How Public Debts are Repaid.—When bonds are issued by the public authorities some provision ought to be made for paying them at maturity; but this is not always done. |Refunding.| The national debt, when portions of it become due, is sometimes refunded, that is, paid off by issuing new bonds. |Sinking funds.| In the states and municipalities the usual plan has been to establish a sinking fund when the bonds are issued, and then to pay a certain installment into this fund out of each year’s taxes. By this process the sinking fund grows year by year until it is sufficient to pay off the bonds when they become due. |Serial issues.| A better plan is to issue the bonds in such form that they will fall due serially, that is, one or more bonds coming due in each successive year of the loan period. Then, instead of creating a sinking fund to pay off the whole debt at one time, the bonds are paid off one by one. The serial bond plan does away with the necessity of holding large sums in hand awaiting the maturity of the debt, and thus diminishes the risk of loss through poor investment or corruption.
Are Public Debts a Public Evil?—Alexander Hamilton, who was Secretary of the Treasury in Washington’s first cabinet, propounded the doctrine that a public debt, if not too large, is a source of strength to the government. He argued that when government bonds are widely held by the people, all those who own the bonds are interested in the stability and prosperity of the nation. Other noted financiers at various times have contradicted Hamilton and have declared all public debts to be public evils in that they impose burdens on the people without giving them anything tangible to show for it. But the truth is that public debts do not fall entirely in either class. They are benefits in one sense and evils in another. The power to borrow, like any other power, may be used wisely or unwisely. In times of great emergency, or for public improvements of permanent value, money may very properly be obtained by borrowing; always provided, however, that arrangements are made to pay off the debts within a reasonable time. The evil comes when governments borrow money in order to pay current expenses or to defray the cost of improvements which are not needed, and when they complacently allow the debt to pile up, year after year, with no thought of reducing it. “Sufficient unto the day is the evil thereof”, it is said; but we can also make the evil sufficient unto the future as well.
General References
C. A. Beard, American Government and Politics, pp. 358-378; Ibid., Readings in American Government and Politics, pp. 323-342;
F. W. Taussig, Principles of Economics, Vol. II, pp. 483-561;
Everett Kimball, National Government of the United States, pp. 445-479;
W. B. Munro, Government of the United States, pp. 233-245; Ibid., Principles and Methods of Municipal Administration, pp. 403-478 (Municipal Finance);
C. F. Bastable, Public Finance, pp. 261-280[pp. 261-280];
E. R. A. Seligman, Essays in Taxation (9th edition), pp. 66-99 (The Single Tax);
C. J. Bullock, Selected Readings in Public Finance, pp. 39-49; 143-157; Ibid., Introduction to the Study of Economics, pp. 493-520;