentiment revolted against the latter ifi the Free Banking Act of New York in 1838, and spread over most of the states of the middle west by 1855. Opposition to indiB- criminate borrowing and pledging state credit began shortly after the crisis of 1837 and realized itself in constitutional pro- £ot in many states in the early forties. It is the purpose of the second chapter to explain the immediate causes for such opposition and the chief facts in relation to the same in some of the most representative states. SECRI ST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 21 [20] CHAPTER 2 THE IMMEDIATE CAUSES OF THE CONSTITUTIONAL RESTRICTIONS ON STATE INDEBTEDNESS WITH PARTICULAR REFERENCE TO NEW YORK AND PENNSYLVANIA The early constitutional restrictions on state indebtedness may be traced most directly to the failure of internal improvements, and to the lapse of the market for American securities in 1839^ which resulted partly from debt repudiation by some of the states,^ and partly from the crisis of 1837. The legislatures had abused their power to borrow money and in catering to the clamor of the different interests of their respective states, eighteen of them had authorized the issue of $108,223,808 of stock in the three and one-half years between 1835 and 1838.«" The market for securities was overcrowded, cities planned on paper had failed to spring forth full grown when served by the beneficent influence of a local canal ; canals were competing with each other for an all too meagre business and private capital and activity were developing. It was at this time that public opinion waa^ aroused and that provisions were incorporated into the funda- mental law so as to effectively protect the people from excessive taxation. In the early period of the improvement crusade pub- lic debts were looked upon as unreal because they represented only a small fraction of the wealth added to the country by the improvements themselves. The reality of the debts could no longer be ignored, for the time of final reckoning in many casea was swiftly approaching. Public sentiment was eager for rigid ^The Democratic Review, vol. 10, p. 12, (1842) » Maryland, Florida, Louisiana, Arkansas, Illinois. Indiana, and Mlchlean ^ere delinquent in 1845. Bankers Magazine (London) vol 5 p 220 Th^ Journal is quoting The Democratic Review. Nov. 1845. ^ The Democratic Review, voL 10, p. 12. [21] 22 BULLETIN OF THE UNIVERSITY OP WISCONSIN restrictions and these we tod placed in the constitutions of the ^ttoL Island was the first state to give definite ^^Vr^'^^Jo this sentiment in constitutional form. The convention to form the constitution of 1842 was called primarily to make some change in the local representation and in the judiciary,' hut when it had completed its work we tod the following as one of the new pn,vi- sions of the constitution. "The general assembly shall have no power hereafter, without the express consent of the people, to in- L state debt to an amount exceeding 50,000 dollars, except in time of war, or in case of insurrection : nor shall they m any case, without such consent, pledge the faith of the state for the pay- ment of the obligations of others. ' - This provision did not, how- ever, become the pattern which has been so accurately followed by the other states. New Jersey, with practically no debt, furnished this in 1844.' . . .. The constitutional convention of New Jersey was unique in its membership. It was constituted, by express agreement of an equal number from each party, and consisted of fifty-eight mem- bers of whom twenty were lawyers; three, ex-governors; one a chief justice; one an associate justice and several ex-members of Congress « ' ' Politics was laid aside and the welfare of the state calmly considered. ' " The following is the provision adopted rel- ative to state debt: "The legislature shall not, in any manner create any debt or debts, liability or liabilities, of the state, which shall singly, or in the aggregate with any previous debts or lia- bilties at any time exceed one hundred thousand dollars, except for purposes of war or to repel invasion, or to suppress insurrec- tion, unless the same shall be authorized by a law for some single . ... - «^r»^ihit4nn Inserted In the constitution of evr»» ...we would rejoice to see a proMbm^ ^^^^ ,^^ ,,y ''^''jyZuT.^'^Te DZoe^^Re^L. vol. 10, p. 15. (1842); .i<.e. porpose whatsoever. Tne expressed that there Is "nothing m any ibid., vol f • P-„f,'^»' 7„'"t„7;„Veet us from fraudulent Insolvency or excessive ?' "«„rbut ?he o"aCg'en? dlshon s.y and discretion of the legislature." **Ces H.! b'^X, vol. 60, p. 21. quoting the Baltimore American. trTr^;; sra?;"eht':kTan.'9. 1844. was ,99.566.57. Nile,. H.. He^- ter, vol. 65, p. 324. 8Niles, H., Register, vol. 66, p. 208. (18^4). •Niles. H., Register, vol. 66, p. 291. (1844). [22] SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 23 work or object, to be distinctly specified therein ; which law shall provide the ways and means, exclusive of loans, to pay the inter- est of such debt or liability as it falls due, and also to pay and discharge the principal of such debt or liability within thirty-five years from the time of the contracting thereof, and shall be ir- repealable until such debt or liability, and the interest thereon, are fully paid and discharged ; and no such law shall take effect until it shall, at a general election, have been submitted to the peo- ple, and have received the sanction of a majority of all the votes cast for and against it at such election ; and all money to be raised by the authority of such a law shall be applied only to the specific object stated therein, and to the payment of the debt thereby created/ '^*^ Provision was also made against the state lending its credit in any case. Niles, in commenting on these provisions says : * * New Jersey is profiting by the experience of some of her sister states. She has not suffered from the pressure of a public debt.^'i^ Although it was Rhode Island and New Jersey which first im- posed the restrictions on state indebtedness, it was New York which first started the agitation for the same. The explanation of the origin of the New York restrictions furnish an interesting chapter in her financial history. New York 's financial history from the beginning of her internal improvement movement down to the formation of her constitu- tion in 1846 can be divided into two main periods. The first ex- tends from 1817 to 1826 ; and the second, from 1826 until the act of 1842, which, in a modified form, became a part of the constitu- tion. Both were periods of excessive borrowing, but the finan- cial philosophies which characterized the two were widely dif- ferent. During the period 1817 to 1825 — nine years — New York in- creased her debt $7,737,770^2 ^nd did not decrease it at all. But in 1817 she wisely set aside a definite revenue^^ for the payment of the interest on loans, and for the final redemption of the prin- ^'^ Constitution, 1844. Art. IV, Sec. 6, par. 4. "Niles, H., Register, vol. 66, p. 323. (1844). "New York Assembly Documents, No. 236, p. 7, (1845). " Revenue from the Erie and the Champlain Canals, and receipts Irom the auction and salt duties. [23] I 24 BULLETIN OF THE UNIVERSITY OF WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 25 t ! 1 I cipal. This was a measure of caution against the possible failure of her canals, and similar precautions were taken until 1825.^* In this year, however, with the completion of the Erie Canal and the beginning of a system of lateral canals, a radically different policy was adopted. Revenue from the latter could not be hoped for for some time even by the most sanguine. Notwithstanding this, the state tax, which during the period 1816 to 1825 had paid into the Treasury three millions of dollars, was discontinued, and a glorious epoch of "freedom from direct taxation'' ushered in. Not even the interest on amounts borrowed for the lateral canals was provided for,^^ and the whole drain had to fall on the Gen- eral Fund. After the repeal of the state tax, this was rapidly being depleted. But the treasury protests were not sufficient guard against the numerous petitions for canals that flooded the legislature. The Comptroller had protested against such meth- ods of public financing, yet Governor Clinton not only failed to give him support but maintained that the revenue arising from improvements was a false test, and that ''the means of the state are ample— her resources great— her credit equal to any emer- gency."'® The Comptroller each year renewed his recommenda- tions for a state tax ; Governors Throop and Marcy both repeat- edly asked for the exactment of the same, but to no avail. Not- withstanding that the ordinary expenditures in 1829 exceeded the resources by $173,000, the legislature authorized expenditure for the repair of the Oswego, and the Qyaga and Scuaca canals to be paid out of the General Fund. In 1831, Governor Throop laid down the general principle that should govern state bor- rowing, maintaining that the items of public benefit, probable return of revenue and the means of the state should be constantly held in mind, and if the improvements required would not pay the interest and principal in a reasonable time, the legislature should consider the advisability of levying a direct tax. He for " In 1824, "a provision was added to a law authorizing a loan . that the Commissioners of the Canal Fund should borrow only such amounts as they could pay interest upon, including payments on previous loans, from reve- nues of the fund in their hands. Comptroller's Report, 1837, p. 14. ^' Ten millions was authorized to be borrowed in the period 1826-1836. Comptroller's Report, (1837), p. 15. *• Quoted in Hunt's Merchant Magazine, vol. xxiii, p. 621. one was opposed to carrying on internal improvements by direct taxation. ^^ By 1835 the General Fund was all but exhausted. Borrowing continued and the legislature stubbornly refused to enact a law for a direct tax.^® In 1836, a still further breach of financial etiquette was indulged in when the legislature provided for building the Black River and Genesee canals without any means of paying the debt created. In 1838, the Committee on Ways and Means proposed borrowing $4,000,000 a year for ten years. This received the Executive sanction in 1839, and with the justifi- cation of his signature the Governor promulgated the following rule : "To avoid the necessity of resorting to taxation, however small, the obvious and sound rule of financial policy will be, to adjust the loans of each year, so that the annual interest of the whole debt may always fall within the clear income of the state. '^^® This was not only a protest against taxation, but a declaration in favor of perpetual debt. Surplus tolls following this rule became the base of new loans,-" and the funded debt, by 1843, had been increased twenty millions. ^^ This meant ruin un- less some radical change was adopted.^^ It was in 1842 that the change came. The credit of the state was at its lowest point of depression ; three and one-half millions of debt was due in sixty days, and less than $200,000 was in the hands of the Commis- sioners of the Canal Fund and in the treasury.^^ On March 29, 1842, the legislature passed an act ' ' To provide for paying the Debt and Preserving the Credit of the State'' which suspended the public works, authorized a loan of over five [24] "Annual Message, Lincoln, C. Z., Messages, etc., vol. iii. p. 323. *8A bill imposing a one mill tax was introduced in the Senate in 1833, but it failed of passage. Ihid., vol. iii, p. 439. ^'Senate Document, No. 96, (1839), p. 12. See also. Message of Governor William H. Seward, 1840, Lincoln, C. Z., Messages, etc., vol. iii, p. 797. ^ "The policy distinctly avowed and adopted was that 'every five hundred thousand dollars of revenue will serve as a basis of finance to sustain ten mil- lions of debt.'" Assembly Document No. 242, (1838), p.' 18. » "Comptroller's Report," January, 1843, Assembly Document, No. 10, p. 21. '=1825-1838—12 years— debt increased $3,570,920; and diminished $5,142,- 609. From 1838-1844—7 years— debt increased $15,799,431 ; and diminished. $1,251,607. Assembly Document, No. 236, (1845), p. 7. Six per cent stock, which in 1833 bore a premium of more than 20 per cent., was not salable at a discount of 20 per cent, in 1841. "Comptroller's Report." 1843, Assembly Docu- ments, No. 10, p. 21. ^ Ibid., p. 21. [25] 26 BULLETIN OF THE UNIVERSITY OF WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 27 millions of dollars to pay the interest on the canal debt, to sup- port the government, to repair the canals, to pay the temporary loans at the banks, etc. It also provided for a state tax of one mill on a dollar, and pledged the proceeds of this together with the surplus canal tolls, for the money borrowed.-* This repre- sented almost a complete reversal of policy. Although it pro- vided for a loan, it was done to maintain the credit of the state, and it pledged the taxing power to support it. Taxation for pur- poses of internal improvement which had found no *^ advo- cates among the people,''-^ in 1839, became a dire necessity in 1842 to save the honor of the state. This act of assurance, al-^ though it by no means represented the unanimous sentiment of the legislature,^^ together with the appointment of Mr. A. C. Flagg as Comptroller, produced an almost instantaneous effect upon public credit.^" It was only a short step from the passage of this act, in view of the state of public feeling on the matter of state debt, to the incorporation of restrictive provisions in the fundamental law. In the legislature of 1841, Arphaxed Loomis introduced what afterwards came to be known as the ''People's Resolution. ' ' It read : "Resolved that the Constitution of the state be so amend- ed, that every law authorizing the borrowing of money, or the issuing of state stock, whereby a debt shall be created or increased on the credit of the state shall specify the object for which the money shall be appropriated ; and that every such law shall em- brace no more than one object, which shall be singly and specific- ally stated ; and that no such law shall take effect until it shall be distinctly submitted to the people at the next general election ; and be approved by the majority of the votes cast for and against it at such election. That all money to be raised by the authority of such law be applied to the specific object stated in such law and to no other purpose whatever, except the payment of the debt thereby created or increased. This provision shall not extend or »Ihid., p. 23. » Message of Governor William H. Seward, 1839, Lincoln, C. Z., MessageSf etc., vol. iii, 796. *The vote in the Assembly was 50 for and 27 against. Those opposed were Whigs. Hammond, J. D., Political History of Political Parties in the State of New York. vol. iii, 279. ^ Ibid., p. 285. apply to any law to raise money for the purpose of suppressing insurrection, repelling hostile invasion or defending the state in war."-® This resolution was introduced in the session of 1842, and was discussed fully but failed of adoption. Its purpose, how- ever, was not lost, for in essence it later became a part of the con- stitution. It was concerned primarily with public control, and did not mention the amount of indebtedness which the state ought to contract either in the form of direct borrowing or by lending its credit. Yet it was looked upon as "visionary and danger- ously revolutionary in its (their) character."-^ The "People's Resolution" was passed during the legislative session of 1844. In the same session, an amendment to the con- stitution was also passed which embodied the principles of the Act of 1842, limited the aggregate indebtedness in any one year to one million dollars, without a vote of the people, and provided for the creation of a sinking fund and the payment of all debt both principal and interest to be contracted in the future within a period of eighteen years. The amendment was rejected by the Whig vote in the session of 1845, so as to necessitate the calling of a constitutional convention.^** The main reason, therefore, for calling the convention — "The single cause — was the improvi- dence on the part of the legislature in contracting debts on behalf of the state. "^^ The provisions adopted on the subject of state debt may be summarized as follows : Art. VII, sec. 9. Forbade the loaning of the State's credit. Art. VII, sec. 10. Allowed a debt of $1,000,000 in the aggre- gate for "casual deficits or failures in revenue" or for "expenses not provided for." Art. VII, sec. 11. Placed no limit on the amount of debt that could be contracted to repel invasion, etc. * Quoted in Hammond, J. D. History of Political Parties in the State of New York, vol. iii, p. 287. *» Ihid., p. 287. ^Ibid., pp. 540-544. ^ The Democratic Review, vol. xviii, p. 403. Other considerations also prompt- ed the calling of the convention, but with them we are not concerned. It la worthy of note that it was constantly the Democrats or Radical Democrats who supported the limitations. See Hammond, J. D., History of Political Par- ties in the State of New York, vol. ill, p. 388. v1 I [26] [27] 28 BULLETIN OF THE UNIVERSITY OF WISCONSIN Art. VII, sec. 12. Provided that no debt except that allowed in sections 10 and 11, was to be authorized except by law for some single work or object distinctly specified in the law. For loans so made, a direct tax was to be levied to pay the principal and in- terest within eighteen years, and all such amounts were to re- ceive a majority popular vote. Such in brief is the historical background of New York's con- stitutional debt limit. It was made when the debt of the state was more than twenty-eight millions of dollars, when the annual interest charge was more than one million four hundred thousand dollars, and when the ordinary expenses of the government were **anually met by loans in effect, if not in fact, borrowed in each subsequent year to pay the interest upon the debt which the ne- cessities of the previous year accumulated."^^ The time was ripe for a change not only in New York but in other states which were deeply indebted. Not only was opinion focussed upon the size of the debt, but upon the incidence of the expenditure. The propriety of lending the state's credit to pri- vate corporations had come to be seriously questioned. Private aid was generally solicited under the plausible pretence of de- veloping the resources of the states, and many of the improve- ments, indirectly, at least, did redound to public benefit. But this was in many respects a questionable use of the taxing power and such use was criticized on the ground that the proper func- tions of government were violated thereby,^^ and public funds used for private purposes. But the sentiment which so strongly favored restrictions on public debt in the early forties was by no means universal in 1838. The debates in the constitutional convention of Pennsyl- vania make this very clear. Pennsylvania began her active in- ternal improvement era in 1826, and fully discontinued it by the sale of her improvements during 1857 and 1858, although the movement for sale started during the financial embarrassment of 1839 to 1844. By 1857 the Governor could say, '* Every consid- eration of public and private interest requires the separation of "Governor's Message, 1846, Assemhhj Document, No, 3, p. 25. » "Report of the Comptroller of New York," (1843), Assembly Document No. 10, pp. 33-34. [28] SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS the State from the management and control of these works."" How different is this from the sentiment expressed in the Consti- tutional Convention of 1838, when the proposal to limit the state debt to $30,000,000, except in time of war, was called ** prepos- terous"; when a state debt was called a ** blessing"; and when it was hoped that even the proposal to limit the debt at all would quickly be quieted, so that the legislature would not think that the convention wished to commit any such ''suicidal act." To speak of the state debt as ''debt" was a misnomer; it was "capi- tal in business" ; "a weight permanently neutralized" ; a debt of $30,000,000 was held to be a mere bagtelle when compared with the wealth of the state. Yet by 1857, when the state had im- mensely increased in value, and the state works had been dis- posed of, an amendment to the constitution fixed the limit at $750,000— $30,000,000 had shrunk to $750,000 in the short period of twenty years. Public sentiment in Pennsylvania until about 1840 was clearly in sympathy with the internal improvement policy. Pennsyl- vania, like New York, had founded her hopes on the revenue to arise from improvements. She, like New York, had computed her debts in terms of state solvency. Neither of them had stopped to realize that credit in the last instance, in case of the failure of their industrial ventures, rested upon the willing- ness of the people to be taxed. And taxes were just what the people were unwilling to endure. New York deferred taxation until she wr.s forced either to tax herself or repudiate her debt. Pennsylvania, like New York, when she began her works estab- lished an Internal Improvement Fund, but this was indequate.'* Likewise, she imposed a state tax in 1831, but this furnished little revenue^® and was repealed by the Act of February 8, 1836, which chartered the United States Bank of Pennsylvania, and •* "Message to the Legislature," 1857, p. 8. "This fund was to be supplied by certain auction duties, escheats, divi- dends on canal, road and bridge stock. The revenues could not amount to more than $60,000 per year— the interest on a debt of $1,200,000. Between 1826 and 1842, the Commissioners of the Internal Improvement Fund expended $53,352,648. Bishop, A. L., The State Works of Pennsylvania, p. 209. "During the five years of Its existence 1831-36, It yielded but $1,052,650 — an amount slightly less than the Interest on the Internal Improvement debt la 1835. Ibid,, p. 212. [29] ■ 30 BULLETIN OF THE UNIVERSITY OF WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 31 1 i extended the internal improvement works — a law which ** com- prised three projects in an obvious log-rolling combination." Taxation was asked for by the State Treasurer in 1838, but the request was ignored. In 1840 a small tax was levied, but it was not until 1844 that a permanent tax policy was adopted and the returns from the tax irrevocably pledged to pay the interest on the public debt. This law was made irrepealable. But direct taxation for improvements was no more favorable to Pennsyl- vania than it had been to New York, and the agitation for such works rapidly subsided. State debt had now become a reality and was calculated not with respect to the wealth of the state, but to the part of this wealth which the people were willing to pay as taxes. From direct taxation to constitutional limitation on state debt was but a short step, and this was taken in 1857 by an amend- ment which limited the debt to supply casual deficits to $750,- 000, allowed the state to borrow without limit to repeal invasion, or suppress insurrection, but prohibited all further debt entirely. The state was forbidden to lend its credit to or become a stock- holder in any corporation, and was required to establish a sink- ing fund so as to reduce the state debt by at least $250,000 an- nually.^^ It is not necessary nor is it our purpose to relate the experience of the other internal improvement states, and the steps which finally led to constitutional restriction on their indebtedness. Suffice it to say that the experience of all of them was far from reassuring and greatly influenced the policies of those that came afterward. The first necessity in industrial development was adequate transportation facilities ; the second was sufficient capital to de- velop the same. Some of the states dug their own canals, built their own railroads and established their own banks. Others gave their support to private companies which did the work for them. All were affected by the mania of speculation of 1836 to 1840 ; some were able to Weather the financial storm of 1837 and following, by systems of taxation or otherwise, while still others " state Constitution of Pennsylvania, 1838, as amended in 1857, Art. XI^ Sections 1, 2, 3, 4, 5. [30] , like Michigan and Louisiana did not rise above repudiation. After the storm and stress had subsided, after railroads had proved themselves superior means of transportation, after the corporate form of industry had become developed and special charter legislation given away to general charters ; after reforms were secured in banking legislation and bank supervision strengthened, the states emerged crippled and torn, as it were, by the ravishes of excess, bearing in their constitutions debt re- strictions so rigid as to make almost impossible a duplication of their former experience. These restrictions in the light of ex- perience were almost universally adopted by the new states, and have been copied down into our own day. Let us look at the nature of them in some detail. [31] 22 BULLETIN OF THE UNIVERSITY OF WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 33 ill > iiii CHAPTER 3 THE NATURE AND SIGNIFICANCE OF THE CONSTITU- TIONAL RESTRICTIONS ON STATE INDEBTEDNESS The main features of the constitutional restrictions on state indebtedness may be grouped under the following general head- ings: (1) The amount of money which may be borrowed for ** casual deficits" in revenue, for ''delays," for ''extraordinary*' purposes or for "purposes not provided for." The amounts for these purposes can ordinarily be borrowed without any special legislative or popular approval. (2) The amounts allowed for suppressing insurrection, repelling invasion, and protecting the state in time of war. There is, as a rule, no limit placed upon these amounts. (3) Certain other sums, either specified or un- specified. When named, they, in most cases, agree with the amounts allowed for casual deficits, etc., and may be borrowed only under definite laws, for purposes specified in the law and only after they have received either legislative or popular ap- proval or both. Most generally the laws authorizing such loans must provide for a direct annual tax to pay the interest as it ac- crues and the principal within a certain number of years. Oftentimes the amounts allowed with such approval are likewise limited. (4) Legislatures are, as a rule, prohibited from assum- ing any private or public debt ; from lending their credit to pri- vate corporations, from contracting any debt for internal im- provements, and from becoming stockholders in private corpora- tions. With this general statement let us look at some of the re- strictions more in detail, as well as the time in the history of the states when they were made. There were no constitutional restrictions upon the states' bor- rowing power before 1842. In this year Rhode Island imposed the qualifications spoken of in the preceding chapter. She was quickly followed by New Jersey, in 1844, while the latter was an- [32] ticipated slightly by Michigan, which, by a constitutional amend- ment in 1843, required all loans on the credit of the state, except those for raising money for the actual expenses of the legislature, judiciary, and state officers, as well as all amounts for repelling invasion, etc., to be accepted by a majority vote at a general elec- tion. This measure was to safeguard the use of state credit, and came only after "the funds of the state had (have) to a great extent been injudiciously applied, and in many instances, squan- dered with wanton profligacy. . . . ,"i and after the cor- porations to which the state had lent its credit had in "nearly every instance failed to pay accruing interest and were (are) in default. "2 Nothing concerning the latter subject was said in the amendment and it was not until 1850 that the state was pro- hibited from lending its credit. Louisiana, in her constitution of 1845,3 limited the aggregate state debt which could be con- tracted to $100,000, without at the same time levying a direct tax to pay the interest and principal at "maturity,"* New York imposed her restrictions, as noted above, in 1846, L did also the new state of Iowa which entered the Union in that year. The former fixed the maximum debt without popular approval at one miUion dollars and forbade the state to lend its credit to any pri- vate individual, corporation, or association ; while the latter fixed the maximum debt without popular approval, at one hundred thousand dollars, and forbade the state from ever becoming a stockholder in any private company, corporation, or association » Wisconsin and Illinois, in 1848, limited their respective state debts to $100,000 and $50,000; the former required the approval of a majority of all members elected to each house for anything above this amount, while the latter required for anything addi- tional the consent of a majority of all votes cast for members of the general assembly making the loan. Both of them re- stricted the state 's power to subsidize private capital. No.'f8,^p''%i' ^<^°^°»"tee on the Governor's Message." 1842. House Document 'I?.??"?'^ Messasre." 1842, Joint Documents, No. 2, p. 29. Articles 113, 114, 121. •*'*'• "when'due.'' "*""'''' '^ ^^^^' ^^^^' ^^^ Constitution of 1868 changed this to tlo^r^'^ '^^^""^^^ constitution of 1844 contained practically the same provL [33] 34 BL'LLETIN OF THE UNIVERSITY OF WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 35 other states, either when entering the union - -J^^'^ ^^'J^ their constitutions, have followed the examples -t them m th« early period, so that at the present time not only the or gmal m Si Sprovement states hut the others as well, a most without Spti" have rigidly circumscribed the POwers of the Jates^o creaie debt. The arguments used in ^^^f "^^^^^^^ ^'f f? '"jf forties against state debt were repeated during the fifties, etc., and are uid in our own day.» Constitutional restrictions are the rule in the United States and it remains only to point out ome^f Z changes that have been made in the later joos^- lions which tend to show either a more or a less strict adherence "-Z ::rtt1estrictions in a few states have been su^^ ciently treated for our purposes in the preceding chapter. They cluld be explained fully only by a f f -i;-^;:„^X* ^^^^^^^^ nf internal improvement schemes, of the effect of the philosopny Se p'LdTf westward expansion, etc., etc. This fuller analy- ;i woJld take us too far from our thesis, which is concerned rather with showing the general causes whfeh P'^^ueed *e^^ strictions, the effect of these upon the position of the states as Sitriai units, and of their legitimacy or illegitimacy from the standpoint of public finance and present political philosophy. One common characteristic of debt limitations is the require- ment that all loans above a certain minimum must receive a vote of popular approval. These requirements being almost unani- mous among the early constitutions no doubt give evidence of the general distrust that was felt for legislative bodies ' During the forties, Michigan, Rhode Island, New York, New Jersey, Iowa Illinois, and California required popular votes ranging from' a majority to two-thirds; while Louisiana required no vote at all, and Wisconsin a legislative majority. In four states. New Hampshire, Vermont, Connecticut, and Massa- chusetts, there are no constitutional restrictions at all on state .ywa, for instanc the "Debate. In *he Constitutional Conven«on of mah" Proceeding of the Constitutional Convention, 189o, vol. 11, »»• "^J' ",„ „-.,. m/e Tesolutiou at a meeting at Albany. New York Nov. 21, If"' '" «!?■. y,««, «es" " Political Parnea <» the State ot New York. vol. Hi, p. 388 , retoV?M^l."/^« ri839. Z.oe„.e„* NO. 3 P 5. nH«^ ReporU, 1839-40; Constitutional Debates o/ Iowa, 1857, vol. 1, PP. ^bo. '=<>'.'" [34] . debt; while in quite a number, the amounts that can be borrowed for temporary or extraordinary purposes are not limited. Ex- amples of the latter are Delaware, 1897 ; Indiana, 1851 ; North Carolina, 1876 ; South Carolina, 1895, etc. As a general rule there are no limitations at all upon the amount of money that can be borrowed to repel invasion, sup- press insurrection, etc. There are some exceptions, however. Alabama, in her constitutions of 1875 and of 1901, requires a two-thirds legislative vote for the making of such loans, while Arkansas, in her constitution of 1874, makes no provisions at aU for such debts. The same is true of the Florida constitutions of 1865, 1868, and 1875. In her last constitution (1885), Florida is allowed to borrow only for refunding her debt and repelling invasion. The last constitutions of Missouri (1875) of South Carohna (1895) and of Tennessee (1870), however, make no pro- visions for loans to suppress insurrections, etc. The amounts which may be borrowed for casual deficits or tem- porary purposes vary considerably among the different states, but show httle variation as between the different constitutions of the same state. Table "A" below indicates the chief facts con- cerning the amounts allowed for this purpose by states, by year groups, for constitutional changes, as well as the date of the last constitution for each state. iJ^Sl'I" ^''"' *•"' '*^*'' ^""^ ^^*«« "f t^""- constitutions in which there are no limits on the amounts which may be bo^ all for such loans, and where other than fixed amounts are al- [35] 36 BULLETIN OF THE UNIVERSITY OF WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 37 TABLE A AMOUNTS OF TEMPORARY LOANS ALLOWED FOR STATES BY DATES OF CON- STITUTIONS. (OOO's omitted.) States. 1KKQ 200 xUsUO, X8O0 Illinois, 1870 50 (') 250 li% (3) of assessed value Indiana, 1851 Iowa, 1857 100 to 250 100 (1855) («) 500 (1857) (») 100 (1858) (») 1.000 (1859) (») 500 100 (1845) (») 100 (1852) (3) 300 (3) 50 50 250 (») Kentucky, 1890 $500 Louisiana. 1898 $166 0864) (') 100 (1868) (3) "56 (1864)""' Maine, 1819 (») 300 (3) Maryland, 1867 Michifiran, 1908 "256 Minnesota. 1857 (0 Missouri, 1875 250 Montana, iXstf Nebraska 1875 ■"56*(8) 300 (3) "ioo"'" i66(») Nevada. 1864 New Jersey. 1844 100 (») 1.000 New York, 1894 $1,000 North Carolina, 1876 («) ....(«)... North Dakota, 1889 200(5) Ohio, 1851 750 (•) Oklahoma, 1907 400 (•) OreiTon, 1857 50 (») 750 («) 50 (') Pennsylvania, 1873 1.000 Rhode Island, 1842 South Carolina, 1895 (3) South Dakota, 1889 lOOD. . • . V /• . ■ . Texas. 1876 100 (3) 200 • « • •••••• Utah, 1895 200 .......... • • ■ V /#■•• Virsrinia. 1902 (») (2) '""466 Washinerton, 1889 West Virginia. 1872 (») ...(') Wisconsin, 1848 100 (*) Wyoming, 1889 1% of assessed value. (0 Amendment. (') Amount not limited. (3) Not mentioned as such. {*) As a maximum. (') Extraordinary expenditure. (•) Or other expenditures not provided for. O For extraordinary expenditure or public improvements [36] TABLE B SHOWING THE CHANGES MADE IN THE VARIOUS STATE CONSTITUTIONS IN" THE MATTER OF TEMPORARY LOANS. (OOO's omitted.) States. (Latest constitutions.) Constitu- tions, befwre 1860. $ Constitu- tions, 1860 to 1869. $ Constitu- tions, 1870 to 1879. $ Constitu- tions, 1880 to 1889. $ Constitu- liong, 1890 to 1899. $ Constitu- tions, 1900 to 1909. $ Alabama 1901 100 250 300 Illinois, 1870 Iowa 1857 56'*" (100 to 250) (100 to 1,000) 50 50 750 Kansas, 1859 Michigan, 1908.... Nebraska 1875.... Penn., 1873 Tpyii<« 1S76 250 100 1.000 200 100 TABLE 6 No limit State Date of Const. Delaware 1897 Indiana 1851 Worth Carolina 1876 South Carolina 1895 Virginia 1902 West Virginia 1872 No provision State Date of Con»t. Arkansas 1874 Florida 1885 Louisiana 1898 Mississippi 1890 Other than fixed amounts State Date of Const Colorado 1871 Idaho 1889 Wyoming 188» From Table ''A" it is seen that the amounts allowed for tem- porary loans vary from $50,000 in Oregon, for instance, to $1,000,000 in the states of Kansas, Pennsylvania, and New York. These amounts seem to have been chosen according to two main considerations : first, a comparison more or less haphazardly mad& with the amounts allowed in other states, and second, a compari- son of the amounts which would be added to the already existing^ debts in each case. The prevailing tendency was to reduce bor- rowing to a minimum. To illustrate : The chairman of the com- mittee having this matter in hand in the constitutional conven- tion of Iowa, 1857, said, respecting the $100,000 proposed for deficits, ''We could not see any real necessity for the state incurr- ing any debt at all, but in order to prescribe some limit, we con- cluded to settle on the amount named in the section. ' '® Mr. Gil- * Constitutional Debates of lotca, 1857, vol. i, p. 261. [37] ( n BULLETIN OF THE UMVERSITr OF WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 39 laspy replied that the legislature would borrow to the full amount allowed so that the safest move was to put the limit low » Some were in favor of prohibiting all debt."> The amount finaUy de- cided upon was $250,000-it had been $100,000 in the constitu- tion of 1846— and it was accepted by a vote of 16 to 11 " In the Kentucky convention, 1849, the amount thought desirable for cas- *Sn nnn'*' "^""^ ^'"'^ ^^^'^'^^ *° ^^00,000. Some looked upon $500,000 as a mere pittanee-an amount which would hardly clean the streets of New York City for a year," yet this amount was accepted by a vote of 62 to 31." Temporary loans are gen- erally justified on the ground that income and outgo of public funds never exactly offset each other, and that it is better to an- ticipate^ taxes by loans than to constantly tamper with the tax rate. But one is rather inclined to believe that the amounts were allowed more often as a partial conce^ion te the demands for state activity, which could not altogether be crushed out. than ^d of a tax for every loan m excess of a minimum operated in most cases as an effective check upon undue borrowing, and it was felt that some margin was not only desirable but Lessary Interest payments on the outstanding debt were large, and ti' tar distant Taxation was a surer and safer, but not always a more popular means of satisfying both of thes; demands "^ Ordinarily, no set duration is fixed in the constitutions for tem- W loans. There are some exceptions, however, to thJrl Missouri, in her constitution of 1875, allows $250,0^0 to heZ- Zod T^ '"^ """'' ^'''■' '"* '''' ^"^'^ '^'^^^ ^ for a longer shall be paid when due," while Minnesota allows them to run ttenTe d T™. "'^ '""""*'*^ "^'^^ ^ disti^Tti n be tween the duration of temporary and of other loans, but fixes the maximum period at five years. Colorado aUows them to run ten to fift een years, and Nebraska thirty years. •llHd., p. 261. n ^ZTpTtT' ""''"''' "^ ^'^"' ''""' ^^^- 1' 271. "fit ?sl ''""'"^'^^^ '' '"^ ''^'^ ^--««- Of Kentuclcy^ 1849, p. 782. [38] With respect to loans accepted by the legislature or by popular vote or by both, there are generally no limitations on the amounts that may be borrowed. Maryland, however, is an exception. She fixes the aggregate debt possible at $100,000. Louisiana, in her constitutions of 1879 and 1898, allows no borrowing at^ aU over that necessary to repel invasion or to suppress insurrection. Ohio also fixes a maximum : nothing at all above $750,000. The chief facts in respect to the duration of the permanent debts al- lowed in the different states are collected in the following tabular statement—* ' D ' '—which shows these data according to the last constitutions, with the relative position of the states, etc. TABLE D SHOWING THE PERIODS WHICH STATE IX)ANS MAT RUN. THE RELATIVE POSITIONS WHICH THE STATES HOLD. AND THE DISTRIBUTION OP THE PEBIODS BY YEAR GROUPS. State. ^♦Amendment. "Amendment. California »* Colorado Idaho Iowa Kansas Kentuck.v... Maryland.... Minnesota... Missouri Nevada Date of constitution , 1908 1876 1889 1857 1859 1890 1867 18o8 1875 1864 Duration. 1 1 75 years 10-15 " 20 20 'w&en due" 20 yean 15 10 n 20 Relative position. 1 9 7 7 5 8 11 10 7 State Date of constitution. Duration Relative position. Distribution by year groups. N^w Jersev 1844 1905 1889 1907 1895 1889 188^ 1872 1848 35 years 50 30 25 40 •Vhen due" 20 20 20 4 2 5 6 3 Yr. No. 5- 9 1 N«w York '* 10-14 S North Carolina 15-19 1 Oklahomfti •.••••••••• I 20-24 5 Soutli Carolina 25-29 1 fir^iifVi Tlab-nto. 30-34 2 Washino^ton 7 7 12 35-39 1 Vlrsrinia West 40-44 1 Wisconsin 50-54 1 55 and over 1 ••wlien due" 2 Total 19 [39] I 40 BULLETIN OF THE UNIVERSITY OF WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 41 «j These data show little uniformity among the various states as respects duration of permanent debt. Moreover, the periods are maxima and apply to all loans irrespective of the purposes for which the money is borrowed. California has changed the period from twenty to seventy-five years, New York, from eigh- teen to fifty years, and South Carolina, from twenty to forty years. Otherwise, the periods specified in the different constitu- tions have remained the same. This tendency to defer the time of payment, although not marked nor general, is significant when the purposes for which states borrow are taken into considera- tion. All of the outstanding debts of Alabama, Florida and Kansas in 1908 were for refunding purposes. A large percent- age of that for the other states is of this general type and repre- sents old loans which have been pushed on into the future rather than having been paid.^® The constitutions almost as a unit prohibit the states from lending their credit to and becoming stockholders in private cor- porations. These practices were engaged in from early times particularly by the internal improvement states and were among the chief causes for the abuses of the period. Capital was scarce and timid, while private credit was undeveloped. It was but natural that aid should have been given to private undertakings in canal and railroad building, particularly, when public opinion gave them a public character and when future economic welfare was thought to depend upon them." But private aid, legitimate in some cases, was abused, and nearly all of the new constitutions of the forties and fifties absolutely prohibited it.^« Such restric- tions are, however, not universal, nor are the prohibitions against "The following data show for a number of states, chosen at random the relation of the bonded debt for funding and refunding to the total bonded debt outstanding 1902. Alabama, Sept. 13, 1902, 100%; Florida, Dec 31 1902 100% ; Idaho, Dec. 31, 1902, 37.86% ; Indiana, Oct. 31, 1902, 99.73%'- Ken- tucky, June 30. 1962, 61.32% ; Maryland, Sept. 30, 1902, 78.20% ; New York Sept. 30, 1902, 0.00%; Pennsylvania, Nov. 30, 1902, 96.86%. Wealth, Debt and Taxation, Washington, 1907. ''Table 69." "The courts lent validity to this practice. Vide, Sharpless v. Mayor of Philadelphia, 21 Penn. State 147, (1853). " Rhode Island said nothing about the practice in her constitution of 1842 Iowa, in 1846, prohibited stock subscriptions, but said nothing about the state lending its credit. New Jersey prohibited the lending of credit, but was silent on stock subscription, etc [40] becoming stockholders so general as are those on lending credit to private concerns.^^ Some of the states have not acted consist- ently on the matter of private aid. Kansas prohibited the state from lending its credit in 1858, and in the following year re- moved the restriction. Louisiana prohibited this in 1864, al- lowed it in 1868, and again prohibited it in 1879. Much the same spirit of vascillation— of course the result of the pressure of poli- tics, etc., rather than an evidence of a changed philosophy — is also found with respect to the states becoming stockholders in pri- vate concerns. The experience of the internal improvement states has left its impress so deeply marked upon people's minds that even today there is little disposition to give the modern wealthy state more privileges with respect to the use of credit than were given to those of the forties and fifties. Michigan is an excellent example of this. In her constitution of 1908, the maximum debt allowed is $250,000 : no addition can be made to this under any considera- tion. Not even the protective devices of legislative or popular approval can bring to the state this financial device which is more liberally accorded to minor civil divisions. New Mexico, in her constitution of 1911, prohibits any state debt by popular ap- proval or otherwise, if the existing debt, exclusive of the territo- rial debt and that of the several counties assumed by the state, ex- ceeds one per cent, of the assessed value of the property of the state. The tendency here noticed has its exception in a few states such as California, New York, Illinois, etc. In California four state projects, which together will involve an indebtedness of about $29,000,000 before completion were voted upon in November, 1910, and their execution authorized.^*^ In New York, provision was made in 1911 for an issue of bonds not exceeding $19,800,000" for furnishing proper terminals and facilities for barge canal "For details see Appendix I. * Ratified in November, 1910, according to the provisions of the State Con- stitution on state debt, Article xvi, as amended November 3, 1908. These provisions are known as the San Francisco Harbor Improvement Act, (Ch. 320, Laws, 1911) ; The Highway Act, (Ch. 383, Laws, 1911) ; the India Basin Act,. (Ch. 407, Laws, 1911) ; and the San Diego Seawall Act, (Ch. 623, Laws, 1911). [41] I 42 BULLETIN OF THE UNIVERSITY OF WISCONSIN traffic ;2i while Illinois has seen fit to provide a $20,000,000 loan for the development of her water power resources. These instances of extensive borrowing are clearly exceptions to the rule. Looking at the period which has elapsed since the day of internal improvements, one sees little evidence of any dis- tinct movement to make debt restrictions less rigid. Here and there changes have been made by increasing the duration of loans or the amounts that may be borrowed, or by occasional constitu- tional amendments, but these are relatively few. The checks im- posed remain effective. Popular approval is not only difficult to get" but the mere fact of its being necessary for almost every trifle, has been sufficient to keep the states well within the con- fines of a stilted financial policy. Such then, in the main are the facts with respect to the states' power to borrow money.^^ The restrictions for the most part grew out of a period of intense speculation, and of general flux ; when the country was not only taking on nationality by an in- creasing population and industrial development, but when indus- try was seeking markets, financial and industrial concerns look- ing for immediate and enormous profits ; when capital was scarce and private credit undeveloped ; when state policies were indefi- nite and administrative^* and financial control weak and unor- ganized, and when the future was discounted hardly more than the present. Such an atmosphere and an environment were con- ducive to excess, and with financial mismanagement, political log- rolling, and downright fraud state projects generally resulted in catastrophe. It was out of this experience that restrictions of "Chapter 476, Laws 1911. This law was ratified by the people in Novem- ber. 1911, by a vote of 315,932 to 311,516. ^Vide, Dodd, W. F., Revision and Amendment of State Constitutions, for a list of recently adopted and rejected amendments relating to state and local -debt. » The details with article and section references are given in Appendix II ••Governor of Alabama, Message, January 24, 1871. In speaking of loans made to private corporations, he said he did not know "to what extent bonds under the various statutes have been endorsed and issued by the state Neither in the executive offices nor in any other ofBce of the government can be found a record of the action of the executive in this regard i cannot even suppose the number of bonds endorsed to any company, the time when and where payable, or whether endorsed or issued according to law " Quoted by Martin W. E., "Internal Improvements in Alabama," Johns Hopkins Vmversxty Studies, vol. xx, p. 83. w/"**"* [42] SECRIST-RESTRICTIONS ON PUBLIC INDEBTEDNESS 43 debt took shape. Legislatures came to be questioned and state policy scrutinized. The sentiment once so strong in favor of state activity reacted upon itself, only to give private and corporate ac- tivity a new lease of life.^^ Many of the restrictions, necessary at the time they were imposed, seem today wholly out of accord with modern conditions. Such amounts of debt as $1,000,000 to New York, or $50,000 to Illinois for temporary purposes, in 1846 and 1848, respectively, when the states were almost at the point of bankruptcy were significant, particularly when there remained the possibility of further loans providing public opinion would consent. Public opinion then, in matters of debt, was a thing to be conjured with. But if $100,000 to the constitutional conven- tion of Maryland in 1851 was sufficient because it was added to the millions outstanding and would have been ** frivolous'' if cir- cumstances had been different, how much more frivolous is such an amount for the same state or any other state of equal wealth at the present time. But public opinion had changed. **The first great error in state policy, committed in Michigan, was the borrowing of money. A state can seldom borrow money with advantage to its citizens. Its only legitimate means is the taxes, levied for the support of its government. It should not be a money dealer, nor should it embark in any other business appropriately within the sphere of individual enterprise. "2« *'It is not the design of our govern- ment to maintain and conduct works of internal improvement."" ''The only aim of a republican form of government should be to protect its citizens in the enjoyment of life, liberty and the pur- suit of happiness. Everything which conduces to partial legis- lation, which raises local questions, and creates sectional difficul- ties, should, as far as possible be studiously avoided. "^^ '*The correctness of the principle of an entire separation of state from *"The rise of corporations into such power that they menace the stability of society, by controlling in their favor legislation, dates from the time when the states were deprived of all direct control over inland transportation." Adams, H. C, "The State in its Relation to Industrial Action." Publications of the American Economic Association, vol. i, p. 68 (1887). "lilessage of Governor J. S. Barry of Michigan, 1845. Joint DocumentSj p. 16. "•'Report of the Committee on Finance." Senate Document No. 8, p. 19, Michigan. *8 Ihid., p. 19. [43] r^ff 44 BULLETIN OF THE UNIVERSITY OF WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 4S • private enterprise and speculation, and leaving to individual energy and private capital the construction of such works as the facilities of commerce may require, is being established by time and the experience of other states. ''^9 ^^The public mind has changed ; and public sentiment is for leaving this thing (internal improvements) to private enterprise. '^ ^o ^'ggldom has a revo- lution been more complete than that which has just taken place in public opinion, within the last six years, on the questions of commerce and finance. Until recently the great business of leg- islation was to borrow money, by pledging the faith of a sovereign, state, engage in internal improvements, charter banks, and stim- ulate a great variety of extravagant speculations/ * «^ Opinion did change; the constitutional restrictions are conclusive evi- dences of it. No objection or criticism is offered because of the change. What is held up to view and what is questioned is the propriety of allowing the experience out of which this opinion took form to be the sole criterion which marks off the appropriate sphere of the state in industrial matters, and discredits the use of public borrowing.. Public opinion is invariably the crystalization of experience, but experience is transcient and continuous, and pubic opinion needs constantly to re-adjust itself in the light of new experience and problems. What we desire to say on the subject of public borrowing as a financial instrument for the modern state may be reduced to two mam considerations, and it is to these which we shall now direct our attention. First, the accepted functions of the state in our present economy; and, second, the fiscal expediency of public -Annual Message of the Governor of Alabama. (1857) quoted in Martin W ^olZ:T.7l I-P-vements in Alabama." JoHns HopL^s UnVe^s^y'Tu'Z: K::ft::\sZ' TiT""'' ^^ ^^^ ^-«^u«-az Conrenuon of tUe State of "Boutwell, G. S.. in Hunt's Merchant Magazine, vol. 8, p. 153, (1843). CHAPTER 4 THE USE OF BORROWING BY THE MODERN STATE If the full effects of the constitutional restrictions upon the &iancial policies of the states could have been foreseen, it is doubt- f ul if the early conventions would have been so eager to impose them.^ But the state had failed to hold successfully the indus- trial field against a people clamoring for internal improvements and against corporations struggling for privileges. Men^s minds had changed concerning the appropriate sphere of the state, and it was but a short step from the rejection of state ownership and control to the advocacy of a strict policy of laissez faire. People came to look upon industrial activity as the peculiar function of private initiative, and to resent even moderate state interfer- ence.^ Most of the early restrictions were born of conditions and of a philosophy which ripened out into a policy of let-alone and mark the return swing of the pendulum against the excesses of the past. On the whole, the attitude toward state debt which these restric- tions express is still adhered to, albeit that the circumstances out of which it arose have almost been forgotten. Economic advance has placed us, in many respects, in a new world. In view of our Conditions were propitious for further abuses of the credit sys- tem when the crisis should wear away. Because of this people began to complain and the legislatures were filled with all sorts of remonstrances against the general policy and practice of sub- sidizing private capital. The outlook once so rosy now took on a different hue. Railroads defaulted their interest payments and creditors were obliged in many cases to look to the tax payer for the interest and principal of loans guaranteed. So long as money was easily borrowed the plan of living in the future worked admirably, but when conditions changed there arose a • The Bankers' Magazine (New York), Sept 1876, vol. xi, 3rd series, p. 183. Vide, also, IMd., June, 1876, p. 946. *'The annual increase of miles of railroads constructed in the United States from 1872 to 1880 was as follows : 1872, 5,870 ; 1873, 4,097 ; 1874, 2,117 ; 1875, 1,711; 1876; 2,712; 1877, 2,274; 1878, 2,665; 1879, 4,809; 1880, 6,711. Statistical Abstract of the United States, 1909, p. 262. [57] 68 BULLETIN OF THE UNIVERSITY OF WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS S9 general dissatisfaction against both the theory and practice of state subsidy.^^ Many people saw more in this movement than the mere increase of debt. An equally objectionable thing, and one much more serious in its ultimate consequences, was the state of mind which the unbridled use of the credit system fostered." Taxes were al- lowed to go delinquent — in fact, direct taxes were frequently not levied, — borrowing was freely indulged in to pay the ordinary running expenses of the governments, and debts when due were pushed on into the future by the act of refunding." These prac- tices opened the door for corruption among city officials, and, on the whole, were not objectionable to a large class of citizens who lacking the moral stamina to prevent the perpetuation of a burden to be endured in the future, silenced any suggestion of an increase in the tax rate to provide for the expenditures of the present. With another class, and a preponderating one, the abuses under whatever form were objectionable, and the proximate cause not only of increased debt but of municipal dishonesty and corrup- tion was held to be the demoralizing influence of the credit sys- tem. The uprooting of this was necessary to the solution of municipal problems and this was possible only by depriving municipal officials, by constitutional enactment, of all power to mortgage the estates of tax payers.^* This attitude of mind is not difficult to understand. Munici- palities were growing rapidly— 12.5 per cent, of the population of the United States dwelt in cities in 1850; in 1880 the corre- sponding percentage was 22.5, and the problems of city growth were new and difficult to solve.^^ The accounts of municipalities were then, as they are now, imperfectly kept ; central supervision " TJie Commercial and Financial Chronicle, May 15 1875 p 464 "The tendency of the period to incur debt has been described as "epidemic insanity." Dillon, J. F., The Law of Municipal Bonds p 5 i«s?® Pe^ cent, of the debt for cities with population of 7.500 and over In 1880 was for funding floating loans; while 10 per cent, was for refunding old debt. Valuation, Taxation and Public Indebtedness 1880 p 290 ^* Bradstreet's, May 22, 1880, p. 4. Ibid., July 28, 1880 p 4' ' "•'All circumstances seem to have combined at once 'to produce the worst Lri ; ^ T ''^^" ^ '?'"'''^'° "^ municipal debts and a record of municipal waste and extravagance for a sad remembrance and solemn warning." Bowles Samuel 'The Relations of States and Municipal Governments." AmZcan Journal of Social Sciences, vol. 9, p. 141. (1877). American [58] was wholly untried and administrative machinery scarcely de- veloped at all. Under such conditions, when abuses arose, it was but natural to seek for an absolute remedy and apply it if pos- sible. The most certain check on excessive borrowing was to de- prive the local units of the power to borrow money, and the way to effectively do this was by constitutional restrictions. The guarantee of prudence and honesty in city administration as well as common sense in subsidizing private capital lay in these means. Other sources of control were not open,^® and the neces- sity for restrictions of some type was urgent. Taxation came to be looked upon as the only legitimate method for raising revenue, for in its use was conserved the very guarantee against excess, viz., the bearing of immediate burden. The wave of sentiment favorable to rigid restrictions on mu- nicipal indebtedness clearly shows itself in the changes made in the state constitutions, by amendment or otherwise, through the period 1872 to 1879. There were constitutional prohibitions against these units lending their credit before this time, but they were not common. Ohio, in 1851,^^ was the first state to abso- lutely prohibit such subsidies. Indiana prohibited counties from lending their credit in 1851, and^^ somewhat restricted their power to subscribe to the stock of private companies. Oregon^^ and Pennsylvania-'^ prohibited municipalities from lending their credit or subscribing to stock in private companies in 1857. Cer- tain conditional restrictions were imposed in Maryland,^* Missis- sippi,^^ Missouri,^^ Nevada,-* and North Carolina-^ during the later 60 's. But the movement to curtail municipal debt was not general and distinct until the crisis period of the 70 's. None of the earlier states, with the exception of Ohio and Pennsylvania, " "But as all experience shows that the use of public credit by local officials defies successful regulation, it follows that the primary error was in the orig- inal grant of the power to borrow money." Bradstreet's, May 22, 1880, p. 4. " Constitution, 1851, art. viii, sec. 6. " Constitution, 1851, art. x, sec. 10. " Constitution, 1857, art. xi, sec. 9. *> Constitution, 1S57, amendment art. xi, sec. 7. ^ Constitution, 1867, art. iii, sec. 54. ** Constitution, 1868, art. xii, sec. 14. ^ Constitution, 1865, art. xi, sec. 14. ** Constitution, ISSJ^, art. viii, sec. 10. *^ Constitution, 1S6S, art. vii, sec. 7. [59] I 60 BULLETIN OF THE UNIVERSITY OF WISCONSIN which curtailed the states' power of lending their credit, ex- tended the same prohibitions to the minor civil divisions. Prac- tically all of them did so, however, before 1880, as the following tabular statement shows. Restrictions upon municipalities, and the amount of railroad aid debt for cer- tain cities State Lending their aid to private corporations Date of const. Becoming stock- holders in private corporations Date of const. Amount debt for railroad aid, (cities with popu- lation over 7,500) outstanding: 1880. Alabama 1875 1874 1879 1876 1877* 1875 1874 1879 1876 18771 18751 1877 1870 1879 18721 1875 18771 1875* 18741 1876* 18733 18701 1876 $798,700 21,331 783,500 Nothiner 3,712,000 16,497 1,020,000 876,500 315,000 895,000 2,070,200 865, 400 Nothinsr 8,028,380 56,000 4,195,027 826,000 373,500 Arkansas California Colorado Connecticut Florida 18751 Georsri a 1877 1870 1879 1872» 1875 18771 1875» 18741 18762 18733 18701 1876 Illinois Louisiana Minnesota Missouri New Hampshire New Jersey New Yorlc North Carolina Pennsylvania Tennessee Texas 1 Amendment. ' Not absolute. » Pennsylvania had imposed her restrictions in 1857, but she repeated them in 1873. Agitation in some of the states for restricting local debt had begun long before the restrictions themselves were finally written into the constitutions. In other states, when public sentiment, hounded by the claims and distorted by the promises of private^ capital, was not strong enough to insure constitutional prohibi- tions, the courts came to the relief of the people and challenged the uses to which public moneys were being put. New York is a prominent example of the first class mentioned, while Michigan, Wisconsin, and Iowa are the leaders in the other movement noted! Let us hastily review their experiences with local debt and the devices adopted to check its increase. The question of the desirability of prohibiting local units from granting aid to or subscribing to the stock of private corpora- tions was raised in the Constitutional Convention of New York ' [60] SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS ei in 1867, and a proposition to that effect was submitted by the -committee in charge. The proposal was smothered, however, by a vote of 41 to 55, and nothing said about it in the submitted constitution.^^ But by 1872, it again came to the front," and the Constitutional Commission appointed in that year to propose amendments, recommended the absolute prohibition of aid to pri- vate corporations in any shape.^« This provision was finaUy added to the constitution by an amendment ratified in November UUP But this did not satisfy the opposition to pubUc borrowingr. Although the total debt in aid of railroads issued by towns, cities, and villages in 1872, was $26,946,662, $10,416,864 had been issued ^or erecting public buildings, $36,658,144 for roads and bridges, $29,335,383 for water works and fire apparatus, and $84,052,655 for parks, local improvements and other purposes. In aggregate this was a little more than 10 per cent, of the assessed value of the property of the state.^^ The county bonded debt, excluding that of New York City, equalled 2.3 per cent, of the assessed value, while the town debt of 416 bonded towns equalled 7.66 per cent, of the assessed value. Some towns were bonded for all purposes to as much as 20, 30, or even 50 per cent, of their assessed value.^^ The net debt of the city of New York, which had stood at $18,- 901^440 in 1860, had increased to $73,373,552 in 1870, and to $116,773,724 in 1875,— an increase from 1860 to 1870 of 347 per cent.' and from 1870 to 1875, of 59.2 per cent.^^ The per capita debt of New York's twenty-four largest cities ranged from $101.87 in the case of New York City, to $8.23 in the case of Co- hoes— an average of $75.80, while the average per capita annual * Lincoln, C. Z., Constitutional History oj New York, vol. 2, p. 358. " ••Governor Hoffman in 1872 recommended the immediate repeal of the gen- eral town bonding law, remarking that, 'aid has already been given to rail- roads, upon the credit of municipalities, to quite as great an extent as Is wise, and in some instances to the oppression of the tax-paying communities.' " Lin- coln, op. cit., p. 557. ^Ihid., pp. 559-560. A proposition to limit the aid to ten per cent of the assessed value of a municipality's property was rejected by the Commission. JUd., p. 560. 2» Constitution, ISlfi, as amended, art. viii, sec. li. *» Governor's Message, 1872, summarized in Lincoln, C. Z., Constitutional History of New York. vol. 2, pp. 558-559. » Ibid., p. 559. "The Bankers' Magazine, Sept. 1876, p. 182. [61] y 62 BULLETIN OF THE UNIVERSITY OF WISCONSIN tax for the same cities equalled but $21.55.33 The average local indebtedness of New York state was estimated at 11.3 per cent, of the assessed value of the state in 1880, and the responsibility for such condition of aifairs charged to nothing ''more nor less than an abuse of credit. Instead of being compelled to go to the taxpayer for money whenever wanted, the city, town and county officials have had the privilege of obtaining funds in the money market. ' '^^ It is not strange that the restrictions on further railroad aid failed to quiet the opposition. The desire to borrow remained, and new avenues of expenditure, together with fraud, waste and incompetency in public life, did not guarantee against a continu- ation of the abuses. The movement for further restriction was revived in 1876, and an amendment passed by the legislature limiting the debt of local units to 5 per cent, of their assessed value. But the Tilden Commission, which had been appointed in 1875 to consider this matter, objected to such an amendment, on the grounds that it could be evaded by raising the assessed value of property to which the ratio of debt would apply, and that it served to prevent ''wastefulness and embezzlement ' ' of public funds only by limiting the amount "subject to depredation. ' '^^^ The restriction which they proposed was to make all loans de- pendent upon laws passed by a two-thirds vote of each house.^* But this, it seems, was ill-chosen advice, in view of the general distrust of the legislature, and when public sentiment for some time had been strongly opposed to everything which savored of special legislation, and was in favor of fundamental changes by constitutional method only. Borrowing power, however, was based upon the assessed valu- ation of property, and in 1883 an amendment was passed by the legislature which fixed the amount at 10 per cent, for cities and counties. This amendment was passed the second time 1884, and in the same year was ratified by the people as a part of the constitution. Thus the disposition of municipalities to play with ** Bradstreers, May 5, 1880, p. 5. « ^incoln, C. Z., Constittition History of Neic York, vol. 2, p 656 "^ Ibid. J p. 674. f k" y. [62] SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS es debt and court taxation "as if for pastime'' was seemingly checked, and the sentiment expressed by Governor Robinson m 1879 "that debt, both public and private, are an unmitigated evil" was given expression. From this brief summary of the conditions that produced the 10 per cent, debt limit in New York state, the conclusion is war- ranted that the restrictions were conceived and formulated to meet a definite issue and were the most practical remedy possible at that time for meeting the situation. Bradstreet's had voiced the sentiment clearly ; against an abuse of borrowing it is impos- sible to provide adequate protection. Sinking fund commission- ers and other devices are mere pallatives and not remedies. The true remedy lies in constitutional prohibition against further debt, and in the accumulaion of a surplus by taxation each year to pay off maturing bonds.^^ There can be but little doubt that the constitutional restrictions against the states lending their credit to private corporations and associations were really meant, in many states, to include the sub- divisions of the state as well. No reason is evident why the peo- ple of the constitutional conventions were so blind as not to see that in the last instance, in case of failure on the part of subsid- ized private capital, financial burdens must fall on the taxpayers. The taxpayers for the state were the taxpayers for the localities ; the personnels were precisely the same. But such an interpreta- tion of the intent of the constitutional provisions though valid, was easy of escape when corporation lawyers were seeking some justification for governmental aid. Justice Cooley in speaking of the Michigan constitution says, "The purpose clearly was to re- mand all such undertakings to private enterprise, and to protect the citizens of the state from being taxed to aid them ; but while the state was forbidden to engage in such works, it was unfor- tunately not expressly declared that the several members of the state, in their corporate capacity, were also forbidden to do so. The conclusion sought and reached was that the agencies of the state were at liberty to do what was forbidden to the state itself, and the burden of -this debt which the state might not directly " Bradstreet's, May 5, 1880, p. 5. [63] I «4 BULLETIN OF THE UNIVERSITY OF WISCONSIN impose upon its citizens, it might indirectly place upon their shoulders by the aid of municipal action. ' '^® Like confusion has been extended even to the present, and concerning this something will be said later. But aid was being sought, and in the fever of •excitement and speculation, it was given. It was but natural that the minor divisions of the state, each desiring to become the me- tropolis^* of its district, and realizing that growth depended upon transportation facilities, should have offered the induce- ments at their command to attract private capital. Thus the burdens which the states had formerly been unwilling to bear the municipalities shouldered ; thus the rivalry which in the former internal improvement craze was primarily confined to the states was shifted to the cities and the counties, etc. But before the localities could extend their aid, a theory of tax- ation had to be formulated to justify their contribution, since the -aid given ultimately rested upon the taxing power. A cardinal rule of taxation is that taxes can be levied only for public pur- poses. Are taxes levied to subsidize private corporations, rail- roads or otherwise, levied for a public purpose ? In brief this is the argument of those who maintained that this was true. Taxes can be levied only for a public purpose. Public purpose means public benefit, and since private corporations serve a particular district, raise the assessed value of property, increase the re- sources of the state, promote happiness, etc., it is the duty of the state to encourage them by any means which she may have at her command. If the state can aid private corporations by extend- ing to them the rights of eminent domain, it can likewise aid them by the power of taxation. The benefits are common and re- turn to the state through increased taxable values, thereby in- creasing the ability to bear taxation. If this is true, and there is no doubt that a great many people thought it to be true, then the whole thing is true ''political economy. '* If the state re- ceives the benefit from such taxation, then the enterprise is of a public character, and taxes levied therefor are for public pur- "Cooley, Thomas M. Constitutional Limitations. Fifth Edition, p 265 Vide, also Dissenting Opinions of Justice Kinney In "Dubuque Co. vs. Dubuque Railroad Company," 4 Greene 1, (1853). *> Vide, Ohio Constitutional Debates, 1873-74, vol. 2, pt. 2, 1435. [64] SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 65 poses. Public purpose or public use was made to mean or in- volve public good. Indeed, the terms were often used synony- mously, and on the basis of this confusion railroads and other pri- vate enterprises were freely subsidized.*" The whole argument was put on the basis of benefit to be experienced.*^ The justifi- cation of taxes was benefit to persons through property. The weakness of the ''benefit'^ argument was not difficult to see and its fallacy was often pointed out. The argument had re- ceived its vogue largely from a Pennsylvania case in 1853 in which the court used the following words : * ' I am of the opinion that a tax must be considered valid, unless it be for a purpose, in which the community taxed has palpably no interest ; where it is apparent that a burden is imposed for the benefit of others, and where it would be so pronounced at first blush.*' *- The public interest in a railroad corporation was held to be as intense when the railroad was privately owned as when publicly owned,*' be- cause travel and transportation were cheapened to a degree far exceeding the charges of every kind, and in addition to these ad- vantages there were added those of ^'rapidity, comfort, conven- ience, increase of trade, opening of markets, and other means of rewarding labor and promoting wealth. ' ' ** Among the eminent judges who dissented from the reasoning in the Sharpless case and the policy to which it gave countenance, there is probably no more illustrious example than Judge Cooley of Michigan, who, in an important case,*^ ''had the independence *>It was largely on such reasoning that the Ohio court, in spite of Constita- tlonal prohibiiion in Ohio against town and cities "aiding railway companies," held, in "Walker v. The City of Cincinnati," 21 Ohio N. 8. U, that Cincinnati was competent under a legislative act to build a railroad from Cincinnati to Chattanooga at a cost of $10,000,000, ** Vide, American Law Register, vol. xi, p. 742 (1872) where this argument is stated and refuted. Vide, "The State of Iowa ex. rel. v. The County of Wa- pello," IS Iowa, S88 (1862) ; "The People v. Salem," 20 Michigan, i52, 501. Par- ticular notice should be given to the opinion of Justice Christiancy. *» "Sharpless v. The Mayor of Philadelphia," 21 Penn. State, 147. p. 168. (1853). . *» "The right to tax depends on the ultimate use, purpose and object for which the fund is raised and not on the nature or character of the person or corpora- tion whose immediate agency is to be used in applying it." Ibid., p. 169. ** "Sharpless v. The Mayor of Philadelphia." 21 Penn. State, W, p. 169 Vxde, also an article by "Cecil" In The American Law Register, Vol. 2, p. l] where the holding in this case is severely criticized. In the same journal "^01. 9, p. 669, the essential contentions of the Sharpless case are upheld. **The People v. Salem," 20 Michigan, ^52. (1870). [65] I! I *. ee BULLETIN OF THE UNIVERSITY OF WISCONSIN and courage to make an unpopular decision ' '^* in a case involving" essentially the same particulars as the Sharpless case above. Judge Cooley dwelt at length in this case upon the growing oppo- sition, popular and legal, to railroad and other aid, and pointed out that because of the difficulties of building, and of the neces- sity of aid for canals and turnpikes in the early period of the na- tion 's growth, these avenues of commerce had come to be spoken of as general utilities. Even the courts, looking for some justi- fication for the aid to railroads that was being countenanced, had ** carelessly'' said that they must be regarded as ''agents of the states. " '' But such saying does not make them such, ' ' continued Judge Cooley. Aid to them, when furnished from general taxes, is unconstitutional, unjust and illegal, because taxes are not levied for a public purpose. Incidental benefit, he maintained, is an insufficient test, and one that would equally as well apply to a newspaper, a hack line, or any other contrivance which re- dounds to public welfare. To him a public purpose for which taxes can be levied has **no relation to the emergency of the pub- lic need, or to the extent of the public benefit which is to follow. It is, on the other hand, merely a term of classification to distin- guish the object for which, according to settled usuage, the gov- ernment is to provide, from those which, by like usage, are left to private inclination, interest or liability."*^ The essential sim- ilarity of the right of eminent domain, conferred upon a corpora- tion, with the right to public aid, contended for by the support- ers of public subsidies. Judge Cooley denied, and maintained that when land is taken under the right of eminent domain it is paid for and the state loses nothing ; but when taxes are levied for the aid of corporations which carry on their works for their own ends and advantages they are levied not for public but for private purposes and are, therefore, illegal. This decision came at a time when the fever of excitment was at its highest, and was * ' anxiously awaited by the legal profession and the public alike.'' In Michigan it served the purpose of a ^ Comment of The American Law Register, vol. ix, p. 501 ; Vide, favorable com- ment on this case in Central Law Journal, vol. 36, pp. 133 fla. Opposing points of view are found in the American Law Register, vol. 9, (N. S.) pp 649-670 «The People v. Salem, iO Mich. 452, p. 458. [66] SECRI ST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 67 constitutional provision against state subsidy and its influence dominated the history of Wisconsin and Iowa, and other states for some time. The experience bf Wisconsin illustrates how much the consti- tutional limitations on local debt grew out of the particular exig- encies of the times. In an important case*® doctrines of bene- fit in the matter of public aid and the essential similarity of the right of eminent domain with that of public subsidy were denied by the Supreme Court and held to be insufficient to justify the use of the taxing power in the aid of private corporations. Pub- lic use was made to imply possession, occupation, etc., by the public or by public agencies, and not merely incidental benefit. The public use in a privately owned and privately managed rail- road was held to be a partial, qualified public use which would of itself not justify taxation in its behalf. The lending of credit to railroads was, therefore, illegal, because taxes were not levied for public purposes. The interpretation of this controverted ques- tion by the court was made almost simultaneously with the hold- ing in the Michigan case cited above, and tended to strengthen the contention of the opposition. But the whole matter, so far as Wisconsin was concerned, was reopened and the holdings in this important case negatived, by the decisions of the state su- preme court in Lawson v. Milwaukee, etc., Railroad,^** and in Ole- son V. The Green Bay etc.. Railroad.^® With subsidies to private companies legalized the financial conditions of municipalities passed from bad to worse. The governor, in his annual message^ January 11, 1872, said: *'As a temporary measure of safety, I recommend the passage of a law prohibiting any town, county or city from creating any debt in aid of any railroad or public im- provement in excess of five per cent, of the assessed value of the property of each town, county or city, and that an amendment to the constitution to the same effect be submitted at the earliest pos- sible moment." A joint resolution to this effect was passed by the succeeding legislature, and a constitutional amendment limit- ing the debt of localities to five per cent, of the assessed valuation *« "Whiting V. The Sheboygan Railway Co.," 25 Wis. 167, (1869-1870). "SO Wis. 597, (1872). '56 Wis. 383, (1874). [67] I SECRI ST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 69 68 BULLETIN OF THE UNIVERSITY OF WISCONSIN of their taxable property was adopted by the people and added to the constitution in 1874.^^ The constitutional measure, however, did not prohibit municipalities from lending their credit to or subscribing to the stock of private corporations, and such a pro- hibition is not now contained in the constitution. Iowa imposed a five per cent, debt limit on her municipalities in 1857, but failed to have such limitations cover the matter of lending credit, etc. This restriction was vigorously pressed in the constitutional convention ; but total prohibition seemed out of the question, and as no percentage relationship of debt to assessed value of property, agreeable to all, could be decided upon,^^ the matter was dropped, notwithstanding an attack upon the whole system of public aid made by the governor in ISSG.*"*^ An imme- diate cause of the five per cent, restriction seems to have been the insecurity and lack of confidence which foreign investors felt with respect to their loans when each municipality could issue its own bonds to private companies or promise to pay the interest of bonds issued by them almost without limit save that which was set by the continual rebuke of the more cautious members of the communities. Unfortunately this element was almost al- ways a minority. The real and underlying cause, however, was here, as elsewhere, to guarantee against excessive taxation. Sub- scription to private companies was more stubbornly opposed than were the direct expenditures of municipalities themselves for the same thing, because of the greater abuse of the taxing power to which it led. All restrictions, however, grew out of the association of debt with the taxes necessary to pay the interest and to expunge the principal. Taxes supported credit, and in order to reduce taxation it was necessary to reduce the amount that could be borrowed." That there was no universal protest against railroad aid, per se, is evidenced by the failure to pro- "* Constitution, art. xi. sec, 3. " Vide, loica Constitutional Debates, 1857, vol. 1, pp. 421-423, where the percentages 6, 7, 8, 9, 10, and 11 were rejected by close votes. Vide, also the same volume, p. 810, where the principle of prohibiting public aid to private companies was rejected. "^'Annual Message," Dec. 2, 1856, in Shambaugh, B. F., Messages and Proc- lamations, etc. , vol. 2, pp. 37 flB. '^Vide, "Spilman v. Parkersburg," U 8. E. Rep. 279 (1891) (W. V.); "Attor- ney General v. Pingree," 120 Mich. 559, (1899) ; McNett, Wm. "Meaning of In- debtedness." etc., Iowa Bar Association Reports, (1903), pp. 116, 127, 128. hibit it at this convention. The principle was vigorously attack- ed*^ but the opposition lacked the requisite strength to insert a direct prohibition in the constitution. But by 1862, the people had become so aroused by the iniquity of the practice, that the Supreme Court, in response to public sentiment, overruled a former decision,'^® and forbade municipalities to subsidize private capital in any form.^^ This decision was reinforced in 1869 when the court refused to draw any distinction in principle be- tween lending credit to and subscribing to the stock of private companies. Both practices involved taxation. The essential contentions of the court were that taxes were necessary to sup- port credit, and that the taxes collected were given to private companies. This was held to be illegal because of the * * coerced contribution ' ' involved, and to be in opposition to that provision of the constitution ^'that no man shall be deprived of his property without due process of law." Taxes, it was held, **are burdens or charges imposed by the legislative power upon persons or property to raise money for public purposes, or to ac- complish some governmental end."^^ But the principles so forcefully expressed by the court in the following words were in the next year repudiated.^® *'If anything can be said to be set- tled in this state, it is, that under the constitution, there is no leg- islative power to endow public or municipal corporations with the faculties of subscribing to the stock of a railroad company and to levy a tax on the inhabitants to pay for it. ' ^^^ Thus in Iowa the way was opened up for further local debt the aggregate of which [68] '^Vide, Iowa Constitutional Debates, 1857, vol. 1, p. 291, where the disas- trous experience of Pennsylvania is cited. On p. 298, Ohio's constitutional re- striction of 1851, is strongly approved. In another place, the advancement of the interests of the state by building railroads out of borrowed funds handed over to private individuals, is held to be as impossible and impracticable as cul- tivating oranges profitably in a hot house, p. 333. An excellent summary of the proceedings of the constitutional convention of Iowa in 1857 is given by William McNett in "What should be deemed Indebtedness within the Meaning of the Constitutional and Statutory Provisions Limiting the Amount thereof which Municipalities may Incur." loica State Bar Association Reports, 1903, pp. 118-127. ""Dubuque County v. Dubuque and Pacific Railroad Company," 4 Greene, 1 (1853). ""The State of Iowa ex. rel. v. The County of Wapello," IS Iowa, S88 (1862). ""Hanson v. Vernon" «7 Iowa, 28 (1869). ""Sewart v. The Supervisors of Polk County." SO Iowa, 9 (1870) ••"Hanson v. Vernon," 27 Iowa, 28. [69] ( I i 70 BULLETIN OF THE UNIVERSITY OF WISCONSIN 1 qLT^^*^^^' ^^^^^^' ^""^ ^^^""^ "^^^ approximately $6,000,000 in We have briefly cited the experience of Michigan, Wisconsin and Iowa, together with the holdings in the three contemporan' eous decisions of their respective highest courts, as further evi- dence of the attitude of mind of the period toward municipal debt. In no one of these states were constitutional prohibitions inserted, but public sentiment against the abuses which had be- come so flagrant was given expression to through the ruling of the courts. Prom what has been given the conclusion seems war- ranted that the wave of public indignation over the abuses of loca debt was justified. The abuses can be traced to an un- healthy industrial and commercial expansion, to the practice of deferring tax burdens to the future, and to the waste and corrup- tion which It permitted. Many of the burdens which ultimately lell-and in some cases with such force as to almost depopulate certain distncts-were so far discounted through the perspective of increased land values and growing cities, that they appeared to be positive blessings. But the time of reckoning came with the crisis period and the results were the restrictions about which we write. Out of this general opposition to subsidies to private capital or coincident with it, arose the companion provisions which limit the total debt to a percentage of the assessed value of property Formerly, the control of local debt had been left to the legislature under some such general constitutional provision as the follow- ing: The general assembly shall provide for the organization of c ties, incorporated villages, etc., and shall restrict their powers of borrowing money, contracting debt, etc., so that they shaU not be abused. We have seen how New York imposed a ten per cent, hmit upon cities and counties in 1884, and how Wisconsin im- Posedafive per cent, limit in 1873. Georgia imposed a seven per "The county debt which was reported, equalled ^ The city and town debt reported, equalled .!^ ^ i i ! ! i ! ! ! ! ! .' ." ! ! ! ' ' 2 690 «* Total ?3.932,02T • . «. !«., Messages and Proclamations, vol. 2, pp. 301-302. [70] SECRIST-RESTRICTIONS ON PUBLIC INDEBTEDNESS 71 cent limit in 1877, Pennsylvania a seven per cent, limit in 1873, Maine a five per cent, limit in 1878, Indiana a two per cent, limit in 1881, West Virginia a five cent, limit in 1872, etc. Re- strictions of one type or the other have limited the fields of mu- nicipal activity, and slowly, with the rise of independent private capital and the increase in the stability of industry, municipali- ties have practically ceased to guarantee the success of private endeavor. Their expenditure and the causes of incurring debt have been extended in other directions, and of these something will be said later. To summarize : The period 1865 to 1880 was above all a period of industrial expansion. Railroads were just coming to be looked upon as the great revolutionary method of transportation. Dif- ferent sections of the country were actively competing with each other in holding out incentives for railroad expansion.^^" Private capital sometimes needed a stimulus to engage in undertakings, the returns from which would be realized far in the future, if at all.'^ The necessity for aid was often unreal but was not severely questioned until the time of the financial pressure of the early seventies. That the loss of a public guarantee tended to check railroad expansion there can be no reasonable doubt,** but that adequate transportation would not have been furnished .without wholesale abuse of public credit is likewise beyond doubt. More- over, this was a period of rapid city growth, and many new uses for borrowed funds were being developed, uses about which agri- cultural communities knew scarcely nothing. Municipal corrup- tion«=^ was fiourishing under the spoils system, and one is not sur- prised to find that the majority of debt outstanding in 1880, is- sued between 1860 and 1880, belonged to the larger cities. The following diagrams show graphically the debt for state and minor "The percentage increase of railroad mileage of the United States from iS7a_i880 was 76.28; that of 1880-1890, 75.35. «VLe the arguments in the Ohio Constitutional convention of 1873 in favor of removing the restrictions on municipalities lending their credit. Debates, vol 2 Dt 3. pp. 2519, 2608. • ^ ^ . « The percentage increase of railroad mileage for the eighteen states impos- ing constitutional restrictions on municipaltes lending their credit, etc., be- tween 1870 and 1880 was 70.40 ; for 18S0 to 1890. 66.50. The Percentage in- crease for the same periods for all the states were, respectively, <6.28 and 75.35. . "Adams. H. C, Public Debts, pt. Ill, chap. IV. 171] I 72 BULLETIN OF THE UNIVERSITY OF WISCONSIN civil divisions outstanding in 1880, issued between 1860 and 1880 as compared with the debt of cities with population over 7,500 for the same conditions. Administrative machinery was undeveloped, the legislatures had failed to check municipal extravagance, and the causes of debt were, in part, at least, of such a character that home rule was im- practicable. Kailroads restricted to one town or a few towns were almost worthless; even those limited to counties were com- mercially inadequate unless their terminals were in recognized markets. Grants of aid by one civil division were of little value unless followed by like grants from contiguous units, and so the evil, as it were by a process of accumulation and neccessity spread throughout the states. State control was the only pos' sible way to cope with the difficulties, and constitutional prohibi- tion seemed the only valid and conclusive remedy to administer That the restrictions should extend beyond subsidies is patent In whatever way debt was incurred it was deU, and it was this from which escape was sought. 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In this chapter a brief resume of the restric- tions themselves will be given, together with the principles in- yolved in them and the significant changes in the constitutions in the several states. Prohibitions against municipalities subsidizing private capital are the rule in the United States. There are some exceptions, however, of which Wisconsin and Iowa are examples. The more modern constitutions such as those of the western states, like Utah, 1895 ; Wyoming, 1899 ; Washington, 1889 ; South Dakota, 1889 ; North Dakota, 1889 ; Oklahoma, 1907, and the constitutions of New Mexico and Arizona all prohibit such subsidies. But the restrictions came later for the municipalities than for the states. The constitution of California restricted the state in this regard in 1849, but the municipalities, not until 1879. Florida imposed the state restrictions in 1865 ; the municipal in 1875 ; Illinois, the former, in 1845 ; the latter, in 1879 ; Maryland, the former, in 1851, the latter, in 1867, etc. Some of the states although free to lend their own credit, nevertheless, limited the powers of the local divisions in this respect during the 70 's. Connecticut and New Hampshire are cases in point.^ Other debt restrictions can in the main be summarized as fol- lows : 1. The amount of debt is generally limited to a definite percentage of the assessed value of the property within the dis- trict in question. 2. A maximum period is fixed beyond which a debt cannot run. 3. A referendum is generally required for all TTor details with respect to all the states, see Appendices 1 and 11, [74] bonded debt. 4. A direct tax is required to be levied at the time the bonded debt is incurred, and at each succeeding year there- after to pay the interest as it accrues and the principal at ma- turity. 5. Money borrowed for certain purposes is not counted in computing the constitutional debt. 6. A definite extended limit is allowed for certain classes of debt. Let us review these general headings in the order named. The ratio of debt to assessed value of property varies consid- erably among the different states, and frequently within the same state for different classes of municipal corporations. Indiana'^ imposed a two per cent, limit in 1881, while Virginia^ imposed an eighteen per cent, limit in 1902 for cities and towns. Mon- tana* has a three per cent, limit for cities and towns, and a five per cent, limit for counties; while Utah^ has a four per cent, limit for cities and towns, and a two per cent, limit for counties. There is no general uniformity among the constitutions of the several states, but a percentage between five and ten is most com- mon and may be considered to be the norm. The ratio most gen- erally applies to all property assessed for state and county pur- poses, and the value used is, in most instances, that of the preced- ing year. In a few cases, however, the assessment is based on real property alone. New York and Virginia are examples of this latter practice. In California^ and Idaho,^ the debt is not to exceed in any one year the income and revenue provided for that year, without the consent of two-thirds of the qualified electors; while in Utah« and Wyoming,^ it is not to exceed the taxes for the current year without a popular vote. In general, it may be said, the debt allowed is based upon the assessment of property. A maximum period is usually specified for which debt may run, and this varies for bonded debt from twenty to seventy-five years. California fixed the period in 1879 at twenty years ; this was extended to forty years by constitutional amendment in 1900, * Amendment to Constitution of ISSl. art. xii, sec. i. » Constitution, 1902. sec. 127. * Constitution 1S89, art. xiii, sections 5 and 6. ^Constitution, 1895, art. xlv, sections 3 and 4. 'Constitution, 1879. art. xi, sec. IS. ' Constitution, 1S89, art. viii, sec. 3. * Constitution, 1895, art. xiv, sec. 3. * Constitution, 1S89, art. xvi, sec. 4. [75] I 7« BULLETIN OF THE UNIVERSITY OF WISCONSIN and again extended, for a few cities, to 75 years in 1906.^^ Oklahoma^^ fixes the period at twenty-five years, Pennsylvania " at thirty years. West Virginia,^^ at thirty-four years, Kek- tueky,^^ at forty years, and New Mexico,^^ at fifty years. South Carolina and South Dakota require that debt shall be paid when due'' without specifying the period. These provisions apply to all bonded debt irrespective of the purposes of the loans or the uses to which the proceeds are put. The almost universal rule is to require a referendum vote for bans involving long time indebtedness. The vote necessary to legalize a loan ranges from a majority to two-thirds of the quali- fied electors, and in at least four states— Colorado, ^« Montana " New Mexico,^« and Utah--is based upon a property qualifica- tion. The levy of a direct annual tax at the time the loans are made and yearly thereafter to pay the interest as it accrues and the principal at maturity is mandatory in a great many of the con- stitutional restrictions. These provisions apply to all public cor- porations, and to all forms of debt outside of those loans which are of a temporary character, or those paid serially. Probably the most significant thing in the constitutional limita- tions and the one that shows a distinctly modern movement, is the omission of certain types of loans from the debt limit, or the ex- tension of the constitutional limit for the debt incurred in the acquisition of public utilities. Some of the states adhere to the absolutely nonelastic restrictions. Wisconsin and Illinois are ex- amples. New York, Virginia, and Oklahoma are examples of those which have adopted a more elastic base. Let us note in particular some of the more recent changes. Alabama, in her constitution of 1901, allows 3 per cent, of the ^'Amendment, 1906, to the Constitution of 1879, art. xi, sec. 18. " Constitution, 1907, art. x, sec. 26. " Constitution, 1S73, art. ix. sec. 10. ^' Constitution, 1872, art. vlii, sec. 8. ^* Constitution, 1890, sec. 159. " Constitution, 1911, art, ix. sec. 12. ** Constitution, 1876, art. xi, sections 6 and 7. ^''Constitution, 1^9, art. xiii, sec. 6. " Constitution, 1911, art. ix, sec. 10. " Constitution, 1893, art. xiv, sec. 3. - [76] SECPwIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 77 assessed value of property over and above the ordinary limit for ''construction or purchase of waterworks, gas or electric lighting plants, or sewerage, or for the improvements of streets."^** Neither the original five per cent, nor the three per cent, addi- tional, is in any way effected by any ** temporary loan to be paid within one year, made in the anticipation of the collection of taxes, not exceeding one-fourth of the annual revenues"-^ for any city or town. All cities having a population of 6,000 or over are allowed to become indebted 7 per cent, of their assessed value ; and debt for the following purposes is not to be counted in com- puting this percentage : ' ' temporary loans to be paid within one year, . . . and not exceeding one-fourth of the general revenues, bonds or other obligations already issued or which may be hereafter issued for the purpose of acquiring, providing, or constructing school houses, waterworks, ' '^'^ etc. Special assess- ment loans are not counted in making up this total, and full pow- ers of funding and refunding are given in addition. Arizona, in her new constitution, allows cities and towns five per cent, ad- ditional debt over the regular amount for supplying water, sew- erage, or lighting plants to be owned by the city or town in ques- tion.23 Montana allows additional debt over the ordinary limit for providing water, but does not name the amount. In order to take advantage of the provision, however, a city must own the utilities, devote the surplus revenues to the payment of debt, and receive sanction ' of the taxpayers.^* Other states adopting essentially these conditions are New Mexico,-'^ New York,2« North Dakota,^^ Oklahoma,^^ South Dakota,-^ Utah,^'* Virginia,3i Washington,^^ and Wyoming.^^* New York, Okla- mimi ^^Constitution, 1901, sec. 225. « Ihid. « Ibid. a Constitution, 1911, art. ix, sec. 8. ^Constitution, 1889, art. xiii, sec. 6. » Constitution, 1911, art. ix, sec. 13. ^Constitution, 189^, as amended, art. viii, sec. 10. "Constitution, 1889, sec. 183. ^ Constitution, 1907, art. x, sec. 27. » Constitution, 1889, art. xiii, sec. 4. *'* Constitution, 1895, art. xiv, sec. 4. '* Constitution, 1902, sec 127. » Constitution, 1889, art. viii, sec. 6. '^ Constitution, 1889, art. xvi, sec 5. [77] 7.1 1 78 BULLETIN OF THE UNIVERSITY OF WISCONSIN homa, and Virginia deserve particular attention. The Oklahoma constitution reads as follows: **Any incorpo- rated city or town in this state may, by a majority of the qualified tax paying voters of such city or town, voting at an election to be held for that purpose, be allowed to become indebted in a larger amount than that specified in section 26 for the purpose of pur- chasing or constructing public utilities,^'' or for repairing the same, to be owned exclusively by such city or town . . . ''»» In addition a direct tax is required sufficient to pay the interest as it becomes due and the principal within twenty-five years. The question in the carrying out of this provision turns upon what are ''public utilities" within the meaning of the constitu- tion. This expression has come to have a well defined popular meaning, but this will not suffice in cases concerning the legal application of this constitutional clause. The Oklahoma Su- preme Court has already interpreted these words in several cases. In State v. Miller?^ sewers are held to be public utilities within the meaning of the constitution. The same court in State v, Barnes,'' quotes approvingly Valley City Salt Co. v. Brown,^' where public utility is made synonymous with public use, and maintains that public use involves the idea of public benefit or advantage as well as use by the public. This line of reasoning led the court to hold that a town hall, since it is constructed by the city, used by it exclusively and for public purposes, is a pub- he utility within the meaning of the term in the constitution. The court put the case on the basis of necessity and used the terms ''public uses" and "public utilities" as identical.^« In Barnes v, HiW' the court reviewed the two above cases and re- stated Its position that "public utility" meant "public use," and held that a park owned exclusively by the city in question was a public utility. These decisions have so distorted the expression "public u tility," and so misinterpreted the logical intent of the ** Italics mine. * Constitution, 1907, art. x, sec. 27. " 96 Pac. Rep. 747, (1908). "57 Pac. Rep. 997 (1908). * 7 Went Virginia, 191. .o™i'i,^;^rnrt"errdasr'''"*" *''•• "*" "^-^ *° "^ '-'"" »- "<> *^199 Pacific, 927 (1909). [78] SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 79 constitutional provision, that any purpose for which taxation would be valid can be supported by this elastic clause. In reality, therefore, no restriction at all is imposed except that of the wishes of the majority of the taxpayers. A more rational but in some respects an indefensible change has been made in the constitution of New York in order to suit the needs of her growing metropolis." New York imposes no constitutional restriction upon the indebtedness of towns and vil- lages. The percentage limitation for cities and counties is ten per cent. This limit, under the amendment of 1884, was not to apply to certificates of indebtedness or to revenue bonds issued in anticipation of the collection of taxes for amounts actually con- tained or to be contained in the taxes for the year when they were made payable. Nor was this section to be construed to prevent the issue of bonds for the supply of water, but the terms of the latter bonds were not to exceed twenty years and a sinking fund for their interest and principal was to be accumulated.*^ Later, by amendments, certificates of indebtedness not retired in ^Ye years, and bonds issued for water purposes, except those of New York city, after the first day of January, 1904," and any city of the second class after January first, 1908,** and for any city of the third class after January first, 1910, were to be counted as debt. By 1907, New York city had almost reached its debt limit, and enormous expenditure was necessary. In order to provide for the expanding needs of the city, it was necessary to change the debt limit. This was accomplished in 1909, by an amendment following a detailed report*** upon the debt of the city made in 1908. This report advised "that debts heretofore or hereafter incurred by said city (New York) for the acquisition of property or for the construction of railroads, docks, or other improvements which shall be owned by the said city, shall not be so included if *^ For further discussion of this change, see pp. 81-82. ** Constitution, 1894, art. viii, sec. 10. ** Amendment, 1905, ** Amendment, 1907. *^ Report of Advisory Commission on Taxation and Finances, "The City Debt in its Relation to the Constitutional Limit of Indebtedness, Containing a Pro- posed Amendment to Section 10 of Article VIII of the State Constitution." 1908. Lawson Purdy, Secretary. [79] 80 BULLETIN OF TflE UNIVERSITY OP WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 81 fi it shall appear by the ascertainment and determination herein- after provided, that the said city is receiving current net income from such property or improvements in excess of the interest pay- able by said city upon the total debt incurred for the acquisition of such property or the making of such improvement. "*« The amendment of 1909 followed very closely the recommendations above, but defined more exactly the circumstances under which the deductions should be made, to-wit : ' ' f or a public improve- ment owned or to be owned by the city which yields to the city current net revenue, after making any necessary allowances for repairs and maintenance for which the city is liable, in excess of the interest on said debt and of the annual installments necessary for its amortization, may be excluded in ascertaining the power of said city to become otherwise indebted, provided, that a sink- ing fund for its amortization shall have been established and maintained and that the indebtedness shall not be so excluded during any period of time when the revenue aforesaid shall not be sufficient to equal the said interest and amortization install- ments, and except further that any indebtedness heretofore in- curred by the city of New York for any rapid transit or dock in- vestments may be so excluded proportionally to the extent to which the current net revenue received by said city therefrom shall meet the interest and amortization installments therefor, provided that any increase in the debt incurring power of the city of New York which shall result from the exclusion of debts heretofore incurred shall be available only for the acquisition or construction of properties to be used for rapid transit or dock purposes/ '^^ The legislature was given power to prescribe the methods and terms under which debt for the above purposes could be excluded, and it has since put the power of determina- tion into the hands of the Appellate division of the Supreme Court, upon the application of the Board of Estimate and Appor- tionment, and after a hearing has been accorded to the parties interested.*® *» Ibid., p. 97. *' Constitution, 189^, as amended 1909, art. viii sec 10 l^w'^V.^Tl 1252''"' '''"'' ^''""^'•^'^^ ^-^^ ^-««^«' ^^ronicle. May 7, [80] This amendment marks a distinct advance over the provisions of the constitutions noted above, which omit loans for specified purposes from the debt limit without at the same time providing that they shall bear net revenue. This provision together with a similar provision in the constitution of Virginia, indeed, marks a decided advance over all the constitutions of an early period and over most of those which have been framed in recent years. In most respects the provisions on local debt in the constitu- tion of Virginia are essentially similar to those in the New York constitution quoted above. The former provide that the exemp- tion from the debt limit shall apply only so long as the municipal plants for supplying water, etc. succeed in producing sufficient revenue to pay the cost of operation and administration, * * includ- ing intere^ on bonds issued therefore and the cost of insurance against loss by injury to persons or property and an annual amount to be covered into a sinking fund sufficient to pay, at or before maturity, all bonds issued on account of said undertak- ing,'' and all ''bonds outstanding shall be included in deter- mining the limitation of the power to incur indebtedness unless the principal and interest thereof be made payable exclusively from the receipts of the undertaking."*® This provision seems to be all that could be asked for in guaranteeing that the amount of debt contracted by local divisions shall not be unduly burden- some, and at the same time allowing expansion of the debt limit for purposes which are in truth revenue bearing. So far, so good. But in these provisions as well as those in New York, the mistake is made of giving the creditor absolute protection against any contingency by making the loan, in case the properties are not revenue bearing, a burden upon the tax paying public, and at the same time extending to the consumer and not to the tax payer the benefit which this guarantee brings. The debt contracted for a particular undertaking is paid for by the consumer only so long as the venture in question is successful. When it fails, not the consumer but the taxpayer bears the burden.*® Is it possible that this arrangement serves as a partial explanation of the unwilling- ^ Constitution of Tirginia, 1902, sec. 127b. '*Vide, chapter 306, Acts of ISoth Legislature of New Jersey (1911) where this is allowed respecting debt for sewer purposes. [81] 82 BULLETIN OF THE UNIVERSITY OF WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 83 ness of cities to undertake municipal enterprise! If the debt contracted for revenue bearing properties can legitimately be considered as outside the debt limit, then the security offered for the loan necessary to acquire them should be their earning power or the properties themselves and nothing else. One class — the taxpayer — should not be required to pay for the benefits which failure to earn net revenue resulting from excessively low charges or from lax administration brings to another class — ^the consumer. The requirement that debt shall be considered as outside the legal limit when the properties which it represents are revenue bear- ing is not equivalent to the requirement that loans for such pur- poses shaU be made upon the security of the properties them- selves or their earnings, and omitting the additional provision that in case of failure to earn net revenue the creditor may rely for the satisfaction of his claim upon the general credit of the taxing body. A readjustment of the relation of creditor and debtor, of consumer and taxpayer is necessary in those cases where such liberties in contracting debt are allowed. A sugges- tion of the needed change is made in Chapter 4 following. Ordinarily the power to borrow extends to all grades of mu- nicipal corporations, without classification as to function, size or needs for borrowed funds. Wisconsin is an example of a state where this is true. Five per cent, is allowed * * any county, city, town, village, school district or other municipal corporation." The same is true in Illinois, and as a result, we have in the city of Chicago, occupying almost identically the same territory, the city Corporation, Cook County, School District, Park Commis- sion and Sanitary districts all with independent borrowing power — in each case the debt allowed not to exceed five per cent, of the assessed value of the property within the geographical district in question.'*^ There are two state constitutions which forbid undue accumulation of debt by over-lapping political jurisdictions. Nebraska prohibits*" any county with all its subdivisions from making a grant in aid of any railroad company in excess of ten per cent, of its assessed value, unless it receives a two-thirds popu- lar vote, in which case it may add an additional five per cent. •* Btati8tic8 of Cities with Population over S0,000, 1908, pp. 22, 26. •• Constitution, 1S75, art. xil, sec. 2. [82] South Carolina prohibits any debt in excess of fifteen per cent, of the assessed value of property for all over-lapping municipal cor- porations.*^^ These are the only two states where the legislatures are prevented from indefinitely increasing debt by the creation of independent corporations. One other characteristic of a limited number of constitutions deserves mention. It is the requirement that the validity of mu- nicipal bonds be certified by some central board or officer of the government. North Dakota's^* constitution requires local bonds to be indorsed by a certificate, signed by the county auditor or other officer authorized by law, stating that the bonds are issued pursuant to law and are within the legal debt limit. Oklahoma's constitution^^ carries a like provision as do a few of the other states. We shall speak of these in some detail a little farther on. These, in the main, are the general principles involved in the constitutional restriction on municipal debt. The prohibitions against lending credit, etc., first written into constitutions be- cause of unwarranted and excessive aid to private capital, were followed by others which limited the total debt allowed to a cer- tain percentage of the assessed value of property, and these are being in turn tempered and conditioned by a more or less arbi- trary elimination of certain forms of debt from the constitutional limit. The changes being made are in many respects beyond criticism, but fundamentally the limitations themselves are open to serious objection, and to the consideration of these we shall now turn our attention. •^ Constitution, 1895, art. x, sec. 5. " Constitution, 1889, sec. 187. " Constitution, 1907, art. x, sec, 29. [83] 84 BULLETIN OF THE UNIVERSITY OF WISCONSIN CHAPTER 3 A CRITICISIM OF THE POLICY OF RESTRICTING MU- NICIPAL DEBT BY THE PRESENT CONSTITU- TIONAL METHOD The term municipality or municipal corporation has been used in the preceding chapters to describe all of those minor political units which owe their existence to legislative enactment, and re- ceive their powers direct from the legislatures. But this use lacks precision in constitutional or legislative provisions which outline financial policy and powers, because it covers too much and essentially different units. A school district, a county, a town or city, although similar as administrative areas, and al- though created primarily for governmental purposes, are so dif * ferent in their functions that they should be given different fi- nancial powers and privileges. Any criticism of the present con- stitutional control of debt and the rationale of the restrictions themselves must be prefaced by a brief analysis of the functions of municipalities. Municipal corporations are in essence of a two-fold character.* From one point of view they are administrative units, in so far as they are the agents of the state ; from another point of view they are business units, in so far as they are created to provide local necessities and conveniences. The former characteristic is illustrated by the county units which are created primarily to aid the state in administering justice, in promoting education, etc. They have a direct and almost exclusive reference to the general policy of the state and serve as agents through which it may be * McQuillin, Eugene, A Treatise on the Law of Municipal Corporations. (Chicago) 1911, vol. 1, pp. 203-204; Pond, O. L., Mtinicipal Control of Public Utilities, p. 21 ; Deming, Horace, The Government of American Cities, 1909, pp. 126-128; Bryce, Jas., American Commontcealth (New and Revised Edition, 1911) Vol. 1, pp. 634-635; American and English Encyclopedia of Law, (2nd edition) p. 1131. [84] SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 85 carried out. The latter characteristic is illustrated in street paving, drain and sewer construction, in sewage disposal and the general business functions of cities. Thus while a city is an arm of the state in the administration of law, for instance, it is, at the same time, and is becoming more and more so, a business unit through which its stockholders^ — the public — are served. From this point of view, a city should be regarded as subject to many of the same laws of finance as a private corporation. The same standards of service must be furnished, and ceteris paribus at the same cost to the consumers.^ Capital must be supplied and replaced when worn out, extensions and improvement made, depreciation provided for and properties kept up as producing units. What cities need from the state is power to carry on local government ; what they should do is in large measure to be deter- mined by those alone concerned acting as a corporate unit. The responsibilities of effecting a desired end should rest with the ap- propriate officials, and the execution of the policies determined upon be according to approved business and economic principles. The accepted functions of political units constantly change, and the regulations governing their activity must be formulated in the light of this fact. A hard and fast, an a priori philosophy of the relations of the state to the minor units, as well as the rela- tions of the latter to commercial and industrial enterprises, is bound to be archaic almost as soon as it is formulated. State con- trol over local finance is necessary — ^the patrimony of both are in a large measure identical, — ^but to be effective it must be dynamic and elastic, and these qualities our present constitutional restric- tions do not possess.* This subject is treated in Chapter 4 fol- lowing. What we are now primarily concerned with is not con- stitutional restraint versus some other type of control, but the principles involved in these restrictions. * Bryce calls them "stockholders." American Commonwealth, (New and Re- vised Edition) 1911, vol. 1, pp. 634-635. * The cost principle which determines the charge made depends, among other things, upon the desirability of general consumption, the cost of the article or service in question in comparison with the cost of some other commodity or ser- vice which the city might provide, etc. * Ashley, Percy, "The Financial Control of Local Authorities." The Eco- nomic Journal (London), vol. 12, p. 187. [85] II % M HI' w BULLETIN OF THE UNIVERSITY OF WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 87 lif liiil 11 There are no valid objections to the constitutional prohibitions, now almost universal among the states, against municipalities lending their credit to and subscribing to the stock of private cor- porations. The era of timidity and scarcity of private capital is past, and subsides in the form of public aid are no longer neces- sary to attract and promote legitimate private enterprise. The market for private securities, through the perfection of ex- changes, is now so vast and the supply of capital so responsive to the demand that requisite funds are readily collected for enter- prises of distinct benefit to industrial growth or supremacy. Such restrictions being essentially a matter of policy, and requir- ing no technical nor extended definition nor involving questions of technique and administrative excellence may conveniently be placed in the fundamental law as settled for an indefinite time. Conditions calling for a reversal of public opinion will not fre- quently arise, and if they do, the change demanded may likewise be incorporated in the constitutions. The other restrictions re- quire extended and detailed treatment. Municipal credit ultimately rests upon the taxing power. Re- siources of municipalities, except for the few properties which are revenue bearing, lie in the value of private property subject to taxation. Taxes become a first lien upon this value, and it is to this that the creditor looks for the satisfaction of his claims. But values for tax purposes, in the United States, are assessed values — a certain per cent, of the market value — and, to guard against undue taxation, constitution makers have expressed the amount of debt permissible to a municipality as a cer- tain per cent, of this assessed value. The determining considera- tion in fixing the debt limit has been the amount of debt' and not the need or desirability of a policy of deficit financiering. But these two aspects of this question, although confused even today in our latest constitutions, are nevertheless quite dissimilar and should be discussed separately. The general property tax is distinctly American, and was com- mon among the states at an early date. This tax, although pos- 1 III J 'Vide, "Doon Townsbip v. Cummins," 1^2 United States S66, S72; "Herman v. City of Oconto," 86 N. Western. Rep. 631, 687 (Wisconsin) 1901; Foote, A. R., Constitutional Municipal Government, p, 83. [86] sessed of some points of value when properties are simple and tangible, is now discredited and generally considered a failure. Its weaknesses as a system of taxation it is unnecessary to con- sider, but the difficulties involved in its assessments are pertinent to our inquiry. These, when approached from the point of view of public borrowing, present new and interesting problems. Constitutional restrictions based upon the assessed value of property are imposed to prevent public credit being abused. But if property is under-assessed, then the use of credit is prevented to the degree of the under-assessment even when a policy of deficit financiering is justified, and also when the debt limit in reality has not been reached when it is measured in terms of actual prop- erty value. Limitations on the use of debt must serve among other purposes, (1) to prevent undue or extortionate taxation, and (2) to express the relative proportions in which tax burdens should be divided between the present and the future tax payers. The total burden which taxpayers must bear will approximately be equal from one tax period to another, but the proportions in which it is divided as between current revenues and debt obliga- tions, must of necessity vary with each change of policy adopted and each new project undertaken. To make the borrowing power a certain percentage of the assessed value of property answers only half of the problem, and this part in an unscientific manner. Borrowing is* a necessary financial device for public corporations to employ. It is liable to abuse, however, and needs to be regu- lated, but regulation must not be made dependent upon the will- ingness or ability of local assessors to correctly or uniformly evaluate property. The difficulties involved in such a scheme of regulation, in so far as the assessment of property— the measure of permissible debt— is concerned, are excellently illustrated in the experience of cities and local divisions in Wisconsin and other states. The constitution of Wisconsin gives counties the privilege to borrow to the extent of five per cent, of their assessed value, ac- cording to the last preceding assessment for state and county pur- poses. Supposing this limit to be reasonable, let us see to what extent its effectiveness is negatived by the assessment of the gen- eral property tax of the state. The average ratio of assessed to [87] ^i 8S BULLETIN OF THE UNIVERSITY OF WISCONSIN true value of property in Richland county, for the ^ve years end- ing 1909,-1905 to 1909— was 48.36 per cent. The similar ratios for the same period for the adjoining counties, viz., Vernon, Crawford, Sauk, Iowa, and Grant were, respectively, 55.18 per cent., 51.34 per cent., 53.79 per cent., 51.00 per cent., and 65.14 per cent. ; i. e., the borrowing power computed in terms of bor- rowing capacity— true value— was from 3 per cent, to 17 per cent, higher for the last named counties than for Richland. The variations of the ratios of assessed to true value for all the coun- ties of the state, 1905 to 1909, inclusive, are indicated by the fol- lowing frequency table.* Ratio of assessed to true value. Number of counties. ( per cent. ) 2 30.00 to 39.99 17 40.00 to 49.99 32 50.00 to 59.99 14 60.00 to 69.99 6 70.00 to 79.99 Interpreted in terms of power to borrow, these results give the counties with an assessed value 70.00 to 79.99 per cent, of their true value, practically double the borrowing power of those with assessed value at 40.00 to 49.99 per cent. The question is not now whether counties should borrow 5 per cent, or nothing at all; it is whether assessed value of property is a satisfactory base upon which to measure borrowing capacity. The same sort of an analysis may be extended to cities in Wis- cousin. The constitution of the state gives to the cities a 5 per cent, borrowing power and bases it upon the assessed value of property within their limits. The average ratio of assessed to true value of the property in Washburn city, Bayfield county, for the ^ye year period, 1905 to 1909, inclusive, was 97.72 per cent. The corresponding percentage for Beaver Dam city. Dodge county, was 44.72 per cent. The chief cities in Dodge county, for the same period, show the following percentages of assessed to true value of property : Beaver Dam, 44.72 ; Waupun, 68.21 ; MayviUe, 44.62; Horicon, 63.16; Juneau, 59.22 and Watertown (part),' • The figures were compiled from the records of the Wisconsin State Tax Com- mission, and arrived at on the basis of bona fide sales. [88] SECRIST-RESTRICTIONS ON PUBLIC INDEBTEDNESS 89 50 39.^ But these figures and those in the Appendix for Wiscon- sin are probably more nearly uniform, and nearer to true value than are the corresponding figures in most other states, yet they forcibly prove that assessed value of property is an imperfect base upon which to compute borrowing capacity. In as much as this measure is common among the states let us still extend our analysis to cities outside of Wisconsin. The fol- lowing table shows the ratios of assessed to true value for the 158 cities of the United States with population over 30,000 in 1908. TABLE P TABLE SHOWING THE RATIOS OF ASSESSED TO TRUE VALUE OP PROPERTY FOR CIllES OF UNITED STATES WITH POPULATION OVER 30,000, 1908. (OOO's omitted.) Ratio of assessed to true value. Per cent 0-19.99. 20-24.99. 25-29.99. 30-34.99. 40—44.99. 45-49.99. 50-54.99. 55—59.99. 60-64.99. 65—69.99. 70—74.99. 75—79.99. 80—84.99. 85-89.99. 90-94.99. 95-99.99. 100 Total. Minimum. Maximum. Over 300 No. 100-300 No. 1 3 1 16 15% 100<^ 6 1 2 1 4 1 50-100 No. 2 2 2 2 30 15% 100% 3 4 2 4 4 1 1 17 30-50 No. 2 1 1 8 4 7 9 3 3 3 1 2 17 47 20% 100% Co 15% 100% Total No. 4 4 2 1 3 6 2 15 4 19 15 7 10 12 2 3 47 158 Distribu- tion. Per Cent 2.53 2.53 1.27 0.63 \M 3.80 1.27 9.50 2.53 12.02 9.50 4.43 6.33 7.59 1.27 1.90 1.27 29.73 100.00 The table above indicates that the same variations in the as- sessment are found in the larger cities — cities where the use of borrowed funds is absolutely necessary and where there is con- stant effort to expand the limit. Sometimes resort is had to con- stitutional amendment. The recent experience of New York City is a case in point. Oftentimes the courts are appealed to hold 'For further data on Wisconsin see Appendix iv. [89] fri ! 60 BULLETIN OF THE UNIVERSITY OB^ WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 91 Ifflff) 111 that this or that is outside the legal limit.® Even out and out evasion is not considered bad taste when circumstances seem to warrant and when the political ring is in command. Chicago furnishes an excellent example of the effect of the assessment of property upon the amount of debt that may be contracted. The legal debt limit is 5 per cent, of the assessed value of property. But property is assessed at only about 15 per cent, of its true value, and notwithstanding this city has half of the population of New York, she has but "one-eleventh of the gross indebtedness and about one-fifteenth of its assessed value . . . "* The smallness of the debt of the city of Chicago is directly attribu- table to the '^extremely low assessment. * '^^ Under-assessment and variation are common to all tax jurisdic- tions." The iniquities of the general property tax are extended to the domain of public borrowing and discriminations between localities, similiarly situated, with similar needs and with equal ability to satisfy them, assured. Control and regulation are con- ditioned upon the success or failure of our local tax officials in the assessment of a tax no longer suited to our complex industrial life and our varied classes of properties. Such a scheme of control is not only unscientific but is absolutely indefensible. It permits an increase in the amount of debt and a decrease in the proportion of taxes by the simple device of increasing the assessed value and lowering the tax rate. Such a thing is more than speculation. It ■ Vide, note 21 on page 07 ; also Fourth Annual Message of John E. Reyburn, Mayor of Philadelphia, pp. viii-x. » Wilcox, D. F., Schriften des Verein fur Socialpolitik, vol. 123, p. 176. "Wilcox, D. F., The American City, p. 393. "The ratios of assessed to true value for 472 cities, towns, villages and school districts, chosen at random from all parts of the United States, are as follows : Commercial and Financial Chronicle, State and City Supplement, 1909. Ratio of a.";«^ j«"fj therefore are secured by the general taxing power rather than by the properties themselves or by their earning capacity. Much has been said concerning the weaknesses and mperfec- tions of the constitutional restrictions on local debt. »«* they are by no means without some virtues. They were >n»PO^ *»^ the most part in a time of undue speculation and abuse of pubUc credit, and at least had the salutary effect of protecting many municipalities from bankruptcy. But the causes which produced them in the main no longer exist, and there are only the slightest chances of their recurring. Some of the causes of abuse stiU re- main, such as the corruption that attends municipal administra- tion, but these have endured in spite of the restrictions. Munici- pal debt has grown under the restrictions and will continue to erow City life and development are dependent upon its utiliza- tion, and its legitimacy as a companion to direct taxation is ac- knowledged by all. Grants of aid to private capital are rapidly being supplanted by expenditures involving competition with private capital in furnishing service. The question then is how can borrowing be legitimately utilized and expenditure of public funds regulated so as to guarantee a maximum of service tor a given outlay. The control of public finance through uniform ac- counts is in process of realization, but the control of public debt in harmony with present needs and standards of efaciency has hardly been brought to notice. It is the aim of the next chapter to state the chief problems in connection with local debt and to suggest some lines along which adequate control may be effected. F^ 1"30:j3 104 BULLETIN OF THE UNIVERSITY OF WISCONSIN SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 105 CHAPTER 4 THE ECONOMIC PROBLEMS IN MUNICIPAL DEBT AND A SUGGESTION FOR THEIR SOLUTION Most of the problems in municipal debt relate to the following facts and conditions. (1) Borrowing for most cities and for some other municipal corporations is a necessity resulting from the functions which they perform. (2) Public credit is often employed when taxation would be more legitimate. (3) BorroA^ing, although usually indulged in too extensively when not carefully regulated, when used with discrimination becomes a ready and legitimate means of securing the immediate use of funds. (4) To borrow successfully implies contact with money markets and familiarity with market conditions, as well as a keen sense of the rights and interests of the borrowing public Connected with these general considerations are most of the problems dealt with in this chapter. Many minor political units and practically all cities have im- portant functions of an administrative character as well as of a business nature which involve the receipt and expenditure of large amounts of public money. An adequate performance of these functions involves, in most cases, the use of borrowed funds These are ordinarily supplied by the investing public, acting through the medium of banks and trust companies. Local units therefore, through their elected officers, bid with private firms and corporations for the command of capital. One problem in public debt, and an important one, is the equalization of bargain- mg power between local officials, representing the tax payers and financial mterests-of guarding against any betrayal of the pub- lic and still protecting the interests of the creditors The methods of protecting these interests are quite dissimilar. Municipalities are interested in selling their bonds or other evi- dences of indebtedness at the lowest possible interest rates, in [104] making their terms of the longest duration possible, in order to defer taxation, and in borrowing as much as allowable in order to keep down the tax rate. The creditors are interested in paying the lowest possible price for bonds, in securing high interest rates, in the legality of the issues,^ in the forms which the instruments take, in the time they are to run, in the security offered and in their general negotiability, etc. Safeguarding the interests of both parties to these financial transactions involves both political and economic considerations. The political side is concerned be- cause the public is acting through its elected officials, who in most instances hold their offices for limited tenure only, and on condi- tion that they act in accord with the demands of a political con- stituency. The rights of the public must in a measure be guar- anteed through such officials. On the other hand, the problems of debt contraction, debt manipulation and debt payment involve not only political but also important economic considerations. Both sides of these questions require some attention. It is almost impossible for local officials to be efficient and at the same time retain their offices. Unfortunately, efficiency is most frequently sacrificed. We are obliged to recognize that incom- petency, at least, is too often the rule among public officials, and particularly so among those whose duties are of a really construc- tive and sometimes of a technical nature. The every day routine, for instance, of tax matters may be mastered in every detail and yet the ability and desire to successfully and economically float a series of bonds — the incurring of a debt — and to make proper pro- vision for paying the same, be wholly lacking in an official. The use of a sinking fund, for instance, to pay current expenses some- times proves too great a temptation to be withstood. An official or an administration which has squandered public money and raised the tax rate inordinately will often be displaced, but cases are almost unknown where officials have lost public confidence or administrations changed because of excessive borrowing. Oppo- > "The question of legality . . . has been proven by the experience of bond buyers, through delays and annoyances incident to legal examinations . . . to be the all important consideration in trading in this class of se- curities." "Report of the Ohio Committee on Municipal Bonds to the Presi- dent of the Ohio Bankers' Association." Banking Law Journal, vol. 24. pp. 790-792. (1907). [105] 106 BULLETIN OF THE UNIVERSITY OF WISCONSIN SECRIST-RESTRICTIONS ON PUBLIC INDEBTEDNESS 107 sition is contrary to the interests of the tax payer, because the day of payment is generally so far in the future that 'some chances remain of his not having to pay, or at least of being better able to pay. Spasmodic objection to borrowing may make itself felt here and there, but the majority of the tax payers are generally willing to allow borrowing to continue. Small popular votes on the questions of debt approval or rejection are the rule. The dis- count of the future acts as a potent force in determining our ac- tions. Human nature and the political control of our munici- palities seem to be in league with the abuse of credit ; the former, because of the discount of the future, the latter, because of the necessity to please a constituency. Some regulation of the power to borrow money and to dispose of the same is absolutely neces- sary and the question turns upon the nature of proper control. In preceding chapters the present constitutional control was outlined in some detail. It amounts on the one hand to a prohi- bition against subsidizing private capital, and on the other hand to a limitation of debt to a certain per cent, of the assessed value of property. The fundamental weaknesses in such a scheme of restriction have also been pointed out. There can be no percent- age of debt to assessed value of property which is a priori correct. In some political jurisdictions a five per cent, limit operates as no restrietion,2 and yet the abuse of public credit is proportionately as great as for units borrowing much more. In other cases a five per cent, limit operates as an obstacle to legitimate enterprise.* There can be no single percentage limit which applies with equal legitimacy to all political units, or even to those similarly sit- uated. The variations in the limits in the United States which range from two and one-half to eighteen, and in Canada* ap- u,^u\^^f ^^^'""^ 1903-1909. Inclusive, there was no county In Wisconsin which had an outstanding debt equal to fifty per cent, of the legal limit— five per cent.— for counties. More than seventy-one per cent, of the average in- debtedness of the sixty-one indebted counties of the state for the period 1903- 1909, was less than fifteen per cent, of the legal limit, i. e. less than fifteen per cent, of the five per cent, of the assessed value. These facts are taken from a study of county indebtedness in Wisconsin which the author made for the Wisconsin Tax Commission. 'The experience of Chicago is a case in point. Vide, the interpretation of the Mueller Law (Chapter 25, Kurd's Revised Statutes, 1905) May 18, 1903, in "Lobdell v. City of Chicago," 8t N. E. 35f, : 227 III. 218. •Perrj, J. Roy. "Public Debts in Canada." University of Toronto Studies. vol. 1, pp. 70-80. [106] proach twenty per cent, are conclusive evidence of this truth. Besides, to merely indicate a maximum to which all units may borrow is not to regulate the use of public credit. It may be that there is a percentage of debt to assessed value of property which for cities and towns of a specified district does tend to assume a certain level, but that this percentage should apply to all units alike is indefensible. The average ratio of debt to assessed value of property for the cities and towns of Rhode Island, in 1907, was 5.16 per cent., and for 1908, 5.38 per cent. But the maximum percentage for thirty-eight civil divisions m 1907 was 23.26 per cent, for a city with a population of 1,274, while the minimum per cent, for the same divisions in the same year was 0.12 per cent, for a city of approximately the same size. Like variations are found in 1908.^ A comparison of the same nature for Massachusetts cities in 1907, shows a maximum per- centage ratio of 7.45 per cent, for a city with a population of 97 434 and a minimum percentage ratio of 2.47 per cent, for a city with a population of 69,272. Eighteen cities, or 55 per cent, of all in the state, showed a percentage of net debt to assessed value under 5 per cent., while 15 cities, or 45 per cent, of all showed a percentage of net debt to assessed value of over 5 per cent. Even a larger variation exists for the towns— 11.04 per cent, to 0.00 per cent.® Both as a measure of the amount of debt which a city is finan- cially able to bear, as well as a barometer of the need for bor- rowed funds, constitutionl limitations are objectionable. As a code of regulations in which the interests of both creditor and debtor are guaranteed they amount to nothing. The amount of funds which a city should borrow is a portion of the total contri- bution which the tax payers are willing to make governed in each case by the uses to which such funds are put. If a community is new, large expenditures are necessary to effect improvements in- dispensible to city development. If the city in question is large and growing rapidly, the tax rate cannot be adjusted so as to pro- vide for large capital expenditure, and resort must be made to borrowing. On the other hand, in older communities, in coun- * Report on Taxation Lavs. Providence, R. I. (1910) pp. 149, 155. • Statistics of Municipal Finances. Boston, 1907, pp. 66, 192. [107] Pi 108 BULLETIN OF THE UNIVERSITY OF WISCONSIN ties, and often in school districts, normal expenditures can and should be adjusted to the machinery of taxation. The necessity of borrowing, in each case, depends upon the activity of the com- munity, together with the position to which it has arrived in sat- isfying cardinal needs and the policy of extension which it has adopted. How much a municipality borrows is largely inconse- quential, providing there is need for borrowed funds, and in case the payment of debt within a reasonable time is assured. Bor- rowing is a financial device, useful when employed with discretion and is hardly liable to great abuse when a rigid policy of liquida- tion is adopted. It is not borrowing which is bad in itself ; it is the disposition to escape tax burden by borrowing which is ob- jectionable. The chief difficulty and the one to be corrected is the weakness in the system of local government whereby officials are permitted and encouraged to borrow for purposes which should be supported by taxation, to borrow too much for legiti- mate purposes and to defer debt payment too far into the future. Rigid constitutional restrictions on the amount of debt will not correct these abuses. The only certain guarantee against their continuance is the adoption of a system of administrative control in which a competent state board or commission, whose sanction must be had for the use of borrowing, for the duration and amount of money to be borrowed, etc., plays a controlling part. Control of municipal debt is a necessary part of the control of local finance, and in many respects the most urgent part. The problems associated with it call for detailed consideration. (1) THE METHOD AND TIME OF DEBT PAYMExXT The chief problem in debt payment, so far as the debtors are concerned, is the equalization of tax burdens between the present and the future. Most commonly, provision is made for debt pay- ment by the accumulation of a sinking fund, i. e. "a. fund to which a fixed proportion of the loan can be carried . . . and either applied at once in the reduction of the debt, or invested at interest until it can so be applied."^ Many of the constitutions 'Murray, Alex., ••Municipal Finance"' etc. The Accountant, Mar 26 1910. p. 445. ' [108] SECRIST-RESTRICTIONS ON PUBLIC INDEBTEDNESS 109 provide for the accumulation of such funds« by requiring that there be levied direct annual taxes at the times loans are made and periodically thereafter. The sinking fund, per se m public finance is a bungling relic of the time when public credit was so low, and public conscience so little developed, that bond holders had to be given some assurance that the principals of their loans would be paid when due. But as a method of debt payment and as a temptation to unprincipled and ignorant city officials, not only does a sinking fund clog and complicate the finances of a municipality, but it has absolutely no redeeming features. Orig- inally required as a guarantee to the creditor and later as com- plete protection to the debtor, it has now, in far too many in- stances, neither of these functions because the **fund" degener- ates into an ' ' account. ' '^ Taxes may be levied in good faith but that the proceeds are kept intact and invested properly, that they are not used to pay current expenses, for instance,^^ is never cer- tain so long as accounts are inaccurately and unintelligently kept and no public reports made of them. The inviolability of this fund is the tax payers' only protection against double taxation. • Payment of debt by the sinking fund method is being replaced to some de- gree by the /erial method. This movement is praiseworthy for it takes out of ?he hands of local officials the control of large sums of money with which comphcated questions arise concerning investments, and which furnish temp- aUonffor iUegitimate uses. Of the 158 cities in the United states with pop « lation over 30.000 in 1907, 135 reported some serial loans. Stat^st^c^ of Cities with Population over 30,000, p. 73 (Washington, D. C ) 1907. Of the growing use of the serial method of debt payment in Massachusetts, see Third Annual Report of the Statistics of Municipal Finance, 1908-1909 V.^^n. (Boston, Mass.. 1911). For a general comparison of the two methods of pay- ment, see Nelson. S. A.. Bond Buyer's Dictionary, p. 45 ; Biddell, Geo., Loans of Local Autho^Hties, p. 34. (London. 1910) ; Terr^ell, Park, "The Issue of Mu- nicipal Bonds." The American City, vol. 4. p. 57. •Terrell Park. The AmeHcan City, Feb. 1911. p. 57. For a scheme for handling sinking funds. Vide, Frost, Thomas B., •'Uniform Methods of Handling a Sinking Fund" in The Government Accountant, Oct. 1911, pp. 268--74. >o Vide the English Parliamentary Report, June 16, 1909, "The Application of Sinking Funds in the Exercise of Borrowing Powers," [cd. 193] where the proper uses of sinking funds are discussed in great detail. The uses of these funds for capital expenditure, though questionable in the United States, be- cause of the absence of administrative control, is clearly different from the use for current expenses, etc., against which we are not now assured. An instance of this very nature was brought to light recently (1911) in tlie case of a promi- nent Wisconsin City. Vide, "Bulletin Number 543" Sew York Tax Reform Association for objections to such procedure respecting the contemplated with- drawal of $17,000,000 from the Sinking Funds in New York State and their use for current interest and expenses. [109] ir f 1 11 M fi^? .1 '^.^/?! ^°^ °^ ^^*^ *^"" disapproved shall be issued, except as hereinafter provided for: provided, however, that if the board accompany its statement of reasons for the disapproval of a loan with recommendations for a modification of the terms upon which it is proposed to issue said loan, said recom mendation may be adopted by a majority vote of the city council or other govern- Ing body and approved by the mayor, if the mayor under the city charter halthe veto power, so-called, or in the case of a town by a majority vote of the vote« « [117] I I if 911 i 118 BULLETIN OF THE UNIVERSITY OF WISCONSIN In some of the states, the nucleus for such control already exists. In other states the machinery exists in all but perfected form In Wisconsin, for instance, the Tax Commission and the Railroad Commission act in cooperation in evaluating public utilities. The Tax Commission uses the value for tax purposes while the Railroad Commission considers the value in fixing reasonable rates The Tax Commission supervises municipal accounts and has the power to install uniform accounts, while the railroad Commission requires public utility corporations, both municipal and private, to keep their accounts on forms provided by it and to report regularly to this body. In this state, therefore, the foun^ dation for an almost perfect system of control and direction of municipal finance has already been laid. What are necessary further is the removal of the constitutional limitation on munici- pal debt, the passage of a general statute covering cities when fully classified, and the conferring on the Tax Commission and the Railroad Commission acting together, such other powers, add- ed to those which they now have acting separately, necessary to a complete regulation of municipal debt. Such control should cover the total amount of debt obligations, temporary and funded, which a city may incur, the amount for each property or use, control of accounts both as to form and publication, mark- eting securities and their certification as to legality, etc. It is not the purpose of the writer to outline a complete system of control or to draw a model bill embodying the points con- tended for, which will serve for Wisconsin or for any other state, but rather to indicate the problem which needs solution and the reforms that may reasonably be expected to follow from the adoption of adequate control. With the establishment of such a system of control as is here outlined, and the inauguration of a scientific and economic use of public moneys, many of the problems of municipal dishonesty, with their source in incompetency and graft, as well as those SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 119 nresent and voting at a meeting duly warned in accordance with »aw and a prop- erly certified copy of such vote shall be forwarded to the board ; and if the vote be deemed to have properly authorized the proposed loan In accordance with the recommendations of the board as aforesaid, the board shall forthwith approve the same, whereupon said loan may be issued; and provided, /"^'"^^ J^*»»^ "^ loan shall be approved under the provision of this section for a period longer than ten years from the date which the securities may bear." [118] other problems associated with the prevalent tendency to borrow too much and to postpone payment too long, would gradually be solved. Cities will continue to grow and the demands upon the public treasury increase. If they are to become business units, then business principles must be adopted and administrative de- vices multiplied and perfected. Until the problems outlined in this chapter are solved, public moneys will be wasted through debt contracted and unscientifically handled, borrowing power will be abused and the tax payers pay the cost. Until some such change is made, the fixed-percentage-of-debt-to-assessed-value will serve to handicap some municipalities while leaving to others too extended borrowing powers, debt will be used where taxation, alone is legitimate, sinking funds if provided will be used to pay current expenses, money will be wasted by borrowing when, market conditions do not justify loans being made, and by un- dertaking enterprises which are uneconomic both as respects the type undertaken and the service rendered. The data and experi- ence which a board or commission of the type indicated would accumulate, would, in a short time, be of inestimable value not only in directing municipalities as between private and public, ownership and operation, but would also serve as scientific infor- mation upon which to build standards of efficiency in public en- deavor. (2) THE MARKETING OF MUNICIPAL BONDS. In selling municipal bonds local authorities enter the money market and bid with private corporations, etc., for command of available capital.^- Practically no municipal bonds find their way onto the stock exchange,^^ but are sold direct to banks,** " The Commercial and Financial Chronicle, vols. 88, 90, pp. 113 and 121, re- spectively reports the following municipal bonds sold from 1892-1909, inclusive r (ooo's omitted). 1892 $ 83,82.3 1898 $103,084 1904 |250.754 1893 77,421 1899 118,113 1905 183,080 1894 117,176 1900 145,733 1906 201,743 1895 114,021 1901 149,498 19«7 227,643 1896 106,496 . 1902 152,846 1908 313.797 1897 137,984 1903 152,281 1909 332,47« " Of the gross amount of negotiable securities of $25,314,429,058 admitted to the New Yorls Stock Exchange as of June 6, 1910, state bonds constituted but [119] I' 'It 120 BULLETIN OF THE UNIVERSITY OF WISCONSIN trust companies and saving institutions, only to be resold to the public, to serve as investments for their own savings, or to be used in National banks as security against government deposits." No difficulties are experienced in selling municipal bonds, pro- viding there is a market for securities at all, because the form of bond is desirable and the security almost perf ect.^« Mr. William A Prendergast, Comptroller of the city of New York, speaking of the bonds of that city, said, '^ There is no better security in the world Nothing less than a cataclysm, so general in its effect as to be nation wide, can seriously affect it."" What is true of New York City is in large measure true of the great bulk of grow- ing cities of the United States. This is especially true of the is- sues of large cities whose bonds are constantly before the people, and whose continued growth is assured, whose properties are val- uable and whose machinery of taxation is well developed. If bonds are issued according to law, if they are within the debt limit, and all legal requirements have been properly complied with,' the security is very nearly perfect, for the holder can com- pel payment by resort to the courts. Taxes are a prior lien to all other claims, and their levy is mandatory .^« But the fact that bonds are within the legal limit of debt and issued according to law, although certified to by appropriate officials at the time bids are made, must be verified^^ by the buyer, and their validity is SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 121 185,403,943 ; New York City bonds, $422,614,600 and other city securities. $19.- 455,000. Annals of the American Academy, vol. 36, p. 89. «0f the $60,000,000 4% per cent, bonds sold at 100-94 by New York City In the spring of 1911. and which were over subscribed five times, $48,000,000, or 80 per cent, went to investment banking houses ; $11,500,000, or 19.25 per cent, to insurance companies and only $500,000, or 0.75 per cent, went to private invest- ors. "The Recent New York City Bond Sale." Escher, F., Harper's Weekly, Feb. 11. 1911. p. 22. » $2,909,000 of state, city and railroad bonds were held for this purpose by National banks on Oct. 31, 1910. Report of the Comptroller of the Currency, 1910, p. 20. » Under the Aldrich-Vreeland Banking Act of May 30, 1908 circulation to the extent of 90 per cent, of the market value of municipal bonds may be taken out, but only to 75 per cent, of the cash value of commercial paper. " Comer's Weekly, May 6, 1911, p. 34. ^Vide, Weil, Harry E., "Municipal Bonds Explained." Annals of the Ameri- can Academy, etc. vol. 30, pp. 38^390. Vide, also Tte Independent (New York), vol. 65. p. 60. «» Vide, Conway, Thomas Jr., and Atwood, Albert N., Investments and Specula- tion, (New York, 1911), p. 191. "The Growing Safety of Municipal Bonds." Commercial and Financial Chronicle, vol. Ixxxxii (1911), p. 1405. [120] often not easy of proof. ' ' Municipalities are not held to a strict accounting of debts and obligations incurred, unless the same are legally incurred, and it has too frequently happened that munici- palities have sought (and in cases succeeded) to avoid their just obligations upon purely technical grounds. ' '*« * ' Opinions on the subject vary, but any where from twenty to fifty per cent, of the aggregate municipal bonds are defective in the procedure of their issue. That is to say, flaws are detected by the attorneys m their examinations."" Of course, municipalities may be made the basis of civil procedure in case of bad faith, and this helps to compensate for the disadvantages which the creditors experience through changing administrations, new policies, etc., and the fact that they must scrutinize the legality of the issues. The present debt limits, which at best provide against bankruptcy, and the presence of the taxing power make an investment in municipal securities almost second to none. Yet they are not what they might be to the creditor, and far from equally advantageous to the debtor. The one supreme fact in which the creditor is interested is the right to enforce the use of the taxing power. Indeed, it may be said, one of the main purposes of the debt limit is to insure the existence of such a proportion between the amount of indebted- ness and taxable wealth that the debts contracted will in all cases be paid.*^' This is another safeguard extended to the bond holder. True, it prohibits, in most instances, a too flagrant use of the bor- rowing power, but it at the same time woefully lacks all marks of an intelligent administrative policy. Not content with making the bonds in all cases a lien on taxable property, an added precau- tion is taken to prohibit this mortgage from tempting the tax- payer to repudiation. But what of the protection to the tax payers ! Whether the asset acquired from the use of the bor- rowed funds is properly used, whether it is wasted or ruthlessly destroyed, the creditor cares little. His security is certain so *• Squire, A., "Essential Recitals in Various Kinds of Bonds." AnnaU of the American Academy, etc. vol. 30, p. 254. « Lownhaupt, Frederick, "Municipal Bonds, Facts Regarding their Issue and their Security." Booklet Number 1, {Moody's Magazine, 1911). *^Vide, Fisher, Irving. Elementary Principles of Economics, (Second Prelim- inary Edition*) (1911), p. 29. [121] i % I I 122 fc BULLETIN OF THE UNIVERSITY OF WISCONSIN long as taxable private wealth endures. Even in those compara- tively few cases where bonds are seemingly based upon the earn- ing power of municipal utilities — since they are counted outside the constitutional debt limit if they' pay the interest on the bond- ed debt and contribute to the sinking fund a sufficient amount to pay the bonds at maturity — the creditor is safeguarded by the pledge of the faith of the issuing corporations in case the proper- ties do not make such contributions. In any case, the existence of taxable values upon which the city may legally be compelled to levy taxes is the source of the security and not the fund accum- ulated for its payment. Negotiability is always an important factor in the value of any credit instrument.*^ The security of two issues may be identical, and yet the bonds of well known place or places near financial markets have a greater negotiability and hence greater value than these from places not so well known or so advantageously located. The market for municipals is narrow and the adoption of any measure which will widen it cannot but react upon the demand and through it upon their value. There is no necessary reason why the bonds of a small village whose population is enterpris- ing, whose affairs are well managed and whose growth is certain ought not to command as low an interest rate as those of large cities, providing they are issued with as great a discrimination as respects their purpose, form, and amount and possess equal negotiability. A distinct step toward giving them these charac- teristics would follow the certification of their necessity and their legal validity by some recognized competent centralized author- ity. The fact that there existed such securities would be adver- tised broadcast by financial houses and would react both to the advantage of the creditor in a wider market, and to the debtor in a reduced interest rate. Such has been the experience in those countries where certifi- cation has been put on an efficient basis. The Ontario Railway and Municipal Board says of their experience in this matter: **A great many applications were made to the Board, although there *^Vide, "The Better Protection of Municipal Securities", Bankers' Law Jour- nal (1907), vol. 24, p. 785. This is the Report of the Committee on Municipal Securities to the Executive Council of the American Bankers' Association. [122] SECRIST-UESTUICTIONS OS PUBLIC INDEBTEDNESS 123 were no irregularities in the bye-laws or debentures in order ro secure the certificate of the Board, and thus enable the mumci- palTt es to obtain the highest market price for their securities and fo facilitate their sale, and make their transfer more convenient and inexpensive. Not only have the municipalities received a better price for their securities, but a great saving of expense has been effected by the act. It is estimated that the i^i^anced price and the sa^-ing of expense to the municipalities will amount to thousands of dollars in each year.'- But the power to certify legality alone is not sufficient. Its necessary compliment is the power" to certify the economic necessity of debt contraction, as well as to prescribe the amount and form of debt which is allowed. In these respects, the judicial review provided for and the pow- ers given to the Supreme Court in the state of Georgia to validate municipal bonds, as well as the law of Colorado which requires that refunding bonds be registered by the State Auditor, are de- fective. The same may be said of a Texas law" which gives to the Attorney General the power to validate muncipal bonds, as well as of those parts of the constitutions of North Dakota" and Oklahoma" which provide for bond validation. What is to be counted as debt within the constitutional limit should not be a subject upon which the court's judgment must constantlv be sought. The issues at base are economic and not le-al and while it might be possible for the courts to formulate definite legal principles which would settle most of the difficul- ties arising under the present hodge-podge of legislation they have not so far done so." The provisions governing debt con- traction should be so definite and unmistakable as to prevent un- due expansion bv ,x-sort to the courts. Borrowing for legiti- » Ontario Railu-,,,, and MunMpal Board, TInrd innual Report 1908 9-12 » Tide "Report of tbe Committee on Municipal Securities to the Eiecutive CouocU ;f tbe American Bankers- Association.' Bandera La« Journal, vol. 24, p. 788. " ConstituMon, 1889, sec. 187. « Conelitution, IW7, art. x. sec. 29. ,„„rt.. >,.„<. adonted « "There Is no established rule of construction which the courts »"«/*°f' ™ In defining the words (what is debt in the constitutional sense). The desire on their pirt not to limit the legal indebtedness of municipalities, "r to compel the navment of a moral obligation rather than any fixed rule of construction has at t'lm'eTinfluenced their decisions." Abbott, Howard S., ATreame on t». I,«» o/ ilunicipal Corporations, (Saint Paul. 1906), vol. 1, pp. 334-33o. [123] j 124 BULLETIN OF THE UNIVERSITY OF WISCONSIN SECKIST-RESTRICTIONS ON PUBLIC INDEBTEDNESS 125 mate purposes, and in legitimate amounts as demonstrated by- sound policy and needs ought not to be prevented by rigid con- stitutional provisions, nor debt, contracted in good faith, and after due consideration, be invalidated because of some minor errors that may have crept in either through neglect or oversight dur- ing the process of issue. As it is today such errors are sulBficient to invalidate the evidences of debt in the hands of the innocent holder" and to involve the tax payers in wasteful and unwar- ranted expenditure. Too often, no doubt, municipal officials have taken advantage of this fact, and either through acts of commission or omission, have been able to sell worthless securi- ties. This fact, together with the enormous amount of borrowing by coterminous and conflicting jurisdictions for a multitude of purposes has made it necessary for bond houses in effect to vali- date every issue which they purchase. This is expensive and the costs are paid by the debtor public. A question essentially economic in all its phases should be solved by resort to economic principles. As it is today it is primarily a question to be worked over and dissected by the courts. Municipalities must borrow money. The securities which they issue are possessed of those qualities well suited for investment purposes. Some method should be adopted which would not only check the extravagant use of municipal credit and make it impossible for city officials, either through innocent or wilful mis- conduct, to flood the market with questionable securities, but which would also determine the procedure of issue and legality of securities. A possible controlling agent has been outlined in this chapter, and in a broad way, the powers pointed out which are necessary for scientific control. The problem is the adjust- ment of local debt to the accepted and developed lines of private finance, an adjustment in which the interests of both creditor and debtor are fully conserved and guaranteed. By such a reform, expensive law suits over the legality and validity of contested bonds, far-fetched judicial decisions, counting this and that with- " "It is agreed that where there is no authority for an issue of municipal bonds that the holder, however full of faith, is not protected, and the bonds are void In all hands.- Hill. John P.. "The Advisability of Registering Negotiable Cou- pon Bonds The Green Bag, vol. 16. p. 14 (1904) ; of. Simonten, T. C, A Trea. Use of the Law of Municipal Bonds, (1896) section 124. [124] -^ out or within the debt limit in order to make room ^^^^J^/ needed improvement, or to curtail an undue disposition to bor- rot wouM in large measure be displaced by uniformity, pre- "^e ;ll2stSht to be emphasized, therefore are problems of control. Control cannot come through blanket provisions which affect the amount of debt only and ignore t^e f ^^^que of issue. Borrowing is a legitimate method to provide for large capital expenditure: it is nothing more than a simple financial device commonly employed in our -^^^1^^ j^^^f^^f f"* Adequate and enlightened control must be addressed to the tech- nique of debt creation, where the problems of equalizing tax bur- dens between the present and the future show themselves through the time and method of debt payment, as well as to the technique of borrowing where the relations- of debtor and creditor are re- vealed in the determination of an interest rate. Public debt is necessary to our local economy. Accurate ac counts, publicity and control, so vital as respects current revenue • and expenditure, become doubly necessary when debts are in- curred for vast undertakings and sinking funds accumulated for their payment. Public expenditures are increasing pan pa^su with the function of public powers. Larger and larger amounts of income are being diverted from private into public channels, and borrowing more and more indulged in. Just as there can be no fixed percentage of public to private income, so there can be no fixed relation between borrowed funds and the total contribution which a people are willing to make. The nee essary proportion must vary from time to time and from district to district. Neither can debt be made a certain percentage of the assessed value of property. The criterion for a proper meas- ure of the relation of public to private income is service rendered, whether public income shows itself in taxes paid or in indebted- ness contracted. Service is the guiding principle, and the meas- ures undertaken to insure this in the form of checks upon the wastefulness of public money, whether by unreliable, incompetent or crooked officials, or by meaningless accounts etc., are likewise applicable to the control of public borrowing. The subject can be summarized, and the point of view of the author formulated, [125] h 126 BULLETIN OF THE UNIVERSITY OF WISCONSIN I in the contention that public borrowing is neither a blessing nor an evil, but a legitimate financial device, useful to some political units, indispensible to others, and harmful to still others, which requires for its proper control administrative talent of the high- est type. Not only is the present constitutional control theo- retically wrong ; as it operates it is open to the serious objections commented upon at length above. As a scheme of regulation it absolutely fails of its purpose. It was designed to prevent abuse of public credit, and it was thought this end could be realized by limiting the amount to be borrowed. In some cases, not only have the abuses but also the uses of credit been prevented ; while in others its use has been flagrantly abused in spite of the limita- tions. The limitations were born originally of a philosophy which stamped public debt as a public evil, and this philosophy still retains its hold upon us. The problems in public debt are, however, broader than curtailment of use ; they involve regulated use, and call for immediate attention. What is needed is a pro- gram of correlation ; correlation of municipal functions with busi- ness methods, of creditor's interest with creditor's obligation, of debtor's sacrifice (taxes, etc.) with the kind and degree of public service furnished. CD 3 2.ar as QD«r^ O 00 s [126] Calif. 111. Iowa La. Texas Wis. 00 00 00 oc ocoo i(^ 4^ ..• 1^ ». .c^ 00 U' to a. 00 CO Ind. Kas' Mich. Minn. Uiiio' Ore. Pa. h^ Nrt ta^ NiA .i^ ^^ t-^ OO 00 00 Ot OD -X 00 W W O OT iO «» — 00 "^ tw -~J Ci CJi Ci 2! a < *"* Pc-Pp* pc 00 Qcoc Tenn. Va. W.Va. ot 00 'X OO c. a. w w -2 ocoo Idaho Mont. S.Dalc. Wash. T oc ot 00 00 cr CO y OC cr> (C to « 'J to 1850 18 5 j6 cr ii I— I Q o d > W o cc > Q O 2! zc I— ( H d t— ( o as CO F3 a Oh > W C w r H O o •^3 70 Q O as cc r/3 H O o H ffl O :^ a «5 O d cc T3 l-H O o c ?► o :^ cc J^tal or: ocoo c c o> I op op 00 wi iC *^ CO 3 QD 00 00 00 00 00 00 OO 00 to to to ^ fi' ■■£> p. ocoo eg llcT P B* 8 as o oe 00 00 •f^Ob Earl- iest Const. Calif. Ill La. Maine N. Y. Wis. 1845 to 1849 ^-k ^i* k^ ^^ (»i ^^ 00 00 00 00 00 00 >+- IC t— ^- ^ ♦f*' 00 ^ cc to 00 o Earl- iest Const. • o D tr • p • • • 1850 to 1859 OO -^ to -^ — 5- O rji O- Oi Earl- iest Const. Nev. W.Va. 1860 to 18o4 aos*oo CO 0» p OOTjOO 2 (T> s» ;-^ !* "^ OO^OD CO Vr Sep •^ K 1^ oo^Joo o.-'O OO CO c;< O O 3 i—M coC ;0 CO en s <^ £ Er « " 8: 00 o — -i^ d > o CO M o cc H I— t d o cc 5d o C cj n3 re d d ?* H a td C/j >-t o2 S CO H H M^ S^ ed CD Hg as ''^ — H d 1—4 C3 H I— ( O :? cc > 2! O a so H O CO B3 O w Ki Q O o O a state Maine . Maryland. Mlchicran .. Minnesota . Mississippi. Missouri. Montana.. Nebraslca. Nevada. New Jersey. New Yorlc... North Carolina. North Dakota. Ohio Oklahoma Oregon Pennsylvania.. Rhode Island... South Carolina. South Dakota Tennessee Texas Utah Virginia. Washington.... West Virginia. Wlseonsin Wyoming APPENDIX II -TABULAR STATEMENT OF THE CONSTITUTIONAL PROVISION'S REI^ATING TO STATE INDEBTEDNESS L Alabama Arizona California Colorado JL/P I cl W ajTG* ••••• ••■• ••• Mt lOxiCl&i* •••• ••••••••• ■ Geoi^a Idaho Illliiois Indiana Iowa Kansas Kentucky Louisiana Date of constitu- tion 1865 1867 1875 1901 1910 1836 1864 1868 1874 1»49 1879 1902 (a) 1908 (a) 1876 1897 1838 1865 1875 (a) 1885 1868 1877 1889 1848 1870 1908 (a) 1816 1851 1846 1857 1855 1858 1859 1850 1890 1845 1852 1864 1868 1879 1898 1848 (a) 1868(a) 1851 1864 1867 1850 1908 1857 1832 1868 1890 1820 1665 1875 1889 1866-67 1875 1864 1844 1846 1894 1905(a) 1868 1876 1889 1851 1907 1857 1857 (a) 1873 1842 1868 1895 1889 1870 1845 1866 1876 1895 1850 1864 1870 1902 1889 1861-1863 1872 1848 Allowance for defense, insurrection, etc. Art. IV IV X* XI* IX VIII XVI XI VIII IX* VIII III IV VII VII IX IX X XI II 114 111 114 111 44* 46* VI III III III XIV X IX IV' XV XIII Finance XII IX IV X VII V XII VIII X XI XI IX IV Sec 41 32 3 213 5 'io' 6 "3 1 37 18 1 4 4 4 4 7 35 49 22 33 34 4 10 7 96 13 2 5 1 3 6 11 3 XIII VII VII VII XIV 4 18J 24 7 2 4 13 Allowance for casual deficits, etc. Amount JlOO,ooot 300,000+ 350.000 Amount not limited 300,000 300,000 300,000 i-i mill per dollar of assd. vai.* Amount not limited 200,000 li% of assessed value 50,000 250.000 Amount not limited 100,000 250,000 100.000 500,000 100,000 1,000,000* 500.000 500,000 100,000 100.000 100,000 100,000 300,000 50,000 50,CKH) 50.000 50,000 250,000 250.000 250,000* + 100.000 50,000 100,000 300.000 100,000 l.OCO.OOO 1,000,000 1889 IV XIII VIII VIII X VIII XVI 33 33 33 Amount not limited Amount not limited 200,000* 750,000 400,000 50.000 750.000 1,000.000 60,000 Amount not limited Amount not limited 100.000* Art. X XI IX • •••••• ■ VIII XVI • • • • • • XVI XI VIII VII VIII III IV X VII VII IX IX X XI II 114 111 114 111 VI III III III XIV X IX IV XIII Finance XII IX IV VII VII 29 184 2 5 4 4 100,000 lOf.OOO 200.000 200.000 Amount not limited Amount not limited Amount not limited 400,000 Amount not limited Amount not limited 100, COO 1% of assd. val. of prop. V XII VIII X XI XI IX IV IX X XIII VII VII III XIV Sec. 3 213 5 I • • • 1 3 1 37 18 1 2 3 3 3 5 35 49 22 33 34 4 10 5 44 2 4 1 3 6 10 2 Provision for other Debt Amount not named Art. IV IV ••••«••< XVI* XI+ VIII III* xit II 111 113 111 Sec. 41 32 3-5 3 t • • • « 7 5 36 50 Tax for Int. • • ■ • ■ Prin. Yes Yes Yes Yes Yes Yes Yes Yes* Yes Yes Yes * Yes Yes Yes Yes Yes Yes IV 4 182 23 7 1 4 13 7 11 2 IV X XIII VIII VIII X VIII XVI 33 33 49 I 29 7 184 1 5 4 6 1 V V VIII* X XI* IX* IX X III XIV* (a) Amendment, IV*t Xt XIII* VIII Yes Yes Yes Yes Yes Yes Yes I • • • • • Yes Yes Yes Yes * Yes * Yes Yes Yes Yes Yes Yes Duration loan 25 20 20 ■75* ■ 10-15 ■ • • • • • « 20 •••«••••■ 20 20 10 10 When due 30 30 At maturity When due When due When due 3 25 7 11 49* 1 29 7 184 3 Yes Yes Yes Yes Yes Yes Yes Yes Yes* Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes 15 15 15 Approval Leg. Maj Maj. Pop. > • • • • ■ » * • • • < Maj. Maj. Maj. Maj. Maj. * Maj. Maj. Direct 10 to 30 13 * 10 20 35 18 18 50 Yes Yes Yes Yest Yes Yes Yes Yes Yes Yes+ 30 25 20* 40 When due Direct Maj. Maj.* Aggregate not above the amount named unless by law Amount » > • • • • « 1350.000 !•••■•••■*< 300,000 300.000 'm,m 200.000 H% of the assessed value 20,000,000* • ••• •••• •••■ •■•■ ■■ (•••••••••••••••••I 100,000 100.000 500,000 100,000 1.000,000 100,000 f* I* 300,0(!0 3,500,000* 100,000 100,000 100,000 50,000 250.000 250,000 Art. IX VIII XVI xvi' VII VIII t • • • • • • VII IX IX 114 VI XIII III III III I • • • • • • • IX Sec. ^ot assume local or corporate in- debtedness. Not contract debt for internal im- provements Art. X* Sec. 16 • • • • • I VIII* Par.l XIP IV X* vir 22 m 34 i Maj. Maj. Maj. Maj. Maj. Maj. 30,000, OOOt 100,000 50. 0(J0 100,000 300.000* 1 0,000 1,000.000 1,000,000 50,000,000 200,000 750,000 50,000 750.000 1,000,000 50,000* 100,000 100,000 100,000 34 Yea Yes 20 20 5 Maj. Maj. Maj. XIII Finance XII IX IV VII VII XII VIII XI XI IX IV XIII 2 4 1 3 6 10 2 182 1 7 1 4 13 56 58 XII XIV IX VIII+ XI* XI+ IX+ IV» VII 200,000+ »•••••••' 100,000 1% of assessed val.of prop. XIV VIII XVI 33 XIII XIV IV IV X XI tl 20 6 176+ Art. IV* IVt IV* General provisl'n VIII IV XI* XI* X+ X* X1+ XI* XI XI 110' 113 44 46 Sec. Must not lend credit to pri- vate corpora- tions Art. 33 54 93 "6* 7* 36* 177 5 258 XIV* X* IX VII*+ VII* VII1+ 4+ 8 6 9 13 VIII* X* 6 28 26 17 185 Finance IV* IV+ IV** IX x+ XVI XI XII XI VIII* XIII XIII III IX III* VII VIII III IV XI VII IX XII X II 113 109+ 112* 5h 58 VI 9 14 5 6* XII+ XII XIII XI* *'vri+' X* XIIIT VIII* XVI+ 183 6 III III III* XIV X IX* Sec. 41 33 54 **253 7 "h 1 10 ;13 Tax to pay loan is irre- pealable Art. Sec 4 13 10 7 10 5 5 2 38 20 12 33 177 XII XIV IV XIII Finance XII Vlllt IV VII VIII* 22 33 34 6 12 5 5 258 1 10 '36" 15 185 10 6 V+ V* XII* VIII X XI XI IX IV XVI+ X XIII* II III XIII VIII VIII X VIII XVI* 45 1 2 3 9 6 9 10 ■••••■« VIII XVI xvi' XI VIII III IV VII VII IX IX X XI 114 111 114 111 III III III IX 4 185 IS 7 5 6 13 11 1 31 50 12 185 5 6 6 3 6 IV XIII Finance XII IX IV 1 37 18 22 33 34 XII XIII «••••• I VIII 44 2 4 I 3 6 182 Must not become stock- holder in private corpora- tion Art. XIII* IV IX XI XII XI III TX III VII VIII X IV* XI VIII VIII XVII+ XII XVII+ XIII 121 108+ 112* 56 58 III III III XIV X XII XIV IV XIII VIII* XII VIII X XI XI IX X XIII* II VII VII XIII XII X VIII XVI* Sec 13 54 **25^ 7 10 13 7 10 5 5 2 6 20 12 2 3 8 7 6 5 177 22 33 34 6 13 5 258 49 1 185* 15 6 5 6 11 1 31 31 31 14 185 9 6 10 *May by } vote of Iwth houses. *Never engage in. +May bj § vote of lolh a bank. *i Leg, vote necessary. tNo further debt unlit paid. *Not engage in. **Toa banlL *§ Leg. vote necessary. +No further oeM «MU 1 paid. *Not engage In. ••Toabank. *Internal improvements to be encouraged. *Intemal improvements to be encouraced^^ ♦Unless contracted in time of war. ^Maj wtw lar consent. , , . ♦General assembly make provisions for just and legal debts of the Stale. •State establish highways and extend aid ♦Duration 10-15 years. +Aggrec*t« at any «■• t 50,000 10 3 mills on each dollar of a for public buildings ►By ♦May by 1 vote of all members of both _ ♦Internal Improvements to be encoara geC . ♦Internal improvements to be encouracM. ♦For public buildings— no limit. *For this and refunding onb'. *Is allowed when the whole property is s«cunU. *Unless contracted in time of war. •Unless contracted in time of war. •Majority of all votes cast for mfmbers of 1 al assembly. +Encourage inlerual imp* *By a tax or from other source of revenue^ 'Mj ity of all votes cast for assembly mfmo^rs. implication. *To construct deep water way. etc *May establish a state bank. *Municipal or corporate. +Maj charter a st»t« with branches. ♦Unless authorized In times of war for the 4-l-»£\ cfotp *Appropriation. +In a banking institution *State to encourasre internal improvements. * Appropriation. +In any bank or bftnloiic *When due. +11,000,000 for public Impw ♦Assembly may borrow to pay slate debt vote unnecessary. , 1 ^i_ ^r *0f all votes cast at the general electioo. ^L authorized in time of war. *Not to exceed eight million dollars, /^c^pt to !■- ternal improvement companies and Umb to 0«U one fifth of their capital stock. *Except to internal Improvement comiMmcs •■« then toonli'one fifth of their capital stock. ♦Nothing at all besides this* ♦Nothing at all besides this. ♦To assume debt of municlpalitiea contracted in limm of war. for ♦Allowed in three counties. ♦Allowed i)y amendment, 1906 ♦Except the improvement of ^— -,_--- •Allowed to lend aid for constrocUoa of and bridges amendment 1888.^ ♦May by two third Leg. vote of both to extent of 1* millions to a bank wlttaoat vote. ♦Appropriation may be made. ♦Internal improvements encouraged and +May incorporate a bank. *Aai«ndni«nt banks allowed ^^ . , ^ »,^ «^ .^ •Amendment, 1859. +Total debt noC to 130,000,000 (amf.ndmcnl. IBM.) •Duration is two years. ♦In any one year. ♦Within a time limited by law. ♦Or be a parly in carrying them on. ♦Except for extraordinary expeoies. case of war. *Except for charitable akL ♦Not to prevent education of deaf. dumb, etc ♦No tax if treasury contains money to ke^e-p a stnK- ing fund of 2 per cent. ♦To pay interest annually . ▼Except to unfinished canals unless people consent. ♦Except to complete unfinished c*::^, etc. ♦30 year period allowed for these. "^Mai- by a *Excepl for necessary support of tbe poi*. ♦No other debt at all allowed. ♦Lnle^ m Mar. ♦Unless in time of war. , , ., . ♦No other debt at all. +Unless in time of war. ♦No other debt at all. +Unless in timeof war. ♦Without the people's consent. ,^ ,^ *dO years allowed lamendment 1886 Art. Ias'^c mJ +Unless by consent of i Qualified voters. ♦When due. +Or other sources of revenue. ^Except for support of poor. ♦State ought to encourage internal im^OTementSi. ♦Necessary for temporary loan. ♦Necessary for temporary loan. ^Max raaraatao railroad bonds to any amount not exce«dlar ttVJM per mile. *No other debt at all except that necessarr tt> . existing debt. ^^ , ^ ♦Public buildings, $200,000. +Over and abov* tte 1 ritorial debt. ♦No other debt at all. +Except to liabilities. ♦Or be a party in carrying them on. ♦No olfcer at all. ♦No other debt at all. +Except pablic ♦Unless incurred in time of war. ♦Unless Incurred in time of war. ♦Except where grants of land have such. ♦For all debt above amount of taxes of tho year. +Unle^ 5 popular vote favor it. *" necessary support of poor. APPENDIX III CONSTITUTIONAL RESTRICTIONS ON MUNICIPALITIES LENDING THEIR CREDIT AND SUBSCRIBING TO THE STOCK OF PRIVATE COMPANIES. States Alabama. Arkansas. California .. Colorado Connecticut Delaware — Florida Not Lend Credit Const. Article ■72 •Georgia. Idaho Illinois.... Indiana... Kentucky. Louisiana. Maryland.. Minnesota. Mississippi. Missouri Montana.. Neb r as lea. Nevada New Hampshire. New .Jersey New York . North Carolina. North Dakota. Ohio Oklahoma Oregon Pennsylvania.. 1875 1901 1868 1874 1879 1876 187 1897 18753 1885 1868< 1877* 1899 1870 1851* 1S90^ 1879 1898 1867*" 1879^ 1868»» 1890 186511 1875 1889' 2 187513 IV IV XI Xll IV XI XXV VIII III IX III VII VIlI IV X Section 55 94 6 5 31 1 III IX XII VII XI IV XIII XII South Dal 88.90 70. 6f? 82.99 80.88 63.53 03.74 56.60 45.73 73.07 45.90 66.20 03.31 53.11 55.95 58.31 57.87 73.31 65.40 67.35 83.3CI! 82.78 63.71 80.66 50.51 67.41 76.30 85.41 70.96 76.24 86.52 71.33 64.85 66.48 62.39 45.59 73.84 83. 71. 75. 87. 67. 64. 61. 35 10 86 80 96 65 55 75.55 43.37 64.44 78.18 71.48 51.44 09.64 53.32 59.01 77.97 59.40 79.58 51.38 62.10 72.67 81.48 69.04 75.75 85.15 67.68 64.93 59.88 82.28 42.28 61.22 05.04 71.58 45.79 97.72 57.50 57.00 80.53 53.04 63.42 62.30 77.91 03.92 54.2:i 65.68 88.98 77.05 82.25 78.86 62.90 64.55 55.05 44.72 68.21 44.02 63.16 59.22 50.39 57.08 58,52 57.60 72.82 65.37 67.48 52.13 63.97 75.54 73.33 51. eo 69.55 52.03 56.34 77.96 56.36 77.03 51.07 60.69 69.80 79.44 69.20 73.23 86.08 69.53 67.07 57.41 73.93 41.83 I APPENDIX IV— (Continued. County Marinette . Mamuette . Milwaukee Monroe Oconto Oneida Outagamie. Ozaukee Pepin . Pierce Pollc Portage , Price .... Racine . . Richland . Rock Rusk St. Croix Sauk Sawyer Shawano.. .. Sheboygan .. Taylor Trempealeau Vernon V JLlcLZ) •• •••• •••■ ■•■! Walworth Washburn . . Washington Waukesha. Waupaca . Waushara . Winnebago Wood 1902- 1906 52.87 53.22 51.21 69.78 55.56 50.89 69.26 72.28 56.73 1903- 1907 46.45 63.52 65.31 62.92 54.40 64.36 58.40 52.94 52.30 60.73 31.12 64.71 51.41 • • • ■ • • 50.76 63.84 63.10 57.28 50.47 53.01 51.15 66.92 53.06 48.14 68.72 75.12 53.86 54.85 45.73 60.09 60.24 00.30 1904- 1908 1905- 1909 48.56 53.07 50.02 64.86 50.79 46.87 07.93 74.36 52.90 53.40 45.93 50.25 57.35 59.22 51.45 49. 4t 63.62 02.85 51.65 56.50 51.46 50.63 73.05 51.20 53.20 58.85 36.0f» 62.29 50.01 74.33 50.28 48.81 55.70 48.25 53.07 49.58 62.50 49.40 46.14 67.98 72.94 50.66 52.42 46.74 53.90 54.38 58.30! I 48.36 02.50 47.89' 54.89 55.9: 53.79 48.97' 46.95 49.51 48.29 70.10 68.48 50.08 55.59 56. B7 30.47 01.40 47.76 73.50 51.15 63.12 62.78 60.64 71.34 56.15 57.75 70.12 56.?? 49.49 55.23 55.18 36.37 59.18 45.79 71.47 50.29 62.27 50.45 69.03 55.06 City No cities. South Milwaukee Wauwatosa M' est A His Milwaulcee r*l)^T*L'Si ••..•••••••-. Tomah , Appleton Kaukauna New London t?e.vmour City . . Cedarburg Pt. Washington. 1902- 1906 36.08 53.78 30.74 50.64 84.29 70.81 66.24 88.34 64.62 53.i'4 66.54 81.56 1903- 1907 Prescott River Falls No cities. Stevens Point... Phillips Burlington Racine Richland Center Beloit Edgerton Evansville Janes ville Laoysmith Glen wood Hudson Ne w Richmond . . . River Falls (1st ward) Baraboo Reedsburg No cities. Shawano Elkhart Lake Pl.vmouth Slieboygan I^Iedford No cities. Viroqua No cities. Delavan Elkhoru Lake Geneva \Vhliewater No cities. Rarlford West Bend 0< onomowoc Waukesha Clinton ville City. New London Waupaca Berlin Mena.sha Neenah Oshkosh Grand Rapids... Marshfleld Pittsville 74.47 93.30 55. £4 63.68 71. 9S 59.14 49.72 76.83 6*<.87 104.13 74.90 81.20 61.. 3C 65.69 67.94 58.21 64.10 64.67 70.81 53.32 53.00 62.40 73.06 8i.40 60.89 73.96 70.58 37.57 55.45 30.27 50.48 84.10 68.06 66. Vo 83.84 65.47 54.20 (Hi. 14 79.0*^ 48.86 61.25 71.92 86.80 50.12 01.21 70.54 59.42 52.07 76.13 07.98 52.57 89.08 72.03 72.53 57.62 54.85 T4.40 72.00 76.48 67.17 65.00 56.07 61.33 61.52 70.66 65.64 73.13 51. 6S 5^.63 65.07 70.45 79.88 65.12 63.19 74.43 64.50 67.09 71.90 74.68 1904- 1908 1905- 1909 41.28 52.76 32.56 49.17 85.00 65.42 66.96 79.10 65.98 55.79 66.60 81.00 51.34 63.61 73.24 79.98 50.37 59.94 70.46 5«.85 58.30 77.15 06.77 50.87 80.67 66.80 70.98 55.35 75.52 49.20 55.69 68.66 69.08 72.81 64.60 62.10 53.84 56.97 61.81 68.58 59.85 71.70 53.80 54.37 71.09 71.73 81.30 46.43 59.75 68.91 63.29 69.70 73.88 71.59 49.23 52.14 34.76 49.00 83.90 04.48 'W SECRIST-RESTRICTIONS ON PUBLIC INDEBTEDNESS 127 BIBLIOGRAPHY Abbott, Howard S., A Treatise on the Law of Municipal Corpo^ rations, etc., (St. Paul, 1906) 3 vols. Adams, H. C, Public Debts, (New York, 1892). . ^ ^ ^. Adams, H. C, The State in its Relation to Industrial Action, Allison, E. P. & Penrose, Boies, A Historij of Municipal Develop- ment, (Philadelphia, 1888). Bidden, Geo., Loans of Local Authorities, (London, 191U). Bishop,' A. L., The State Works of Pennsylvania, (1907). Bourne, E. G., Historij of the Surplus Revenue of 1837, (New York, 1885). * ^ , iqiax Bryce, James, The American Commonwealth, (New York, lyiu;, new and revised edition. ^ Callendar, G. S., ''State Enterprise and Corporations,'' Quar- terly Journal of Economics, vol. xvii. Chamberlain, Lawrence, The Principles of Bond Investment, (New York, 1912). Chandler, Alfred D., The Metropolitan Debts of Boston and Vi- cinity, (Brookline, Mass., 1905). Conway, Thomas Jr., and Atwood, Albert N., Investments and /Speculation, (New York, 1912). Cooley, Thomas M., A Treatise on the Constitutional Limitations, (Boston, 1883), 5th ed. Crozier, J. B., The First Principles of Investment, (London, 19110- ^ . .., Curtis B. R., (ed.) Memoir of Benjamin Bobbins Curtis with some of his Professional and Miscellaneous Writings, (Bos- ton, 1879), 2 vols. Deane, Maurice B., Municipal Bonds Held Void (New York, 1911). Deming, Horace, The Government of American Cities, (New York 1909 ) . Dixon, Frank H., State Railroad Control, etc., (New York, 1896). Fisher, Irving, Elementary Principles of Economics, (New York, 1911). [127] 128 BULLETIN OF THE UNIVERSITY OF WISCONSIN SBCRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 129 i H. Garland, James S., New England Town Laws, (Boston, 1906). Gray, James M., Limitations of the Taxing Power, etc., (San Francisco, 1906). Johnson, W. C, Belief of the States, House Doc. No. 296, 27th. Cong. 3rd Sess. Hammond, J. D., History of Political Parties in the State of New York, (Syracuse, 1852), 3 vols. Hazard, Register of Pennsylvania. Lanman, J. H., History of Michigan, (New York, 1839). Lincoln, C. Z., The Constitutional History of New York, (Roches- ter, 1906), 5 vols. Lincoln, C. Z., State of New York, Messages from the Governors, etc., (Albany, 1907), 10 vols. Martin, W. E., '^Internal Improvements in Alabama,'' Johns Hopkins University Studies, vol. XX. McQuillin, Eugene, A Treatise on the Law of Municipal Corpo- rations, (Chicago, 1911). Nelson, S. A., Bond Buyers' Dictionary, (New York, 1907). Niles, H., Register, etc. Perry, J. Rby, ''Public Debts in Canada/' University of Toronto Studies, vol. i. Pond, 0. L., Municipal Control of Public Utilities. Purdy, Lawson, Sec>., The City Debt in Relation to the Consti- tutional Limit of Indebtedness, (New York, 1908). Shambaugh, B. F., The Messages and Proclamations of the Governors of Iowa, (Iowa City, 1903). Simonton, T. C, A Treatise of the Law of Municipal Bonds, etc , (New York, 1896). State and Local Taxation, Second International Congress, Colum- bus, 1908. Thorpe, Francis N., The Federal and State Constitutions, Colon- ial Charters and other Organic Laws, etc., (Washington 1909), 7 vols. . ' Trotter, Alex, Observations on the Financial Position of the States of North America, (London, 1839). Wilcox, D. F., The American City, (New York, 1904). Wilcox, D. F., Schriften des Vereins fiir Socialpolitik, vol. 123. [128] Constitutional Proceedings Iowa : The Debates of the Constitutional Convention of the State of Iowa (Davenport, 1857), 2 vols. Kentucky: Reports of the Debates and Proceedings of the Con- vention of Kentucky, (Frankfort, 1849). Ohio: Proceedings of the Ohio Constitutional Convention, (Co- lumbus, 1873). Pennsylvania: Constitutional Debates, (Harrisburg, 1838). Utah: Proceedings of the Constitutional Convention, (Salt Lake, 1895). Documents Alabama: Governor's Messages, 1857, 1871. Canada: Report of Ontario Railway & Municipal Board, (Toronto, 1908). England: Parliamentary Report June 16, 1909 (cd. 193), "Ap- plication of Sinking Funds in Exercise of Borrowing Pow- ers. jt England : Parliamentary Report of the Select Committee on the *' Repayment of Loans by Local Authorities." (1902). Illinois : Legislative Reports, 1839-40. Michigan : House Documents, 1842, 1845, 1846. New York : Assembly Documents, 1838, 1845, 1846. New York : Senate Documents, 1839. New York: Comptroller's Report, 1837, 1843, etc. New York : Advisory Commission on Taxation and Finance, 1908. Ohio : Senate Reports, 1831, 1834, etc. Pennsylvania: Governor's Messages. Rhode Island: Report on Taxation Laws, (Providence, 1910). Statistics of Municipal Finances, (Boston, 1907). Statistics of Cities with Population over 30,000 (Washington, 1907, 1908). Valuation, Taxation and Indebtedness, (Washington, 1880). Wealth, Debt and Taxation, (Washington, 1907). [129] I 130 BULLETIN OF THE UNIVERSITY OF WISCONSIN Periodicals The Accountant, (London). American Journal of Social Science, vol. ix, 1877. American Quarterly Review. American Law Register. Annals of the American Academy, etc., (Philadelphia). Bankers^ Law Journal. Bankers' Magazine, (London). Bankers' Magazine, (New York). Bradstreets, (New York). Commercial and Financial Chronicle, (New York). The Democratic Review. The Fortnightly Review. Hunt's Merchant Magazine. The International Review. The Independent, (New York). Iowa State Bar Association, Reports of, 1903. Moody's Magazine. New Jersey Law Journal, (1879), vol. ii. The North American Review. Science. SECRIST— RESTRICTIONS ON PUBLIC INDEBTEDNESS 131 State of Iowa ex rel. v. The City of Wapello, 13 Iowa, 388 (1862). State V. Barnes, 97 Pacific Rep. 977 (1908). State V. Miller, 96 Pacific Rep. 747 (1908). Stewart v. Supervisors of Polk Co., 30 Iowa, 9 (1870). Tood V. City of Laurens, 26 S. E. Rep. 682 (1897). Valley v. Board of Park Commissioners, 111 N. W. 615 (N. Dak.) 1907. Valley City Salt Co. v. Brown, 7 W. Va., 191. Wilcoxen v. City of Bluffton, 154 N. E. 110 (Ind). Whiting V. Sheboygan Ry. Co., 25 Wis. 167. Wilson V. The Board of Education, etc., 81 N. W. 952. Wilson V. The Board of Trustees, 27 N. E. Rep. 203. Chief Cases Cited. Barnes v. Hill, 99 Pac. 927, (1909). Board of Education v. Betting, 9 New Mexico, 588. City of Williamsport v. Commonwealth, 84 Pa. 487. Dubuque County v. Dubuque Railroad Co., 4 Greene, 1. Fenton v. Blair, 11 Utah, 78. Hanson v. Vernon, 27 Iowa, 28 (1869). Kennebec Water District v. City of Waterville, 52 Atl. Rep. 774 (Me.) 1902. Law et al. v. People ex rel., 87 III. 385. Lobdell V. City of Chicago, 81 N. E. 354, 227 III. 281. National Life Insurance Co. v. Meade, 133 S. Dak. 37. People V. Salem. 20 Mich. 452 (1870). Sharpless v. Mayor of Philadelphia, 21 Pa. St. 147 (1853). [130] [131] « V'^ Si^ \ IV a%^ '■•• /\/ti'^5^^ m OCT t 3 I92i COLUMBIA UNIVERSITY LIBRARIES 0041422040 l' ;^1 q END OF TITLE