to be applied “to the purchase or payment of one per centum of the entire debt . . . to be made within each fiscal year, which is to be set apart as a sinking fund, and the interest of which shall in like manner be applied.” No obligation could be more formal, yet it was not formally observed. No attention was paid to this provision after the war, and at its close the payments and purchases did not proceed in the orderly fashion prescribed by law. The surplus revenues which for a time were abundant were used for the cancelation of debt far more rapidly than had been contemplated by the law. Nor were the bonds called in or purchased retained as a fund, for by the law of July 14, 1870, it was ordered that they be canceled and destroyed, and that an amount equivalent to the interest upon such canceled bonds be paid annually into the sinking fund. In the subsequent history of the country there were epochs in which there was no debt cancelation, others in which it proceeded rapidly, just as the condition of the revenues permitted. Congress and the Treasury Department have been satisfied by the explanation that the aggregate debt reduction has been far greater than that contemplated by the law. The sinking fund to-day therefore stands practically as an expression of the policy of debt reduction, and of the authority of the Secretary of the Treasury to purchase bonds in the market for this purpose, and has no other significance. The expression occurring in our financial reports of purchases for the sinking fund means simply for debt repayment.
Whenever the financial condition of the nation warrants a repayment of debt there are simpler methods of proceeding than sinking fund arrangements. Bonds may either be called in or may be purchased in the market. Theoretically purchase in the market is preferable when the bonds are below par, but as this condition is not likely to occur in any State which has a surplus for debt payment, the case is of no practical importance. On the other hand, the terms of the contract may be such as to prohibit calling in the bonds, as has been the case in the United States, and leave no way of redemption open except purchase at a premium. In such a case the premium paid is to be compared with the saving of interest which would have to be paid during the unexpired term of the bond before redemption becomes optional. Much more suitable, therefore, for the purposes of fiscal administration are bonds which are not limited as to term of payment, but which can be redeemed at their face value at the will of the Government.
When there are no specific sinking-fund attachments to public debts, the repayment of public debt might be regarded, so far as the contract with creditors is concerned, as a work of supererogation. But just as a business man gains in credit by prompt or anticipated payments, so a policy more liberal to creditors than legal requirements demand redounds to the credit of the State. Repayment of the principal is not essential, as we have seen, to the maintenance of public credit, as States whose debt continues to increase stand in good repute, but is a policy to be recommended. Of its utility as an outlet for surplus revenues we shall speak in discussing financial policy. For conversion of public debts, see Debt, Public.
Having considered public debt in relation to public credit, we may briefly outline its relations to fiscal operations. The creation of debt is a source of revenue which serves to equalize the difference between public expenditures and ordinary revenue. This difference may be caused by irregularity of revenue or casual deficit. Loans are then required in anticipation of revenue, and in such cases they should be temporary, of short duration, subject to redemption at will or in a brief period. If at the expiration of this period there is no accumulation of funds available for payment, the only alternatives are an extension of the loans or their incorporation in the funded debt. The difference between ordinary revenue and expenditure may be caused by a national emergency, such as war, to provide for which the ordinary sources of income, however stretched, are wholly inadequate. Or, again, the difference may be caused by the investment in great public works, which either in their effect on the general tax-producing capacity of the people, or by revenues appropriate to themselves, are expected to pay for themselves in the long run. In the cases named a resort to funded debt is the only way open by which to meet such expenditures. For a further development of these principles, see Debt, Public.
Financial Policy. The aim of financial policy can be summed up as the attainment of adequate revenue, a revenue adequate to fiscal needs and responsive to changes in them. This involves the questions of distribution of sources of revenue and elasticity of income.
The separation of government into national and local authorities, with the interposition of a third class of regional authorities in the case of Federal States, brings with it a division of expenditures and the need of adequate revenues for each form of government. The ideal of independence in action within their several fields can only be realized when to each are assigned certain independent sources of revenue. Without such revenues these authorities become mere disbursing offices lacking vitality. The problem of proper revenue is the most serious one which confronts the maintenance of a distribution of authority sanctioned by usage or proposed by legislation. It is a question of practical statesmanship, which must in each country take into consideration the facts of national development, and cannot be decided upon general financial or political principles.
The question at issue is partly one of law and partly one of fact. What sources of income does the law allow to the several bodies, and are these in fact suitable? In the United States the Constitution gives the Federal Government the power to collect taxes, duties, imposts, and excises, but prohibits it from imposing a capitation or other direct tax except in proportion to the population. This in fact excludes the Federal Government from the field of direct taxation, which is left to the States. Should the nationalization of railroads demanded in many quarters ever become a fact, it would withdraw from the States an important and remunerative object of taxation. Given the present functions of the Federal Government, the revenue opportunities have proved ample for its purposes.
In the States the revenue question is more perplexing. Except that they may not impose customs duties, there is no limitation upon the power of the States. But since the needs of the State governments are relatively small as com-
