The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface to the Third Edition
• From Preface to the Second Edition
• From Preface to the First Edition
• General Introduction
• Chapter I
• Chapter Ii
• Book I: Public Expenditure
• Chapter I: State Economy. General Considerations
• Chapter II: The Cost of Defence
• Chapter III: Justice and Security
• Chapter IV: Administrative Supervision. Poor-relief
• Chapter V: Education. Religion
• Chapter VI: Expenditure On Industry and Commerce. Constitutional and Diplomatic Expenditure
• Chapter VII: Central and Local Expenditure
• Chapter VIII: Some General Questions of Expenditure
• Appendix.: On the Classification and Guiding Maxims of Public Expenditure.
• Book II: Public Revenue the Economic Or Quasi-private Receipts
• Chapter I: The Forms and Classification of Public Revenue
• Chapter II: The State Domain. Lands and Forests
• Chapter III: The Industrial Domain
• Chapter IV: The State As Capitalist. Administrative Revenue
• Chapter V: State Property.—general Considerations On Quasi-private Revenue
• Book III: Public Revenue (continued) the Principles of Taxation
• Chapter I: Definition and Classification of Taxation
• Chapter II: The General Features of Taxation
• Chapter III: The Distribution of Taxation
• Chapter IV: The Tax System: Its Forms
• Chapter V: The Shifting and Incidence of Taxation1
• Chapter VI: The Principles of Local Taxation
• Chapter VII: The Canons of Taxation
• Book IV: Public Revenue—concluded - the Several Kinds of Taxes
• Chapter I: Taxes On Land
• Chapter II: Taxes On Capital and Business
• Chapter III: Personal and Wages Taxes
• Chapter IV: Taxes On Property and Income
• Chapter V: Taxes On Consumption: Their Classification: Direct Consumption Taxes
• Chapter VI: Internal Taxes On Commodities
• Chapter VII: Customs Duties
• Chapter VIII: Taxes On Communications and Acts
• Chapter IX: Taxes On Successions1
• Book V: The Relation of Expenditure and Receipts
• Chapter I: Introductory—state Treasures
• Chapter II: Public Indebtedness, Its Modern Development
• Chapter III: The History of the English Debt
• Chapter IV: History of the French Debt, Indebtedness In Other Countries
• Chapter V: The Theory of Public Credit and Public Debts
• Chapter VI: The Forms of Public Debts
• Chapter VII: The Redemption and Conversion of Debt
• Chapter VIII: Local Indebtedness
• Book VI: Financial Administration and Control
• Chapter I: Introductory—historical Development
• Chapter II: The Budget—its Preparation—the Collection of Revenue
• Chapter III: The Vote of the Budget—control and Audit
• Chapter IV: Administration and Control In Local Finance

BOOK I

PUBLIC EXPENDITURE

CHAPTER I

state economy. general considerations

§ 1. The question of the nature and amount of public outlay forms, as we have seen, one of the cardinal branches of finance; it has an important influence on the other departments of the subject, and may be regarded as the real end of the financial system. In order to estimate correctly the expenditure of any given society, for state or public purposes, it is desirable to see the general features of the agency which so applies this part of national wealth. Most persons are familiar with the conception of a state economy, and are even prepared to adopt the view prevalent among students of social science, that Society is an organism with an independent life, manifesting itself in the exercise of different functions, one set of which has been specialised in the regulating organ or the State. Without pressing this resemblance so far as is sometimes done,1 we may accept the evident fact that the state organisation has certain points of analogy with the arrangements of the individual, and that in regard to economic action the comparison is particularly close. The individual and the State have each receipts and expenditure. Each endeavours, or should endeavour, to obtain the greatest result with the smallest effort; for each it depends on the relation between these economic categories whether wealth is being accumulated or debt incurred; and for each a careful method of keeping accounts is needed as a safeguard against errors. There is, however, a still closer parallel to be found in the case of those associations formed for the accomplishment of certain special ends which are usually known as ‘juristical’ persons or corporations. From the ordinary private partnership, through the local trading company, the progression can be traced up to such a body as the East India Company, that at one time was sovereign all but in name. In all these associations the principal financial phenomena are exhibited in a similar manner, and in a way that helps to explain the character of state finance. The existence of such general resemblances should not, however, conceal from us the fact that public agencies are in some essential points distinct from the ‘economy’ of the individual or of the association. It is the presence of these special and peculiar features that renders the examination of state economy needful in treating of public finance.

2. The first distinctive point in the public or state economy is its compulsory character. The individual or private association has to submit to limits other than those of his or its own will, but so far as legal restraints are concerned, the State stands in a position of complete independence. It is entitled to claim all the services and property of its subjects for the accomplishment of whatever aims it prescribes to itself. When stated in so rigid a form, the proposition is likely to awaken dissent, and yet, from the strictly legal and administrative point of view, it is a commonplace since the time of Austin.1 The effectual limits to state action depend, not on any legal or administrative rules, but on the difficulty of overcoming the obstacles set by external nature, and the sentiments of its subjects. Its expenditure and the objects to which it is directed are bounded by the productiveness of the national industries, and the facility with which the national wealth can be obtained through taxation for public use. The compulsory nature of state action is, then, a trait which marks it off from the individual or the private society.

A second point of difference appears in the ends to be attained through state agencies. They are mainly, as Roscher remarks,1 of an immaterial kind: the protection of the society against aggression, or internal disturbance, and the promotion of progress in civilisation, are hardly capable of being definitely measured and assigned a precise value, nor, even if they were, could the share of each individual be allotted to him in the exact proportion that he was willing to pay for it. The force of the State must prescribe what is to be paid by its subjects as a body, and the share that shall be borne by each. As regards expenditure, the absence of a strict standard makes it very hard to judge the extent to which the public resources should be applied for the satisfaction of the several wants. This vagueness is made still more apparent by confining our attention to a single public need in a given country—say, the amount of protection against foreign and home enemies required by England at present. How shall we determine the expenditure that is suitable for this object? ‘Adequacy in such cases,’ says Sidgwick, ‘cannot be defined by a sharp line. Most Englishmen are persuaded that they at present enjoy very tolerable protection of person and property against enemies within and without the country, but it would be difficult to argue that our security would not be enhanced by more and better-paid judges and policemen, or more and better-equipped soldiers and sailors.’2 The problem, it is evident, can only allow of an approximate solution, such as the actual circumstances will permit, and this finds its expression in the sentiment of practical statesmen, who say with Sir R. Peel, ‘In time of peace you must, if you mean to retrench, incur some risk.’

When the problem is widened so as to include the relations of the several wants of the public organs of the society, its difficulty is increased; the adjustment of the separate items of outlay and the proportion that the total amount shall bear to the sum of national revenue, is a task that tries the abilities of the most skilful administrator.

In connexion with the direction of public expenditure, a third feature of public economy comes into prominence; one which, it is true, may in some degree be found in private associations, but in a very restricted form. That is the existence of special interests opposed to the general welfare. It goes without saying that the individual desires what he deems to be for his own good, and in most private companies the shareholders wish for the prosperity of the institution in which their capital is invested. There are, however, cases where the holder of a few shares may make a gain indirectly, through some action of his company, which will lower its dividends, and being so far an ‘economic man,’ he may vote for and advocate that course. Instances of the kind are not very common, and the power possessed by persons in the situation just described is so slight that it may be neglected. The state organisation is differently placed. ‘Sinister interests’ exercise a good deal of control on its actions. There are large classes whose aim is to increase, not to reduce, the public expenses. More particularly is this true of those connected with the great spending departments of the state.1 Military and naval officers are extremely anxious to insist on the importance of increasing our land and sea forces in order to secure a better system of defence. But each fresh addition to outlay unfortunately fails to secure this result, which appears as far off as ever.2

Reaction against the evils produced by these tendencies has, in England at least, raised up an opposite school of extremists, who are opposed to even the outlay required for real efficiency. The inherent difficulties of the state economy are thus intensified by conflicts of interest and sentiment which, if not peculiar to it, at all events are most prominently exhibited in its working.

A fourth point of difference between the economy of the individual and that of the State is shown in the determination of the area of work for each. The citizen will naturally adopt the most profitable employment open to him, or should it seem expedient, he will combine several different occupations. The interest of others is a very secondary consideration; his activities will depend, as to their sphere and extent, on the ‘net advantages’ to be gained. His investments of capital will be similarly determined. Within the customary limits of law and morality he will seek to make his advantages as great as possible. The field of state action has to be mapped out on different grounds. The fact that a particular business or part of social action could be managed by the State without economic sacrifice, does not prove that it should be handed over to public agency. It is in general a sound practical rule that ‘the State should not interfere with private enterprise,’ and whatever be the theoretical qualifications needed, it is plain that even its partial truth limits the operations of the public power. The existence and constant working of individual and associated ‘economies’ (Privatwirthschaften) beside and under the protection of the great compulsory economy (Zwangwirthschaft) of the State, is a point which should never be forgotten.

Fifthly, a private economy differs from that of the State not only in the limitation of its area of action, but in the object of its working. It seeks to obtain a profit from its operations; in the language of finance it aims at a ‘surplus.’ The individual or company that just makes ends meet at the close of the year1 is not in a prosperous condition. Something more is required to give a fund for expenses beyond the necessary minimum in the former, and for dividends in the latter case. The greater the surplus the more successful is the result deemed to be. The ideal of state economy is, on the contrary, to establish a balance between receipts and expenditure. A State that has very large surpluses is as ill-managed as one with large deficits.1 The best practical rule is to aim at a slight excess of receipts over outlay in order to prevent the chance of a deficit.2 The position of the State as drawing its resources from the contributions of the several private economies under its charge is the reason for this course of conduct.

The last of the points of difference usually noted is rather apparent than real; it results from the mode adopted in regulating state finance, but in fact state and private economy here fundamentally agree. The private person must, it is said, regulate his expenditure by his income; the State regulates its income by its expediture. Such is in form the common mode of determination. The individual says, ‘I can spend so much’: the finance Minister says, ‘I have to raise so much.’ On looking more carefully into the matter, we discover that a certain amount of expenditure is necessary to support individual life, and that each person must procure that amount at least under peril of death. For all classes above the lowest this minimum of expenditure rises to a higher point, and increased outlay is essential for the obtaining of increased income.1 On the other side, state expenditure is not definitely fixed; it has to be determined by various considerations, one of which is the pressure that its discharge will place on the national resources. We can easily conceive the United States wisely incurring expenditure that an Indian administration would as wisely avoid.2

§ 3. Though the several characteristics that we have been engaged in noticing mark clearly the distinct and peculiar aspect of public economy, we have still to constantly bear in mind that the consumption of wealth for public ends is a part of the consumption of wealth in general. As a study of human wants must form the basis of the economic theory of consumption, so must an examination of the number and order of state wants be an essential part of our present inquiry.

The classification most familiar to English readers is that of J. S. Mill, who distinguishes between the ‘necessary’ and the ‘optional’ functions of Government.3 The value of this division is, however, much impaired by his subsequent admission that no employment of state agency can ever be purely optional, as also by the further concessions made in his examination of the limits of laissez faire. The arrangement suggested by Roscher is more in analogy with the case of private outlay, viz., that into (1) necessary, (2) useful, and (3) superfluous or ornamental expenditure,4 corresponding to the necessaries, decencies, and luxuries of individual consumption. It does not require much acumen to add, that the first head is unavoidable, that there is generally a presumption in favour of the second, while there is always one against the last. The formation of such general categories as the foregoing does not help to solve the real difficulties of the matter.5 The terms used to describe the groups just mentioned carry with them an already-formed judgment. By placing a particular form of expense under the heading of ‘necessary’ or of ‘ornamental’ outlay, we have pronounced an opinion on its merits or demerits. It still remains to settle—and this is by far the most troublesome part of our task—the several items to be placed under each head. In order to meet this difficulty we shall find it necessary to consider the proper functions of the State, and how far it is bound to discharge each and all of those functions under circumstances of financial pressure. One of two possible lines of inquiry may be adopted. Starting from our conception of the State, we may seek to determine the proper sphere of its action, and the amount of its justifiable outlay within that sphere, using either general reasoning or appeals to specific experience as our guide. Or we may prefer to trace the development of public tasks, and endeavour by following their direction in the past to form an estimate of their present position and probable future. It may even be expedient to combine the two courses of inquiry, using each as the corroborator or corrective of the other. Here, as often elsewhere, the historical or inductive method comes in to support and check the conclusions of deduction.

§ 4. The primitive theory of politics, if theory it can be called, accepted the omnipotence of the State as a leading principle. The legislator was to fashion the society in the mould which seemed to him best; the very idea of individual claims had no place in such a doctrine. In its passage through feudalism European Society obtained the idea of private liberty, though, owing to the imperfect state organisation of the period, the effect that might naturally be expected was not produced. The centralised monarchies which succeeded the mediæval system claimed the privilege of regulating individual action in a mode that in some respects recalled classical antiquity. The religious and political struggles of the sixteenth and seventeenth centuries were the result of their undue activity in those domains of human life. Commerce and industry did not assert their right to freedom till a later period. State regulation of industry found its highest expression in the so-called mercantile system of the seventeenth century, and particularly in the administration of Colbert.1 The reaction against this policy produced the first theory of state action that had an economic basis—the doctrine of laissez faire, or, as it was entitled by Adam Smith, ‘the simple and obvious system of natural liberty.’ Its rise at the particular time was the result of powerful forces. It is true of humanity that ‘it learns truth a word at a time,’ so that, as the problem of the sixteenth century had been religious liberty, that of the seventeenth political liberty,2 it was reserved for the eighteenth century to assert the claims of industrial and commercial liberty. The similarity in general features of these movements is remarkable. Each was the natural reaction against exaggerated pretensions; each perhaps attached too much importance to its special object, but all have profoundly affected European society for good. In examining this earliest scientific theory of the State, it is most desirable to see exactly what its doctrines really were. The common opinion that the advocates of laissez faire were opposed to any state action is dissipated by a study of their writings. They lived in an age of restrictions in which the most pressing work was to get the many hindrances to effectual industrial activity removed. A body of thinkers including Quesnay, Turgot, and Du Pont de Nemours among its members can hardly be said to have been indifferent to the necessary functions of the State. The real bearing of the laissez faire or ‘natural liberty’ system can be best appreciated by a consideration of the exposition given of it by Adam Smith. In a well-known passage of the Wealth of Nations he has set forth the functions of the ideal State in a manner that leaves no room for mistake as to his views.

‘According to the system of natural liberty, the Sovereign has only three duties to attend to; three duties of great importance indeed, but plain and intelligible to common understandings: first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting as far as possible every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual, or small number of individuals, though it may frequently do much more than repay it to a great society.’1

It is only necessary to read this passage in order to see that the policy favoured by Adam Smith was not a purely negative one. The State has not merely other functions than the economic ones; where private interest is likely to prove insufficient, it has economic ones also, and those, too, of great extent and importance, as will appear when considering his more detailed discussion.

The temporary predominance in the domain of political speculation of the laissez faire view is a commonplace of the historians of political economy.2 We need not repeat the account already given of the different effects produced by the Smithian doctrine on French and English thought. It will suffice to see the operation of newer tendencies, and for this purpose we may pass at once to J. S. Mill. His theory of state action is, in fact, a product, or rather application, of his utilitarianism, and thus we are led to expect what we do in fact find, viz., a close resemblance between his practical proposals and those of Bentham.1 He declares emphatically that—

‘The admitted functions of government embrace a much wider field than can easily be included within the ring-fence of any restrictive definition, and that it is hardly possible to find any ground of justification common to them all except the comprehensive one of general expediency.’2

This extremely vague and general statement is, however, supplemented by a declaration in favour of laissez faire as a general rule. ‘Letting alone, in short, should be the general practice: every departure from it, unless required by some great good, is a certain evil.’3

In regard to state action, as in so many other respects, Mill occupied a transitional position. He had accepted the traditional creed of the economists which was strengthened by his own sympathies in favour of freedom, as well as by his study of the brilliant work of Dunoyer,4 which he frequently quotes with approbation. But other influences affected him: the writings of the French socialists and the social philosophy of Comte both tended to impress him with the advantages of state action in certain comparatively untried directions, and consequently his attitude as to the true policy of the State is in some respects not defined with sufficient precision.

Since his time, the disposition to criticise the shortcomings of the doctrines of the Physiocrats and Adam Smith has become general. The possible theoretical difficulties and the conflicts of individual with general interest have been most forcibly stated in Sidgwick's minute and thorough discussions.5 This natural tendency has been reinforced by the influence of German economists who repudiate the practical position of Adam Smith as a product of the ‘shallow a priori rationalism’ of the eighteenth century, which regarded the State as an agent for determining private rights and duties (Rechtsstaat) in opposition to the older system of paternal government (Polizeistaat). This newer and wider conception of the State's sphere is conveyed in the term ‘civilising State’ (Culturstaat), or in the fuller description of Bluntschli, who regards ‘the proper and direct end of the State as the development of the national capacities, the perfecting of the national life, and finally its completion.’1

Admitting the force of some of the criticisms that have been urged against an exaggerated policy of laissez faire, it seems nevertheless possible to adhere to the substantial truth of the doctrine quoted above from the Wealth of Nations. The real ground for limitation of state functions is not the existence of an abstract rule forbidding various classes of acts. The rule itself is dependent on the results of experience. To the plea that in many cases state intervention would obviate evils to be found under a system of liberty, Adam Smith would reply that the legislator's ‘deliberations ought to be governed by general principles, that he must act by rules which in the supposed cases would do more harm than good, and that it is the balance of advantage which needs to be regarded.

This consideration duly weighed suggests the possibility of so modifying the older position as to include a class of cases that has appeared to be the greatest stumbling-block in its way, viz. the functions of the State in the lower stages of social development. Now it is beyond question plain that the province, and therefore the expenditure, of the regulating organs of society will vary at different stages of social progress. We may take it as indisputable that the duties of the Sovereign of a central African State and of the government of a European society are and must be very different, but the conclusion does not follow that there are no general principles to which the modes of state action may conveniently conform. The construction of a ‘cut and dried’ formula for the duties of the State is perhaps an impossible task, but a careful study of the nature and forms of state activity, as determined by the character of its organisation, will help to elucidate the difficult problem of its suitable duties.

§ 5. For understanding the true position of the State it is essential to see the way in which its functions have been gradually evolved. In the rudest forms of society each individual depends on his own resources. The Fuegians e.g., have no conception of government, and consequently, as Darwin notes,1 no chance of attaining to civilisation. In the hunting tribe, where the first advance beyond the lowest stage of savagery has been made, the elder is leader in war and judge in peace, the ‘warriors’ are soldiers and administrators. The tribe hunts in common over its territory, which it tries to protect from intruders, and it divides the game that is captured among its members. Thus we see that war, justice, or rather the administration of custom, and economic effort are the three forms of the rudimentary society's activity. The two former, and especially war, are, however, the kind of action in which regulation is chiefly needed, and where the power of the chief is particularly manifested.

The domestication of animals, which is the characteristic of the pastoral stage, facilitates the further differentiation of the chief and ruling body. The accumulation of the peculiar wealth of the period is more an individual concern, but war and justice are public duties. Here, and even in the preceding stage, we can notice the primitive forms of public expenditure, viz., the services of the members of the clan, and commodities, in the form of weapons and supplies for those going on expeditions.

When the tribe settles down on the land and devotes itself to agriculture, a further division of duties appears. The primitive agricultural community frequently tills its land by means of slaves; the freeman confining himself to warlike pursuits and to the duty of attendance at the public assembly, where he has to decide disputes and regulate matters of general interest.

Far later in historical order, but still presenting many points of resemblance, so far as public functions are concerned, comes the ‘feudal’ organisation. Some of the actuating sentiments are different, and the traditions of the Empire and the Church exercise a potent effect; but the same economic basis brings about a reversion to the phenomena of earlier periods. The feudal society is essentially militant. State power is vested in the ‘King’ or ‘Lord,’ who represents and personifies the community. In this capacity he contracts with the vassals for the supply of his (i.e. the State's) needs. The feudal army with its loose organisation is one result of this arrangement. Justice is administered through the Lord's Courts. The economic side of state activities appears in the management of the domain and the regulation of commerce. In this particular historical form we notice the rudiments of much that is important in the developed financial systems of the present time.

The City State as it is found in ancient Greece and Italy, or in Germany and Italy during the mediæval period, presents a distinctly higher type of political life. There is no longer the tribe struggling dimly to attain to the conception of political unity. The disorganisation and absence of the idea of political, as opposed to personal, duty which mark the ‘feudal’ epoch have disappeared. The free citizen of Athens or Florence had as firm a grasp of the truth that he owed duties to his city as the Englishman of to-day. An exaggerated conception of the State's powers, and a disregard of private rights, were the natural consequence, but so far as the financial aspect of political life is concerned, we may note the close analogy in many respects to the modern State. More especially is this true of the objects of public outlay. The maintenance of military (and in some cases of naval) force, the administration of justice and police, the furtherance of certain economic ends, are the principal claims on the public resources. Subordinate to these main parts of public service may be enumerated certain requirements, also represented in modern budgets—to wit, provision for religious service, for education, and for matters affecting social well-being.

Later developments of state life, either in the Roman Empire or in modern European countries, present the same general groups of public wants. Many special points will require attention when we come to examine more closely the detailed heads of expenditure, but so far as the general outline goes there is in many respects a consensus of practice in all stages of society respecting the sphere of the State.1

§ 6. The preceding survey of the actual development of state functions, brief and imperfect as it is, tends to confirm, and yet in some degree to qualify, the conclusions of theory. The forms of state outlay have arisen gradually in the course of history as the outcome of social conditions and sentiments, and they in turn influence the society. A community in which some special duty has been for a long period entrusted to the public power will not easily be able to dispense with this mode of supplying its need. The force of habit is here considerable. The conditions of social life are, however, subject to incessant change. The state outlay suited for the Middle Ages, when war and religion were the great operating forces, is almost necessarily unfit for the modern age, concerned as well with industry and commerce. The ready acceptance of this truth must not lead us to ignore the equally important fact, that state wants in their main features are permanent to a surprising degree. It is not in the character of the public needs, but in the modes of supplying them, that the most remarkable changes occur. There is, moreover, a universal recognition of the superior claims of defence and justice as being the primary duties of the State.

Writers of all schools agree in this belief, and so far history and analysis are in accord. The disputable part of state outlay is that which more especially concerns economic and social administration, and even here a good deal of the matter of controversy lies outside the subject of pure finance, and belongs more fitly to economic policy. Some trifling amount may be expended on, say, the promotion of art. The advocate of laissez faire may object to the course as a matter of economic policy, but so far as finance is concerned the smallness of the amount makes it a matter of comparative indifference. The question of public expenditure in its fiscal aspects is best considered in relation to each particular period of society. We may even accept the doctrine of Mill, that ‘in the particular circumstances of a given age or nation, there is scarcely anything really important to the general interest, which it may not be desirable, or even necessary, that the government should take upon itself,’1 while we at the same time remember that Adam Smith's determination of the Sovereign's duties can include these possible cases. Financial theory in its application to the modern state is at all events bound to recognise and indicate clearly the difficulties which extension of state action is likely to produce. The growing budgets of all modern societies have the tendency towards enlarging the sphere of the State as their ultimate cause, and it is important to see that persistence in this policy is certain to lead to embarrassments in financial administration; but the very necessity for discussing this subject compels us to examine the forms of expenditure as they have been, and are, while seeking to indicate what they ought to be.

§ 7. Another aspect of the problem of state wants requires some consideration. All economic life depends on a due supply of two distinct classes of objects, viz., commodities and services, or, in less technical language, material objects and human labour. The public power cannot dispense with either of these forms of supply, and at each period of its existence we find it demanding them both. The hunting tribe requires its warriors and their weapons and food; either the men without equipment, or the outfit without the men, would be useless. This distinction runs through every phase of social evolution, though it is much more complex in the higher stages. A very rude community can summon its members to act for the public good, and require them to fit themselves for their task. In such cases outlay and income are combined; the member of the tribe is at once paying his taxes and performing a public service. The opposite extreme is witnessed in a civilised State of the present age. The supply of public wants is obtained by the purchase of commodities and the hire of services, the power to carry out these transactions being procured through the possession of the public revenue. Intermediate stages show us the way in which personal service was commuted for money payment, and the delivery of commodities in kind was obviated by the development of a money economy. Survivals of the older order continue; in some cases they are too important to be regarded as mere relics of the past: they are rather ‘revivals’ under new and favouring conditions. When dealing with revenue we shall have to compare the direct with the circuitous method of supplying public needs, and in the present Book we shall have to note some of the economic consequences of the adoption of one or other of these modes.

Having disposed of the more general aspects of public expenditure, we shall next consider the several details, commencing with the oldest and most enduring—the need for defence against outside enemies.

CHAPTER II

the cost of defence

§ 1. Adam Smith commences his examination of the cost of defence by the statement that ‘it is very different in the different states of society,’ and adds, as the result of his inquiry, that it ‘grows gradually more and more expensive as the society advances in civilisation.’1 A reference to the statistics of military and naval expenditure will show that the tendency to increased outlay has continued during the century that has elapsed since the above passage was written.2 There is, moreover, no sign of change in this respect. It is as certain as any prediction in social matters can be, that no reduction in the military budgets of Europe will soon be made; on the contrary, there is every probability that this form of expenditure will go on increasing in the future as it has done in the past.3

The causes that have produced this, at first sight, unfortunate state of things must, it is clear, be deep-seated and persistent, and accordingly, when we scrutinise more closely the operating forces, it appears that the increased cost of warfare, and of the preparations which it involves, is closely connected with some of the normal features of social development. It is principally the result of two general tendencies, viz. (1) the increased division of labour which necessarily accompanies the advance of society, and (2) the development of those inventions that are such a striking characteristic of modern civilisation. The former makes it absolutely essential to set a specially trained section of the population apart for military service, to the sacrifice of their assistance in the ordinary work of production, while they usually receive a higher reward than a similar body of labourers would be able to command in the market. The pay of the British Army is a good illustration of this fact, and it is the most suitable instance to take, as enlistment in it is purely voluntary. The rapid progress of scientific discovery increases the cost of warlike material and equipment, since the constituents of this part of ‘consumers’ capital,’ as it may be called, become much more elaborate and have to be more frequently replaced. If we compare the stock of weapons of a savage tribe with the equipment of a mediæval army, and either of them with the war material now necessary for a single ‘army corps’ of any European State, we cannot fail to recognise the increase in complexity and in cost which the later organisations show. Even in the last quarter of a century the changes in warlike implements and supplies have been such as, while vastly increasing their cost, to render them very different from the appliances previously existing.

§ 2. The expenses of defence and aggression have, it must be noticed, to be divided into two distinct parts. The former, which may be regarded as the normal and regular part—the peace establishment—meets the preparation for war. It is so well recognised a feature of the modern budget, that it passes without comment. The other part of state outlay in this respect is that devoted to actual warfare; it is evidently irregular in amount, and may so far be called ‘abnormal,’ though it is almost certain to recur at indefinite intervals.1

The cost of preparation for war consists in obtaining a supply both of services and commodities, i.e. in the recruiting and training of troops, the provision for pensions, and the selection and preparation of arms, ammunition, and stores generally. Actual war causes expenditure on campaigns and expeditions, and, further, in the replacement of losses, alike in men and stores, incurred during its continuance. In estimating the loss to society through the persistence of the custom of war between nations, both the above-mentioned elements have to be combined in order to judge accurately of the real cost imposed.

§ 3. Preparation for war, as it appears in the successive stages of society, conforms to the general principle declared by Adam Smith. In a savage or barbarous community the cost of warlike preparation is insignificant. The ordinary course of life is of itself a training for times of conflict; the hunter or shepherd is ready at the shortest notice to transfer his exertions to a fresh and more exciting employment. Such rude societies are (with some rare exceptions) organised on a basis of militancy, all the adult males being available as warriors. Similar conditions prevail with respect to commodities. Bows, spears, staves, &c., are useful either in peace or war; they are eminently non-specialised capital, and more elaborate contrivances are as yet unthought of. The introduction of agriculture has a modifying effect, in so far as it tends to reduce the mobility of labour and commodities; but even in this stage the same general features recur. The ordinary husbandman easily becomes a soldier, and there is a recognised interchange between swords and ploughshares. An invasion is still carried out or opposed by a levée en masse, and usually takes place in the ‘off season’ of agricultural work. The cost of preparation for such wars obviously cannot be very heavy.

The introduction of manufactures, and the establishment of urban life that accompanies it, put an effectual check to the ruder forms of belligerency. A State possessing the varied elements of an industrial society—even in a rudimentary form—cannot permit the suspension of the normal economic processes during a period of hostilities, and it is therefore compelled to make adequate arrangements in time of peace in order to obviate the danger. The difficulty is met by the introduction of standing armies, whose origin is thus easily explained. It, in fact, becomes necessary to carry the gradually increasing division of employments into the military art, and to form at least the nucleus of an army, which can be readily increased in case of need. The difficulty of suddenly shifting the artisan from the workshop to the field of battle makes this imperative. Improvements in weapons and systems of discipline furnish additional reasons in favour of increased special training, to be given either to the whole efficient population, or to a selected portion of it, but in any case involving larger outlay.

In the section of the Wealth of Nations devoted to this topic the adoption of either of the alternatives just mentioned is regarded as a cardinal point in the evolution of the military system. The former method—that of training the whole effective population—is described as the creation of a militia, the latter as the formation of a standing army, and a very strong judgment is pronounced in favour of the latter expedient. Admitting fully the truth of some of the views set forth on this point by Adam Smith, it is nevertheless desirable to remember that they by no means exhaust the subject and the considerations relevant to it. His appeal to history more particularly strikes the reader as superficial. To support his contention that standing armies are always superior to militias—an idea evidently derived from his belief in the advantages of increased division of labour1 —he brings forward the examples of the Macedonian army that overthrew the forces of the Hellenic commonwealths and the Persian Empire; the early successes of Hannibal and the ultimate triumph of the Romans; and finally the fall of the Western Empire before the barbarian invaders. The cases quoted, however, fail to establish the doctrine asserted. It is surely contrary to fact to speak of the army of imperial Rome as a ‘militia’; if ever there were a ‘standing army’ it was one. The whole discussion, in short, amounts simply to this: that the better disciplined and trained force will generally defeat its opponents, and that it ought to be called a ‘standing army.’ The historical summary is accurate, if somewhat trite, but the interpretation results in a truism.

We have therefore to replace Adam Smith's account by one more consonant with facts, while preserving those parts of his exposition that are substantially correct. It is certainly beyond dispute that the course of development tends to replace the rude levies described as ‘militias’ by the better trained forces known as ‘standing armies.’ In addition to the instances given above, we may mention the introduction of permanent armies in every European State, so that the tendency towards specialisation is very generally operative. An opposing tendency, however, comes into play. It is equally a principle of evolution that all organised bodies tend to lose their original plasticity; they become, as it were, crystallised into a rigid form, and from this condition armies are not exempted. But warfare is the struggle for existence in its intensest shape, and in that struggle, mobility and power of adjustment are important advantages. The natural result is that the most efficient military machine or organisation of one period proves to be unsuitable for the changed requirements of another and later one. The history of war is, in fact, a series of illustrations of this truth. As convincing and well-known examples we need only note the Phalanx, the Legion, the man-at-arms of mediæval times, the army system of Frederick the Great, and the French system of the 19th century. And it may well happen that a future European war will afford a further instance in the fate of the present German army. The essential condition of military efficiency is constant readjustment—incessant striving towards improvement in discipline, training and equipment. Such efforts, necessary as they are, demand continuous intellectual strain on the part of the organisers, and heavy demands on the public purse.

§ 4. If, as we believe, Adam Smith failed to correctly interpret the past, he certainly did not succeed in forecasting the future. Up to his time there had been a steady movement towards the establishment and increase of permanent forces maintained at great cost. The effect produced on thoughtful persons by the growing European armaments is instructively shown in the statement of Montesquieu. A remarkable chapter of the Spirit of Laws1 describes the position and its dangers to the future of Europe in the following terms:—

‘A new disease has spread through Europe; it has seized on our sovereigns and makes them maintain an inordinate number of troops. It is intensified, and of necessity becomes infectious, for as soon as one State increases its forces the others at once increase theirs, so that nothing is gained by it except general ruin. Each monarch keeps on foot as many armies as if his people were in danger of extermination; and this struggle of all against all is called peace! Thus Europe is ruined to such a degree that private persons, in the present position of the three richest Powers of that quarter of the globe, would not have the means of living. We are poor with the wealth and commerce of the whole world; and soon, by dint of having soldiers, we shall have nothing but soldiers, and be like the Tartars. For that we need only make effective the new invention of militias established in most of Europe, and carry it to the same excess as we have the regular troops.’

This vigorous account has been largely justified by the actual course of events. The wars that resulted from the French Revolution proved the power of national sentiment to raise and maintain enormous forces during a period of protracted conflict, and the reform of the Prussian army under Scharnhorst's guidance, after the disaster at Jena, carried the tendency towards the enrolment of the nation into periods of peace. The wars of the third quarter of the 19th century, and especially the Austro-Prussian war of 1866, and the Franco-German one of 1870–1, have greatly increased the popularity of the national army system, which has been adopted by nearly all Continental States,1 and has been approved by many English writers. The change of opinion in recent years is perhaps most clearly shown in a remarkable essay of Cairnes, in which the respective merits of the older French, the English, and Prussian systems are estimated, with a conclusion strongly in favour of the ‘national army.’2

We may seem, for the moment, to have lost sight of economic and financial considerations, but they really underlie the whole military movement of modern times. The increase of permanent forces had reached its limit before the opening of the French Revolution, when about one per cent. of the population was available for actual service. The prolonged conflicts which arose out of that event led to the addition (as Montesquieu apprehended) of a militia to the regular forces. The modern national army in its full force is the old ‘standing army,’ plus a levée en masse, the latter, it is true, being suitably organised and equipped. This system, though produced at first by a particular set of circumstances, was obviously necessitated by economic conditions. Military power had to be increased, and as the state revenues did not allow of an enlarged permanent force, the only alternative was that actually adopted, by which the whole effective male population became a reserve, and was yet enabled, in times of peace, to carry on its ordinary industrial pursuits.

The question of cost is in the last resort decisive, and it is by it that the merits of the several military systems must be judged. One of the conditions to be included in our measurement of net cost is efficiency. National defence is too important, even from a purely economic standpoint, to be placed in jeopardy through narrow ideas of economy. An ineffective and badly organised army is dear on any terms, though, on the other hand, large outlay will not of itself secure efficiency, and so far weakens the economic resources of the nation. The problem is, indeed, as remarked before,1 one of extreme difficulty, and only allows of an approximate solution. As regards the cost or sacrifice involved in the various methods of defence, the national army presents two great advantages: (1) it requires less direct outlay, and (2) its real pressure is not so acutely felt. It is plain that services obtained through legal compulsion will be cheaper than those that are hired in the labour market at the current rate. Moreover, when the duty of military service is general, and enforced without favouritism, the sacrifice entailed by it will probably be less felt than if the large amount of additional funds needed under voluntary enlistment had to be levied through taxation. Granting, however, both these positions, it yet remains doubtful whether the indirect losses may not be more than the gains just mentioned. The real cost of an army formed on the German type is hard to measure. Mere comparison of army estimates will not establish its superiority over a freely enrolled force. Thus an able writer2 compares the English and German outlay for 1883–4. The former was £16,600,000 for 199,273 men, the latter £18,325,000 for 445,392 men, i.e. an army much more than twice that of England was maintained by Germany at an increased cost of only 10 per cent. This estimate is supported by additional calculations, which make the cost per soldier in England £86, in Germany only £44, or little over half. Such calculations err in the omission of several material circumstances. The rates of wages and salaries in the two countries are not on the same level. Under any system a given number of German soldiers would cost less than an equal number of English ones. Next, though the compulsory service in the former country reduces considerably the amount of direct outlay by the State, it inflicts a tax on those compelled to serve, whose amount could be measured only by what they would pay in order to escape it. A third influencing condition is the indirect effect on the productive powers of the country.

‘The military service,’ says a favourable critic of the German army, ‘postpones to a relatively very late period the productive use of the productive power of the country ... The waste of skilled labour ... is enormous. The future artisan or mechanic has not learned his business when he enters the army, nor can he practise it until he leaves the regiment.... Half the lifetime of the flower of the population is thus unproductively spent. Even in the case of unskilled labourers or peasants, who can go to work from the day they leave barracks, a considerable loss is sustained.’1

None of the foregoing considerations are taken into account by Geffcken. It may, indeed, be argued that the habits of discipline and order acquired during service should be placed to the credit of the German system, but this questionable item would not much affect the general result, more especially when we add the probable loss of originality and initiative, which is another result of discipline. The national army system further involves a supervision of the movements of all the members of the potential war force, and such regulation must in some degree restrict the free flow of labour to suitable markets.

The difficulties in the way of any estimate of the financial merits of different army systems, already evident enough, are enhanced by the special circumstances with which each country has to deal, and which render the complete adoption of a foreign system almost impossible. Thus England has to provide garrisons for many places very distant from her own territory, and service of this kind in India or the Crown Colonies could not be made compulsory. Separation of the home and foreign (or Indian and Colonial) armies appears a retrograde step,1 and in any case the supposed home force might, in time of pressure, be required for service abroad. A great power whose foreign possessions are insignificant has not this problem to face.

§ 5. A partial solution of the difficulty of procuring sufficient military force without compulsory service, and at the same time keeping expenditure within due bounds, is presented in the English Volunteer system. By this method the public spirit of the citizens leads them to give a portion of their time to acquiring the rudiments of military training and sufficient dexterity in the use of weapons. Competent military opinion seems, however, to hold that a considerable degree of organisation is necessary in order to make volunteer forces of any real service in time of war. The endeavour to combine the strict discipline essential for the soldier with the freedom naturally claimed by the volunteer is not an easy one, though the object is eminently desirable. Besides its great advantage in fostering the national sentiment of the members, and impressing them with the conception of their duties to the State, the volunteer corps would, by taking charge of the home fortresses, probably allow the regular troops to be drawn off for foreign service, and would also be a valuable source for recruiting.

It may further be remarked that a very general enrolment of the active population in such bodies, under proper discipline, would be equivalent to the national army system and at the same time avoid the evil of compulsion. In this as in other cases of volunteer assistance for public service, the chief difficulty is to enable the two agencies to fit into each other without friction or waste.

§ 6. The navies of the various powers do not present so much difficulty, for they are less costly so far as the supply of their personal service is concerned, and that supply is taken from a special class already trained to a life of hardship, and accustomed to constant supervision and control, though here, too, the question of obtaining the necessary force without undue outlay is a serious one.1

§ 7. The best and most economical mode of supplying equipment and material for both military and naval forces has been for some time recognised as a grave problem. The extraordinary rapidity of inventions soon makes the most costly and best devised appliances antiquated. It seems a hopeless task to provide all new agencies of attack and defence, owing to their great expense and their certain replacement by later improvements, so that it might appear that the wisest course was to await the outbreak of war, and then procure the best existing weapons. Unfortunately such a course is not practicable. Ships and ordnance cannot be speedily produced and distributed. The stock, the ‘fixed capital’ of destruction as it may be called, like that of productive industry, takes time to create, and in warfare delay is fatal. A steadily progressive policy seems the most advisable in this respect, even from the purely financial point of view, as the pressure is more evenly distributed, and by adopting it there is, on the whole, the best chance of security.

Against the undoubted evil of the great increase of outlay on armaments, it is satisfactory to be able to point to some compensation, or at least alleviation. One result is to favour the wealthier, and therefore the most industrious nations. A rich State can obtain the best ships, rifles, and cannon, and so gains the same advantage over its poorer rivals that civilised peoples generally gained over barbarians by the invention of firearms. Then, as Sir R. Giffen has suggested, the increased cost of warlike equipment is accompanied by an immense expansion of industrial production; if the burden be heavier the bearer is stronger, and is not so much oppressed as we might at first suppose; and finally, though this is problematical, the skill developed in aiding the work of destruction is also of service for industry.1 The best method of securing arms and supplies is also a doubtful matter. The usual alternatives are: purchase in the open market, or state manufacture; and in the former case the contracts may be given privately, or by public tender; but the advisability of state manufacture may be reserved for a more suitable place.2

§ 8. The cost of actual warfare presents problems very similar to those already considered. The national army, when in the field, is a very expensive agency. ‘An army composed of such materials as the Prussian, cannot be employed in war without immense loss and suffering both to the soldiers and the whole nation.’3 The ordinary standing army, on the other hand, is often unfavourably criticised as being composed of the refuse of the population.1 Were this true it would be rather an advantage in the event of war, except in so far as it detracted from military efficiency. In any case it is difficult to measure the cost incurred in war apart from the direct outlay and the loss of men and material in the conflict. There is, besides, the disturbance in the economic system which is a necessary result, and which may injuriously affect, not merely the national well-being, but the state revenues. Such consequences are hard to foresee, and vary widely in different nations. With regard to England, for example, the outbreak of war would materially injure her shipping trade, which forms so important a part of her industry; the diminished profits in that trade, and the innumerable dependent and connected occupations, would soon be shown in the reduced income-tax returns under Schedule D and would so far affect the state receipts at a time of extra pressure. It is needless to add that the revenue would almost certainly be acted on by other results of war, and not beneficially. A Continental State would probably suffer in a different way. Some of its territory might be occupied by the enemy, and its contributions suspended, or under the most favourable circumstances the productive powers of the community would be reduced by the withdrawal of so many men from their usual employments with the natural result of diminishing the yield from taxation.2 All such elements form part of the financial considerations appropriate to the subject.

To make the estimate a fair one, it is further desirable to take into account the possible advantages so forcibly stated by Wagner3 and others. They are: the ennobling effect of warfare on men, and even its value as an economic discipline; its tendency to bring about a better grouping of nations (as in the recent cases of Germany and Italy); and finally the fact that successful warfare may allow of the cost being placed on the vanquished. It might be added that some periods of war have been seasons of high profits, as was the case in England during the French wars of 1793–1815. But these supposed gains are, after all, no adequate set-off against the certain losses. There is no evidence that war promotes higher social or economic training, and it decidedly deadens the higher moral feelings.1 Under given conditions, capitalists may gain by it, but only at the expense of other classes. The power of placing all the expense on the conquered party is not a diminution but simply a shifting of the burden, as happened in the Franco-German war of 1870–1.2 And the redistribution is not always purely beneficial to the winning side, while it intensifies the sufferings of the defeated State.

§ 9. In conclusion, it may be said that war and preparation for war are by far the heaviest charges on the resources of modern States.3 An enormous sacrifice of labour-power and of commodities is inevitably caused by its persistence as a usage among modern nations. The uncertainty and indefiniteness of the requirements of states for this end is a perturbing element in financial arrangements. War has been the principal cause of the great state indebtedness so general in Europe, and of the severe pressure of taxation. It is consequently beyond reasonable doubt that peaceful methods of settling disputes, or limitations on the present rigour of belligerent rights,4 are not merely social, moral, or even economic reforms: they are further of the greatest financial importance. Arrangements for disarmament, if possible, would belong to the same class. But while strongly insisting on the great advantages that are certain to result from the maintenance of peace, and the reduction of military and naval expenditure, it is quite as essential to assert that so long as present conditions last, a well-organised and effective system of defence is a necessary part of state expenditure, and one that amply repays its cost by the security that it affords for the political independence as well as the economic interests of the nation. To maintain a due balance between the excessive demands of alarmists and military officials, and the undue reductions in outlay sought by the advocates of economy, is one of the difficult tasks of the statesman. In endeavouring to attain the proper mean, many specially financial considerations have to be noticed. Among these are: the relation of state to national revenues; the risks to which unsuccessful war would expose the country; and the comparative urgency of the other claims on the State. The application of the amount judged necessary is also difficult to determine. It has to be distributed between services (Personalbedarf) and commodities (Realbedarf), so as to secure the maximum advantage, but this latter question lies, strictly speaking, outside the limits of finance, and belongs to military administration.

note

The growth of expenditure for military and naval purposes is very plainly shown in the following table (000's omitted):—

Whatever qualification may be requisite in consequence of the above figures being obtained from different sources cannot affect the general conclusion that they are adduced to support—the increase of expenditure for the purposes of defence and aggression.

CHAPTER III

justice and security

§ 1. In tracing the gradual development of state functions, we found that the maintenance of internal security, the protection of each member of the society against ‘the injustice or oppression of every other member of it,’ or in more modern phrase the establishment of law and order, was a task that was attempted in the earlier stages of social evolution, and one that became more fully emphasised as political institutions grew in strength. The necessity of the function is admitted by all except advanced anarchists. In fact, the extreme urgency of the claim for public activity in this respect has frequently led to a comparative neglect of other sides of state duty. Both in its social and economic results the establishment of security is of the utmost importance; but there is the danger of limiting its range too narrowly. All institutions and legislative measures that tend to increase the power and resources of the State so far conduce to the preservation of order, and this wider point of view should never be ignored, though it is necessary to give the most prominent place to the agencies directly employed in promoting the end.

An instance of the disposition to unduly confine the subject is found in the Wealth of Nations. The section of the work devoted to this topic deals solely with the administration of justice. Adam Smith appears to have believed that the one matter of importance for the State was to decide disputes, though his account of the introduction of law courts shows that it is just as essential to suppress disorder. The sovereign does certainly discharge a most useful function in settling controversies about the precise nature of private rights and duties: but beside the claims of individuals, there is the whole body of public law, and even individual rights have to be determined in respect to their orbit and incidence by the State. The ultimate aim is the promotion of social welfare by the establishment of security, which may be obtained in two different ways, with very dissimilar financial effects. ‘The Legislature may pass laws which give certain rights and remedies to the persons interested, and may leave it to them to enforce the law by taking their own proceedings, according to their own interests, in the courts of law. In this case the courts are the organs through which the State exercises its power. Or, again, the Legislature may entrust the duty of enforcing the law to an executive department, which then becomes the organ of the State for the purpose.’1 The former method would come under the head of ‘justice’; the latter under that of ‘police’ or ‘administration,’ and it is a significant fact that it is not noticed by Adam Smith. His whole economic system, on its practical side (in this respect in strict agreement with the Physiocratic position), was a protest against the older paternal policy. He had no conception of the development of administration and supervision for social and even economic ends, which is so characteristic of the modern State, and consequently his work presents a gap in regard to this important subject.

The student of modern finance is, however, compelled to take the different elements of justice and administrative police into account when seeking to estimate the cost incurred in guarding the rights of private persons, and the security of the community which is an essential condition precedent to the former object. The growth of expenditure in this direction has been very large, and presents some serious financial problems.

§ 2. Though many of the details of legal development are as yet obscure, its broad outlines have been sufficiently elucidated by the labours of the historical jurists.1 In the primitive community custom is binding; violations of its prescriptions are offences, but any disputes as to the fact of a breach of the customary rule have to be decided by the opinion of the tribal or village assembly. As soon as the chief comes into existence the decision of controversies becomes one of his tasks—or privileges; the submission of the parties is, notwithstanding, voluntary, at least in appearance, and the Judge is entitled to a ‘fee’ for his services.2 Under such conditions, justice is a matter of special bargain. The chief, as judge or arbitrator, gives his time and attention to the decision of disputes, and like any labourer is ‘worthy of his hire.’ Very many legal systems afford evidence of the existence of this dealing out of the commodity, justice, and of the slow process by which voluntary submission became compulsory.

At a far later stage of growth, and even when the coercive power of the sovereign State was fully established, this idea of ‘service for service’ was retained. The financial significance of such a view is apparent. As long as the suitors paid fees for the services of judges there was no need for including the item among the heads of public expenditure. Even if entered, it would only be a matter of account, the receipts balancing the outlay.3

First appearances are in favour of this arrangement. The public revenue is exempted from charge; the persons who are supposed to gain have to pay for a service rendered; and judges are stimulated to diligence by the hope of reward. The operation of individual interest seems to produce a sufficiently satisfactory result. So plausible is this idea that it was maintained by Adam Smith. But before his time the practical weakness of the method was so apparent that the abolition of all law charges was advocated, and Bentham had little difficulty in showing the mistake of the older view. It based its case on a series of false comparisons. The judge—and every judicial official—is indeed a labourer discharging a most useful service even in a strictly economic estimation; but his toil is for the interests of the society at large, and he ought to be paid out of the fund created indirectly through his work, that is, the increased wealth of the society owing to an exact administration of justice and the consequent increase of security. If lawsuits always arose from mistakes, there might be something to be said for compelling the parties in fault to pay for the correction, but this is not the usual case; far more often they arise from intentional wrong-doing by one party, or in many instances through the difficulty of knowing the law. The innocent suitor is not a special gainer by the action of law; he is in rather a worse position than those who by the restraining effect of justice have been saved the necessity of asserting their rights. The great advantage that a legal system sustained by fees gives to the rich is an additional argument against it, as is also the tendency of payment by fees to foster judicial corruption. A court supported by charges on suits would be likely to work so as to increase those charges, and might not be strictly scrupulous in the methods adopted.

The theory, besides, is only applicable to civil courts. If we grant that the criminal courts are to be sustained by the parties—one of those parties is the State, and it must draw its contribution from the public funds. A possible source of revenue may be suggested in the penalties inflicted on wrong-doers. Unfortunately this, which so far as it goes is very suitable, proves insufficient. In many cases there is not enough to compensate the individual sufferers. The offender—either civil or criminal—may have no available property, and we therefore find ourselves forced to the conclusion that the cost of justice should be defrayed by the State. Nor, so long as due care is observed in scrutinising the outlay, is there any form of public expense that is more amply justified. On the due administration of justice depends in a great degree the prosperity of a country. The outlay incurred for it ought not to be regarded as a deduction from a definite and pre-determined fund; it is more correctly a percentage levied on wealth, that but for it would never have existed.1

§ 3. In regard to justice, as to defence, it is possible to adopt different methods of supplying the state requirements, consisting in this case chiefly of services. As Germany has given the world the greatest example of forced military duty, affording a model that has been widely imitated, so has England supplied the most striking and impressive instance of compulsory civic service. The jury system of the United Kingdom, though it does not enter into the national accounts, is, notwithstanding, a heavy tax on those who are subject to it and should be considered in estimating the national burdens. Continental legal systems economise in another direction. By placing judicial salaries at a lower scale, the work is done by an inferior class of men,2 but then they are enabled to employ a larger staff and can secure a quicker disposal of cases. In this they are aided by the superiority in form of their laws. A less skilled judge can deal successfully with the definite rules of a Code, when he would fail under the English method of case-law. But whatever mode be adopted, the total cost of the legal system is not light, as the figures show, and it tends to increase with the growth of population and industrial intercourse.

§ 4. Voluntary service contributes towards the performance of judicial work. As England has a volunteer army, so she possesses a volunteer judiciary in the unpaid justices, who discharge the lower tasks of courts of first instance, and are rewarded by the consideration that attaches to their office, and by the reflection that they have ‘done their duty.’ The Germans, and Gneist in particular, place great weight on the advantages of ‘Self-government’ as it exists in England and is being gradually introduced into Prussia. It is nevertheless of doubtful efficiency (‘justices' justice’ has long been a byword), and from the financial point of view the gain is not great. At all events, the system of unpaid magistrates is only suited for thinly peopled districts, where small offences are comparatively few in number, and where the administrators command respect by their social position. Civil cases, above the lowest, have to be referred to a paid official—the county-court judge; and the criminal jurisdiction over large cities is given to well-trained and salaried magistrates, since the work would be beyond the power of volunteer service. Thus self-help, or rather free public service, turns out to be a valuable aid, but impracticable as a sole or even a chief resource.

§ 5. Next to the cost of law, the outlay on ‘police’ requires notice. The general term ‘police’ has been used in a wide sense;1 we may, however, limit it to its modern meaning. In this application it is of very recent growth. Formerly each citizen was in some degree prepared to defend himself, or belonged to some body or group that would protect him more or less effectually against aggression. All difficulties finally came to the tribunals. Now the State is held bound to have a force on hand to suppress disorder and bring criminals to justice. The absence of a police force from any scene of disturbance is regarded as a grievance, the support of order being supposed to concern it solely. A series of causes has tended to produce this remarkable change in public feeling; they are:—(1) The increase of population, and its great density in certain areas, affording naturally a greater facility for escape to offenders; (2) the alteration in manners that has abolished the custom of carrying arms; (3) the modern industrial system, with the consequent accumulation of valuable commodities, many of them incapable of being identified; (4) the development of agencies for locomotion, and the facilities for escape thereby provided, while pursuit, though difficult to an individual, is still easy for an organised body. The financial outcome of the normal forces has been a great increase both in central and local expenditure, for the purpose of maintaining police forces engaged in supporting and facilitating the action of courts of justice, as also in preventing outbursts of disorder.

§ 6. The penal system stands on the borderland between ‘police’ and administration. When the judge and policemen have dealt with the criminal, he is handed over to the jailor, and in this department of state outlay also there has been a noticeable change during the last century. Ancient societies treated offenders in a summary way. They were executed or reduced to slavery, so that the problems of prison expenditure or management did not arise. The mediæval idea was quite as barbarous, though not so efficient. Criminals who escaped death were the objects of great cruelty, as well as at times of undue lenity.1

The more humane spirit of the eighteenth century brought about a salutary change. Under the influence of the teaching and practical work of Beccaria, Bentham, and Howard, continued by their many followers in their various lines of exertion, the whole system of criminal legislation and penalties was remodelled. Punishment, instead of being regarded as the vengeance of the State or the individual, was transformed into an agency for prevention and reformation.1 Executions became few in number, and prisons, from being purely places for confinement, were used for purposes of discipline and instruction.

The necessary financial result has been a considerable increase of expenditure. Prisons and convict stations are formed on an elaborate scale, with careful provision for the health of the inmates. The comparative leniency of sentences has further tended to perpetuate the class known as ‘habitual criminals.’ This small body—for such it really is in all civilised countries—is yet responsible for the greater part of the outlay on ‘crime and police.’ Any effectual method of dealing with proven ‘habituals’ would be a financial as well as a social benefit. Even under the present arrangements the outlay on the ‘penal system’ is in the strictest sense productive, or at least preservative, of wealth.

CHAPTER IV

administrative supervision. poor-relief

§ 1. The modern State has in some respects added, if not exactly to the classes of objects under its care, at least to the complexity of the tasks connected with those classes. It is still possible to stretch Adam Smith's description of state functions so as to include the subjects of the present chapter, but the extension, though conforming to the letter, hardly agrees with the spirit of that well-known statement. In this instance we have a good example of the way in which public tasks are conditioned by the circumstances of time and place, and of the impossibility of using an inflexible formula to guide the course of social action. The expansion of administrative supervision in the last fifty years has placed a fresh series of duties on public authorities. A century ago there was little of the kind in England, and the older French and German systems of regulation were in a state of decay. The French Revolution of 1789 was believed to have removed these checks on individual liberty, and to have secured by its influence their ultimate abolition in other Continental States. The passage from the Ancien Régime was regarded as definitely accomplished.

Such expectations have proved unfounded; old methods of control and supervision have indeed for the most part disappeared,1 and no one advocates their re-establishment. In their place we have a newer body of arrangements for the regulation of various parts of social life. Under an elaborate system of legislation, a large official staff has been created for the purpose of regulating the free movement of the ordinary citizen. There are inspectors of mines, factories, shipping, railways, tramways, hackney-carriages, &c. The soundness and purity of articles of food are tested by public agents. Many trades are placed under special rules, and local authorities are entrusted with wide discretionary powers in their dealings with the habits and occupations of the communities under their charge.1 The foregoing account, applicable in all points to the United Kingdom, holds true generally of all modern States; there may be differences in detail; the power which exercises supervision may be local in one country and central in another; nevertheless, the broad fact remains, that in both Europe and America the department of ‘administration’ is increasing in extent.2 Opinions may and do differ widely as to the merits of this movement,3 but on the point most pertinent for our present inquiry there can be no dispute, viz. the increase of expenditure that necessarily results from it. The budget of every civilised society is swollen by the charges needed for the salaries of agents engaged in the work of inspection and regulation, while the total cost can only be ascertained by combining the general and local outlay.

§ 2. Some of the causes of the great increase in administrative outlay have been noticed when dealing with ‘police.’ They, however, deserve a more precise statement:—(1) The growth of great centres of population makes organisation and control more necessary; e.g. to employ a body of police to regulate the traffic on a country road would be absurd; in the Strand or Regent Street it is indispensable. The inspection of dwellings in order to prevent overcrowding is another prominent instance. (2) The moral sense of the community stands at a higher point now than it ever previously did, and as a consequence the public power is invoked to remove any evil that shocks public opinion. The legislation as to unseaworthy ships affords an illustration. (3) The democratic movement makes interference with the owners of capital or property generally, as also with large dealers in commodities, acceptable to the holders of political power. (4) The establishment of bodies of officials is carried on so gradually that the total expense entailed by the system is never realised, while the special gain hoped for in each case is distinctly conceived. (5) Finally, the influence of the prevalent political and economic theories should be added. Most cases of actual state regulation would come under the exceptions to laissez faire as discussed by J. S. Mill and H. Sidgwick; they also have been powerfully advocated both in Germany and America on theoretical grounds. It is, therefore, not unreasonable to assume that this tendency of speculative thought has in some degree influenced the conduct of statesmen.1

§ 3. The difficult question remains. How far is this outlay financially justifiable? It may at once be conceded that many of the ends sought are eminently praiseworthy, and that no supposed principle of abstract right ought to hinder the adoption of measures of general utility. The final test must be expediency, but expediency in its broadest sense. It is only possible here to indicate some of the general considerations applicable to the problem, and which have to be used as guides in each particular case. (1) The pressure of taxation, and the probable sacrifice that its increase for a proposed new end would cause, or the advantage that would result from its remission. (2) The possibility of voluntary agencies undertaking the work now carried out by the compulsory power of the State. Thus it should be a matter for deliberation how far Trade Unions could insist on sanitary provisions in factories, and associations of consumers guard against adulteration and fraud generally. The danger of weakening the spirit of association by hasty state intervention is not to be overlooked; all the more that it is unobtrusive and cannot be readily weighed. (3) The extent to which administrative action is really effectual in meeting evils, though of extreme importance, is not easily determined. Sweeping general propositions, to the effect that ‘individuals do things better than the State,’ or that ‘the State does things better than individuals,’ will not carry us far, but the inertness of human nature when relieved from the stimulus of direct self-interest, and the danger of official corruption, both suggest a presumption against state interference, a presumption it is true of very different force according to the case in which it is used. The solution of the problem belongs to the statesman, who, however, will not form a less sound judgment by taking general principles into account.

It seems perfectly certain that administrative expenditure will continue to increase more rapidly than the cost of justice or police. These latter move with population; the cost of inspection and regulation grows much faster, it is, too, more divided and not so definitely ascertainable, and may therefore be regarded, in common with military and naval expenditure, as presenting the principal difficulty for the finance of the future. Growing expenditure implies increased revenue or additional debt, and either means extra pressure on the subjects of the State. The duty of seeing that all outlay is productive of compensating advantage to the community is more than ever imperative.

§ 4. The relief of indigence is now in most countries one of the charges on the public revenue, and has even become at times—as in England under the old poor-law—a heavy burden; it has not, however, been assigned a prominent place in the estimates of outlay given by financial theorists. The reasons for this comparative neglect are not hard to find, for (1) it has generally been a local charge, and has not found its way into the national budgets, which used to occupy most attention; and (2) the state relief of pauperism has been one of the contested questions of economic policy. It is probable that Adam Smith, who does not mention poor-relief in his examination of public expenses, disapproved of any form of compulsory aid to distress, and his followers would in most cases take the same view.1 But though we can thus explain the omission of poor-relief, we cannot accept the reasons as sufficient. From the point of view of public finance, it is immaterial whether the State acts through general or local authorities: e.g. in England before the Act of 1877, prisons were maintained by the counties; since the passing of that measure they are under the Prisons Commission; but in either case they involved a public charge. In regard to the second point, finance is engaged in dealing with facts, and therefore the existence of state aid to those in distress is a valid reason for examining the subject. We may at the same time admit that the question of expediency in this respect is a most difficult one, involving as it does reference to a number of political and economic considerations.

The problem presents itself in the following way. In all modern societies there are persons who, by reason of physical or moral causes, are unable to—or at least as a matter of fact do not—provide themselves with the means of subsistence. The question then arises, what is to be done with this class? Ancient societies relieved themselves from the difficulty by the rude expedients of infanticide and slavery. The Middle Ages met it by the inculcation of private charity by the Church, and by the monastic institutions. In modern times the insufficiency and irregularity of private relief have led to state intervention. The break-up of the mediæval system, and the resulting economic disturbances, made it an urgent matter of public policy to deal with distress. The greater power of the principal European monarchies also furnished the means, in the shape of legislative action, prescribing and limiting the conditions of relief. The growth and expansion of the system of public relief is of itself an argument in favour of its expediency as meeting an evil common to all communities that have reached a certain stage of development.1

This simple and obvious ground for the policy has been supported by several arguments of a more theoretical character. (2) Thus it has been urged that the State is ‘bound’ to relieve distress. The methods in use in ancient times for the suppression of indigence are happily impossible; private charity is not sufficiently regular, and the State cannot with safety so far outrage the sentiments of its citizens as to allow even the poorest to perish by starvation; it therefore has an imperative duty to discharge in the relief of actual destitution. (2) Another contention appeals to justice rather than sentiment. If the relief of distress were left to voluntary exertions, it would in fact amount to an extra tax imposed on the charitable, who would have to pay more than their due share, the niggardly escaping the payment of anything whatsoever towards what ought to be a common burden. (3) In addition to justice amongst taxpayers, the plea of justice to the indigent may be advanced; it may be said that the real cause of destitution is the appropriation of the agents of production by private persons, and that consequently those in distress may fairly claim at least that minimum of subsistence probably attainable in a state of nature, or—to vary the argument slightly—the holders of property may justly be called on for the amount required for the relief of actual want, in return for the benefits that they obtain from the present social organisation; i.e. they are asked to pay a ‘ransom’ for their possessions.1 (4) To these somewhat abstract arguments, a more direct and practical one may be added. Under the present penal system2 criminals are supported in a way that secures them a tolerable and healthy existence: now to deny to the pauper what is thus guaranteed to the criminal amounts to an inducement to crime.

The force of these several arguments, and the fact of the almost universal existence of public relief, would appear to leave no room for doubt on the subject, but we find to our surprise that a formidable list of arguments may be brought forward on the other side. The opponents of poor-relief contend (1) that to give support to the non-worker is essentially ‘communistic,’ and that any such system has ‘communism’ as its logical result; (2) that aid to distress tends to act on population; that therefore an increasing number of applicants for assistance would present themselves, until at last the whole revenue of the community would be absorbed in their support; (3) that state relief demoralises the recipients, while (4) it interferes with the beneficial action of private charity, and injuriously affects the moral sentiments both of givers and receivers. The more extreme foes of relief, public or private, would add (5) that all relief (and therefore public relief) discourages providence and saving. Almsgiving is—as Professor Newcomb puts it—‘a demand for beggars’3 The industrial and economic virtues are, it is said, weakened by every attempt at distributing aid. Finally, (6) evidence has been adduced to show that poor-relief lowers wages, since it allows the lowest sections of the population to work for less than the amount needed for subsistence by the amount of relief that they get from the public authorities.1

§ 5. To strike a true balance between the opposed arguments that have been just stated is indeed difficult, but for financial discussion it is possible to arrive at a satisfactory result. In the present position of most modern societies a methodised system of public relief is indispensable, and therefore forms a legitimate part of public outlay; nor is it hard to fix approximately the standard of relief. If the treatment of the pauper should be better than that of the criminal, it should, on the contrary, be worse than the standard of living of the poorest self-supporting labourer, and unhappily the limits as thus determined are very narrow. For financial as well as for social and moral reasons all relief should be given in the form prescribed by the State, i.e. generally ‘indoor maintenance.’ Assistance from public funds is not ‘charity,’ from which it should be clearly and distinctly separated, and in no way can this be better accomplished than by confining the action of the public agents engaged in relief to a definite sphere. It may be further said that in the administration of poor-relief the reformation of the habits of those who are indigent should be aimed at. What the habitual criminal is in the prison the hereditary pauper is in the poor-house. Expedients calculated to improve the moral of the destitute would powerfully affect the productive forces of the nation.

The relations between the system of legal aid and private charity are of extreme importance. One of the most serious blots in the usual poor-law arrangements is the absence of any connexion between the two classes of agency. We can hardly doubt that the contributions of private persons, properly utilised, would go very far towards meeting the necessary outlay on those in distress, with the double advantage of economising the public funds for other objects, and preventing the evils that result from the existing abuses of almsgiving. Discrimination as to the causes of distress, and consequently the amount and character of relief, can be properly applied only through the operation of private beneficence.1

§ 6. In addition to the direct relief of indigence, the State has been called on to meet the difficulty either by instituting a system of public works, by granting old-age pensions, or by compulsory insurance on the part of the workers. The assertion of the ‘right to obtain work’ supplied by the State is distinctly of French origin.2 It has never obtained full recognition in practice, as the difficulties it would cause are evidently insuperable. The provision of work, the mode of supervision, the rate of pay, and the disposal of the products, are each and all so many obstacles in the way of its adoption. The economic effect on the whole working class would, moreover, be surely evil; the expenditure would be indefinite, and not capable of easy control. A general system of pensions for the aged would undoubtedly provide for one large section of the pauper body, but it would at the same time necessitate a great increase in the public burdens. To add £16,000,000 to the annual expenditure of the United Kingdom would involve a grave disturbance in financial equilibrium, which could only be restored by a series of retrograde measures in respect to taxation. Without pronouncing any opinion on the social and economic aspects of the various pension schemes lately put forward, it is here in place to dwell on the serious financial difficulties that their adoption would be certain to create, and which by themselves suffice to make any step of the kind one of very doubtful expediency.3 ‘Compulsory insurance,’ as advocated in England, and in some degree carried out in Germany, is less open to criticism on the financial side, but it may be remarked that the collection of the insurance charges is likely to be ineffective in a country where labour is allowed full freedom of movement, while the scheme involves the State in extensive financial operations, and at the same time weakens the action of voluntary effort. The English friendly societies even now insure a large number of the more provident artisans, and have been favourably contrasted with the foreign state insurance bodies by Mr. Goschen.1 A strict administration of public relief encourages the habit of insurance, or other provision against distress, and the development of such methods of self-help makes it easier for the State to adhere to the rigid policy of relieving nothing except absolute indigence.

CHAPTER V

education. religion

§ 1. The recognition of education as one of the tasks of the State was a natural result of the decline of the influence of the Church. The innumerable religious institutions of the Middle Ages had provided instruction for youth, as they had provided sustenance for those in need, and when their endowments were in great part seized by the different European sovereigns, some provision in their place, or by their diversion to the supply of education, was obviously suggested. Even the theorists of the eighteenth century hesitated to exclude the duty of assisting education from the sphere of state operations. The Physiocrats and Adam Smith agreed in recommending state aid to education, but only under such conditions as would encourage efficiency in the teachers, with industry and application in their pupils.1 Since their time the tendency has been towards the extension of public effort in all the departments of education. The question presents itself in connexion with each of the three forms of teaching, primary, secondary or intermediate, and university.

§ 2. In respect to primary education we may note the distinct expression of opinion by Adam Smith in favour of state facilities for this form of teaching. The success of the Scotch parish schools had evidently impressed him, and he contends with great force that the increased division of labour due to economic progress tends to weaken the faculties of the workman, and that this evil can only be counteracted by education. The State has moreover, he thinks, a direct interest in the education of the bulk of the people in order to secure political tranquillity.1 A mild form of compulsion is even allowable, since he suggests that passing an examination should be a necessary preliminary to entry into a trade. Adam Smith does not advocate free education, but his reason is curious, viz. that the teacher's diligence is stimulated by the receipt of fees, an aim that would be otherwise reached through the modern result-fee system.

During the present century the state-guided system of primary instruction has become definitely established, as an examination of the details of expenditure will most clearly show. The development of this system has brought out the existence of several difficulties imperfectly recognised at its commencement. Among those are:—(1) The problem of religious teaching; denominational schools are offensive to one section, undenominational ones to another; and both the amount and application of state funds are hotly contested by the different parties. (2) Distinct from the foregoing, but connected with it, is the relation of state to voluntary schools. If no fees are charged in public schools, the private schools complain of the unfairness, which indeed is manifest. On the other hand, fees—especially if education is compulsory—press heavily on the poorer parents. (3) When, to avoid some of the foregoing puzzles, payment by results is made, there is a danger of superficial preparation; and yet without some test of the kind, efficiency cannot easily be measured. The only complete escape from such difficulties would be the abandonment of instruction to voluntary effort, a solution which is forbidden by the importance of education, both socially and economically, as also by the practical impossibility of securing it without state aid in the case of the very poor.

§ 3. Secondary education is in a very different position. The older economists would abandon it to the action of individual and family interest. There is, it would appear, no pressing ground for state exertion in order to supply instruction superior to that enjoyed by the whole population. It may, therefore, reasonably be left to private initiative or to voluntary effort, more particularly in the form—too often disregarded by economic and financial theorists—of endowment by gift or bequest. The modern tendency is here, too, in favour of an extension of state action, generally directed rather to supervision and readjustment of existing resources than to the supply of additional funds. In some instances special agencies for testing the quality of secondary education, either by inspection or examination, have been created.1 From the financial point of view, it must be said that outlay of this kind is not to be placed in the same rank with that in aid of the primary instruction of a country. At best it belongs to the class of useful outlay, and is very likely to be supplied by private funds. It, moreover, is open to the objection of benefiting but one, and that the most independent, section of the population. Against these weaknesses it may claim to be of a moderate character, and not likely to seriously affect national finance.2

§ 4. Universities, or, more generally, institutions for higher education, have to be judged on special grounds so far as their claims for state aid are concerned. It is quite true, as Adam Smith shows, that the higher education in many cases is not a necessity, but rather a luxury or ornament that may very well be paid for by the wealthy, if they desire it for themselves or their families. In most of the remaining instances it is a legitimate investment in immaterial or personal capital, a point of view that predominates in the minds of the professional and commercial classes, so that on either supposition there is no call for public intervention. State or other endowments have besides, the injurious effect of checking the easy remodelling of the system of higher instruction in accordance with the inevitable changes in scientific and literary studies.1 There is unfortunately a tendency on the part of highly paid permanent teachers to take their work in a mechanical manner, and expend their energies in other directions. The result of such considerations leads to the suggestion of thorough reform in the mode of higher education, rather than complete surrender on the part of the State of its regulating functions, more especially when some less obvious parts of the working of Universities are taken into account.

The modern University has very different elements, and may be looked at from different points of view. In the first place, it is a grouping of professional schools, and here the tendency towards extended administrative action almost compels the State to form closer relations with the larger teaching bodies. The increase in the number of professions, entry into which is granted only on supposed proof of competence, as evidenced by examinations and courses of study obtainable solely by means of attendance at a University College, affords a strong reason for offering facilities towards getting the necessary instruction. When the State imposes on candidates for various offices or professions the obligation of having a University Degree, or something similar, it is in fairness bound to supply them with reasonable opportunities for acquiring that needful badge. Moreover, many parts of administrative work could hardly be carried on without the aid of the scientific skill maintained by the teaching bodies.

Secondly, the importance of scientific research in its effects on the production of wealth, and in dealing with many social problems, is now abundantly recognised. Even literary and historical inquiries are found in many cases to be of practical service, and to powerfully aid in the advance of culture. The ‘endowment of research’ is a matter, if not of practical politics, at least of discussion. A University, however, is, or at least ought to be, the home of research, and its support by the State may be claimed on the ground that it discharges this most valuable function. Possessing these two departments, which may reasonably expect aid from public funds, a University naturally adds to them a third in supplying to the richer members of the society the ornamental education or ‘culture’ that they demand and are willing to pay for. By this combination it is further possible to stimulate the teachers by fees that will largely depend on the reputation and credit of the institution where they are placed.

§ 5. The question of ‘technical’ as opposed to general education presents itself in all the stages of instruction, and in each it raises the same problems. The evident economic advantage that a nation obtains through the skill of its producers is a prima facie ground for State aid being given towards the attainment of suitable training. Expenditure for such an object is productive even in a financial point of view, and it may be further argued that individual or family interest will not suffice to accomplish the end desired. On the other hand, the sturdier individualists urge that self-interest, if good for anything, should surely be good for inciting men to learn in the most efficient manner the trades or occupations by which they have to earn a livelihood. The same general result is reached here as elsewhere, viz. that the true test is experience, and it shows that public outlay may be of advantage in promoting industrial training, though it is subject to the inevitable drawback of all state interference in its tendency to reduce private exertion, and in the difficulty of duly regulating the supply of skilled labour called out by its action. The acquisition of training for unprofitable employments is no slight evil, and under the rigid system of regulation inseparable from official management it is not unlikely to occur. Even general education may produce a surmenage scolaire, as the example of France shows.

§ 6. Under the same head the cost of museums, libraries, picture galleries, and institutions for promoting science and art generally should be placed. They come in to supplement the more directly educational agencies, and are often quite as effective in promoting the ends aimed at. The modern development in this domain is remarkable (especially in England and the United States). Central and local authorities have both made considerable efforts in the direction of meeting the wants of the population for opportunities of acquiring information and culture. Few large towns are without appliances that were unknown a century ago, or confined to national capitals. We have to add this expenditure to the cost of schools and colleges before we can say what is the total sacrifice incurred by a nation in its public capacity for the object of culture.

§ 7. Voluntary action may be expected to relieve the revenues of the State from a great deal of this charge. Not only are the expenses of education largely met by the normal economic process of payment for advantages obtained; the donations and bequests of the wealthy have supplied, and we may hope will continue to supply, a good many of the less profitable fields of instruction and research with sufficient endowment. The splendid example set by American millionaires may produce good effect in Europe by attracting attention to the benefits of supporting the educational and investigating bodies to which civilisation owes so much.1

In any case, it must be said that no modern State is likely to suffer financial embarrassment through its outlay in promoting education and culture. Measured against the cost of war, and preparation for war, this form of expenditure is modest and inconspicuous in the total amount; and taken with its probable advantages, it is the least questionable of the many secondary heads of charge.

§ 8. The relations of Church and State have been at different periods the principal problem of rulers. The earlier sentiment rather included the State in the Church than the Church in the State. Modern societies are practically agreed in reversing this position. Excluding the polemical sides of the subject, we can see that for the financier the religious wants of the community need the supply of particular forms of services and commodities, and the question arises whether the public authority should provide these needed objects or leave them to private effort. Historical conditions have determined the actual solution in each country, while the prevalent theoretical view is derived from the doctrines of the last century. Adam Smith, who approached the subject under the influence of Hume,2 regards the clergy as a particular form of police attending to spiritual interests. His ideal is complete non-intervention on the part of the State. The probable result would be a ‘great multitude of religious sects,’ whose fanaticism might be kept in check by the two remedies of: (a) ‘the study of science and philosophy,’ and (b) ‘the frequency and gaiety of public diversions.’ Where, however, there is one predominant religion, the State ought, he thinks, to regulate and control, or, to use his significant term, to ‘manage’ it—a process that is best carried out by the skilful use of the power of bestowing preferment. Religious endowments are regarded as a part of state wealth withdrawn from the more pressing end of defence.1

The circumstances of the case have, it need hardly be said, been profoundly altered since 1776. The United States now afford a remarkable example of the actual working of the policy of laissez faire in respect to religion,2 and they are imitated by the English colonies. Continental nations show a different set of changes: the ‘Established Churches,’ with their numerous independent and private funds, have given place to bodies directly chargeable on the State revenues. The ‘enlightened absolutism’ of the eighteenth century commenced the work of disendowment, which was further carried out by the revolutionary movements since 1789. Later reaction has made the clergy pensioners of the State. As regards the United Kingdom, the American example has, for special reasons, been followed in Ireland, and seems likely to be extended to Great Britain.

Viewing the question as one of finance, it appears that the expenditure on religion, though not large, can be easily supplied by voluntary contributions, and therefore is not an urgent call on public resources, which can be better used for other objects. When the State, for political motives, undertakes the supervision of religion and its supply, concurrent endowment is a necessity in modern societies, as otherwise an evident injustice would be inflicted on the non-endowed sects. Such is the policy of most States at present, but it is more expensive, owing to the greater number of ministers, buildings, &c., that have to be provided.

The provision for religious teaching has a rather close affinity to that for education proper. Modern budgets often combine the two charges under a single head. There is also an historical connexion between them, and it is noticeable that in countries such as the United States and the English colonies, where state endowment of religion is given up, educational bodies take the vacant place. Public expenditure for denominational education is a near approximation to state aid to religion.

CHAPTER VI

expenditure on industry and commerce. constitutional and diplomatic expenditure

§ 1. Expenditure for directly economic objects has often occupied a large place in public outlay. To foster industry and commerce was long regarded as a leading function of the State. In fact, it is to this conception that we owe the origin of finance and political economy.1 The great object of the Cameralwissenschaft of the eighteenth century was to give instruction as to the right direction of national resources, and most of the earlier economic writers of France and England held that it was very important to encourage economic enterprise.

The complete revolution wrought by the combined labours of the Physiocrats and Adam Smith exonerated the State from this difficult, indeed impossible, task; but it is a vulgar error to suppose that the advocates of industrial liberty did not recognise certain definite duties of the State in economic matters. Apart from the exaggerations inevitable in so violent a change of opinion, we see that the sound sense of Adam Smith and Turgot fully understood that in several directions the Government could beneficially aid the efforts of producers.2 The necessities of practice have made it incumbent on States to undertake a series of duties intended for the advantage of industry and commerce.

There is, however, a distinction to be made at the outset. In one sense all state expenditure may be said to be for the benefit of industry. The armies and navies of modern States are productive of the security needed for the full development of industrial effort. The administration of justice and the maintenance of an efficient police have the same effect. A great deal of administrative supervision has, or is supposed to have, considerable influence in increasing production. One of the strongest pleas for aid to education is based on its economic value, and writers of the school of Hume would regard the inculcation of honesty and frugality as the most useful function of the clergy. So close is the consensus of social phenomena, that there is no part of public expenditure that may not aid the progress of economic production.

§ 2. But besides this more general action of the State on industry, there is a special one. Portions of the public revenue are devoted to objects either solely or principally economic; and it is the employment of this part that we have now to consider. It, again, may be divided into expenditure on industry and commerce generally, and that on special trades or employments. Of the former we may notice the following as the most usual: (i) the cost of maintaining a monetary system, as in the case of the English gold coinage; (2) the establishment and preservation of a system of weights and measures; (3) the enactment (as in some countries) of a commercial code, with possibly a special tribunal or tribunals; (4) the maintenance of agencies for facilitating communication and transport, viz., post offices, telegraphic communications, roads, railways, and canals; in the same group may be included lighthouses, surveys of coasts or new countries; (5) consular and diplomatic establishments, chiefly for the benefit of foreign trade, but with an indirect action on home industry.

The slightest glance at the above list at once suggests a criticism. Some of the agencies included, will, under proper management, yield a profit to the State, and seem therefore more fitly to belong to the domain of state industry. The English Post Office and the Prussian railways earn large net revenues for the States to which they belong, and the currency system may, by the imposition of a seignorage, be made to cover its cost, and probably leave a surplus. The answer to this difficulty is not hard to find. Granting the truth of the assertion on which it rests, the fact remains that in many cases the State has to incur còst for the objects mentioned. The gains of post offices and railways will be noticed in their proper place.1 There are, however, some that have a recurring deficit,2 which has to be met out of the funds derived from other sources. We get but one more illustration of the difficulty of drawing ‘hard and fast lines’ in social inquiry. What is in one country a cause of expenditure is in another a cause of gain as a state industry, while in a third it yields revenue through taxation.

§ 3. State aid to special branches of industry presents much greater opening for objections; but here, too, suitable cases present themselves. Among these are:—

(1) The introduction of new and profitable industries In modern times this part of state action has been usually carried out by means of protective duties. The so-called ‘infant industry’ argument is one of the best of the protectionist pleas, and its theoretic force has been recognised by most economists, but the question is really a wider one. The problem before the statesman amounts to this: How far is it expedient to incur a present loss for a future gain? And on the financial side the balance of the different public wants, as also the percentage of the national income absorbed by the State, are elements to be taken into account in the actual solution. In its simplest form, encouragement is given by means of bounties on production, or premiums for the establishment of new industries. A protective duty may be regarded as a tax on the consumption of the protected article, with an equivalent bounty to the home producer; it is, therefore, in reality more complicated than a simple bounty. This aspect of the matter may be reserved for a later stage of our inquiry;1 but here we have to note the difficulty of escaping corruption and favouritism in the application of a policy of encouragement. In an undeveloped industrial system, such aids, if applied with wisdom, may afford a beneficial stimulus, as was probably the case with some of the measures of mediæval sovereigns. They, in some degree, occupy in economic policy the place that despotic government holds in political evolution, but appear quite unfitted for a progressive system of industry.2 The direct support of special branches of production from the public revenue is sure to be a diminishing item of charge in modern countries.

(2) The promotion of inventions, by the inducement of state premiums, or even the encouragement of a higher standard of excellence in production by the same means, has been regarded without disapproval by Adam Smith. Their effect is not to disturb the natural distribution of employments; besides, as he remarks, their cost is insignificant.3 A good patent law will, however, be the most effectual way of facilitating invention.4

(3) The periodical holding of exhibitions of industrial products under state auspices, and in fact at the State's expense, is now an established custom, though it is probable that the need of agencies of the kind is at present less than it formerly was.1

Other expedients are: (4) model institutions, such as agricultural schools, &c.; (5) state subvention of railways and means of transport for the improvement of the poorer districts of a country; (6) outlay on the administration of forests and drainage;2 (7) the support of credit institutions and assistance by loans.3

§ 4. Finally, we should remark that the State may find itself called on to act in relation to any economic interest of the society that it regulates. There is no strict and universally binding rule that can mark off the area of its action. The protest of laissez faire was directed against the policy of continual interference. The intervention of the public power should, however, be only admitted on clear and definite proof of its advantage. The best safeguard against excessive state action is to be found in insistence on a careful calculation of all the elements entering into each case, and more especially of the financial relations that it necessitates.

The actual figures of modern budgets do not indicate much danger from the purely economic action of the State. Some exceptional cases occur where the zeal of politicians has led them to develop the system of public works beyond legitimate limits. Thus the several States of the American Union at one time engaged in a reckless policy of internal improvements that culminated in the repudiations of 1840–50.4 The plans of the French minister, De Freycinet, for railway extension were also arranged on too extensive a scale, as their subsequent abandonment proved. The public works of India have furnished a ground for bitter controversy; but the opponents of the policy have hardly made out their case, though under the special circumstances of the country greater moderation might have been advisable.1

§ 5. We have kept for the last one of the most essential parts of state expenditure—that incurred for the maintenance of the central organs of the State itself. No matter what be the form of government, the head of the State, ‘the Sovereign,’ in Adam Smith's phraseology, must be supported. Round this personal head are grouped the various branches of the executive, and in some relation to it the legislative body also exists. In a so-called constitutional or ‘limited’ monarchy—the prevalent European form of the 19th century—the head of the State may possess a private income, but is far more likely to be paid out of the Civil List. The royal or crown lands are generally absorbed in the public domain, and in any case they must in strictness be regarded as a portion of public property, set apart from the general funds for a specific public object. This application of public revenue is necessary, though it often excites an amount of popular irritation that might be more advantageously exerted in other directions.2 The head of the State is frequently called on to discharge ornamental functions, requiring a good deal of expenditure, and has, moreover, to hold a higher position than the wealthiest of his subjects.

§ 6. A republican State is partly relieved from this expense; its head, usually elected for a short term, receives the salary of a minister in monarchical States. There is, however, a counterbalancing cost in the expenditure on the numerous members of the corporate sovereign.3 Nearly all democratic societies approve of payment to legislators, in order to reduce the chances against poor men being elected. The inevitable result is an increase in the cost of the legislative body; and when the same principle is applied to subordinate legislatures, a further increase has to be faced. The belief that legislative efficiency is improved by reward does not appear well-founded so far as finance is concerned. We must remember, however, that historical conditions, and particularly the way in which wealth is distributed, have considerable effect in determining the wisest course. Thus the English colonies that possess responsible government are perhaps justified in departing from the English method of unpaid legislators. At the same time, there is an unquestionable advantage in the development of public spirit produced by the English system. One point is certain, viz. that the least satisfactory method of all is the granting of small payments which do not attract the best men, while they discourage those who would serve without any salary. The danger of corruption is brought to its highest in the case of ill-paid legislators, who are inclined to supplement their official incomes by less honourable means.

Expenditure on diplomatic agents and ambassadors may perhaps be best placed under the present head. Such outlay is hard to classify. It might be plausibly regarded as incurred for the sake of securing peace, and therefore be added to the cost of the military and naval services. Or, again, it might be regarded as expenditure for economic objects, viz. the promotion of trade, as the consular service undoubtedly is. But on the whole the diplomatic staff is really representative of the sovereign, and is entitled to its present position.

§ 7. In nearly every civilised country the charge of interest on debt has to be considered. We shall have, later on, to examine more closely the theory of public credit and debt, and therefore need only mention it here as an item of outlay.

When dealing with the mechanism of the financial system, we shall find it desirable to distinguish carefully between gross and net revenue, the former being the total receipts, the latter the net result, deducting the cost of collection and the expenses necessary for obtaining the required resources. Here we have simply to note these charges as one of the parts of public expenditure, and to see how large an item they are. In England, the Customs, the Inland Revenue, and the Post Office are mainly earning departments. The mere mention of these establishments will suggest the remarkable differences in the relation of revenue to cost of collecting or earning it. Savings in this respect are as important as those made in connexion with outlay on other state functions, but any reduction of cost which impairs the efficiency of the fiscal service is as imprudent as over-retrenchment in other directions.

The cost of collection, or earning, of revenue in the leading English departments is given in the annexed table.

Having concluded our examination of the forms of state expenditure, we have now to summarise the results, as also to develop some points that could not be properly treated until the several heads of the public services had been duly noticed. There is, however, one topic that must be first discussed, viz. the distribution of state outlay between the central and local powers.

In 1806 a gross revenue of £58,255,000 cost £2,797,000 to collect, or 4.8 per cent., while in 1826 the charge for collecting £54,840,000 was £4,030,000 i.e. 7.3 per cent.

In France the total expense of collection for the ten years 1883–92 averaged about £13,000,000, but of this amount £5,000,000 should be charged to the postal and telegraphic service and nearly £3,000,000 to the expenses of the tobacco monopoly, leaving a balance of £5,000,000 for the cost of collecting the direct and indirect taxes.1 The total charge has risen since. It stood at £14,600,000 in 1893, and has advanced to £16,100,000 in 1901.

CHAPTER VII

central and local expenditure

§ 1. Up to the present we have taken no notice (except incidentally) of the division of duties between the central and local organs of the State. For the object that we had in view, this mode of treatment was quite legitimate. In order to bring out the fact that all expenditure by public bodies is really one in kind, and that any differences are subordinate and secondary, it is advisable to set forth the leading forms of that expenditure in a general and comprehensive manner. The principles that determine the distribution of public functions between central and local powers, or even between federal and state governments, though highly important and influential on financial policy, are yet immaterial when we are considering the broad grouping and effect of the cost of maintaining those compulsory agencies that we place together under the title of ‘the State,’ and the expediency of extending or contracting their field of operations. It is, besides, impossible to draw a precise and definite line, applicable to all or most countries, between general and local expenditure. What is retained in one country or period in the hands of the central authority is in other places or times delegated to subordinate bodies; or, to regard the subject from a different aspect, which is in some cases more in accordance with historical fact, the older and smaller groups have reserved from the encroachments of the State very different amounts of power in different ages and nations.

Examples of this diversity in usage are abundant. The transfer of the English prisons from local to central management has been already mentioned.1 The older system of poor-relief in England was purely local. The great reform of 1834, though it did not go the length of making the aid of the indigent a national charge, yet accepted, and was based on, the recommendations of the Poor-law Commission in favour of complete and efficient regulation of local administration by a specially formed central board. The treatment of primary education affords another example; in England and Wales it is largely under local management, while in Ireland the national school system is strictly centralised. The police systems of the United Kingdom also show like differences in administration.

On extending our view to other nations, we find a similar absence of uniformity. The powers of a Swiss Canton or an American State are far greater than those of an English County or a French Department. Even limiting the comparison to countries with constitutions of the same type, there is still much variety in the actual division of duties.

§ 2. Such remarkable differences have arisen from more than a single cause, but undoubtedly the most powerful reason is to be found in the peculiar historical conditions under which States have been formed and developed.2 To explain, e.g. the diversities in the distribution of public duties in France and Germany, we must see how the governments of those countries have been formed. In no other way is a full interpretation possible. The centralised system of French administration goes back further than the Revolution of 1789; it is a product of the absolute monarchy and of the consequent impossibility of developing local authorities.3 The greater division of state power in Germany is one result of the unhappy conflicts that prevented its attaining to national unity till the present century. In order to comprehend it, we must know the history of the Holy Roman Empire, and its many changes. Exactly similar are the cases of Switzerland and the United States; each is the product of special conditions. The nature of American state and local governments is effected by the circumstances of the colonial institutions from which they have sprung. At all stages of formation this influence is powerful. It is due to the particular events of the time that Italy, at almost a single step, reached the full unity of France or England, while Germany as yet retains so many traces of the process by which it has been formed. There is nothing of rigorous necessity in the course of development; circumstances that may be regarded as accidental have had most effect in deciding the result, and there seems, consequently, little place for the employment of scientific explanation in so purely empirical a matter.

Historical conditions are, however, often the result of deeper forces; the political destiny of a nation is not altogether at the mercy of events. The physical features of its territory, the character and sentiments of its members, go a ong way in determining its constitution. We cannot doubt that the mountains of Switzerland, and the enthusiasm of its citizens for independence, have contributed towards the great vitality of its local institutions; but then it is also true that circumstances somewhat analogous have not hindered Holland from becoming a centralised State.

§ 3. The most complete recognition of the preponderating influence of historical and physical agencies in determining the actual division of state duties between the central body and the local ones, ought not to prevent us from endeavouring—as far as possible—to disentangle from the mass of material any ascertainable general principles. There seem to be—quite apart from national peculiarities—some tendencies, operative in all societies, which assign particular duties to the central agency and place others under local supervision. An examination of the several public wants will, we believe, confirm this view, showing that some of them can be best satisfied by local management, and that others should, in order to attain the desired object, be supplied through the central organisation of the State.

In making this distribution by reference to general principles, it is necessary to take into account the historical influences that we have previously noticed. They partly determine, not only what are, but what should be general, and what should be local tasks. What has been for a long time confided to local administration ought not without good reason to be transferred to the general government, as, on the other hand, where, from any cause, little has been left to local action, the devolution of tasks by the central administration should be gradual and cautious.

§ 4. Additional light is thrown on the leading principles and present position of the distribution of powers between local and central organs, by consideration of the fact that two different tendencies have been in operation during the course of history. Political evolution is not a direct movement towards a definite goal; it is rather a series of efforts following the line of least resistance at any given time. Early societies do not exhibit the opposition or distinction between central and local powers. All government is local either in the tribal system as found in Germany, or in the city states of Greece and Italy. War—and its result, conquest—is the introducer of centralisation. The smaller groups are unable to withstand the successful military chief and have to submit to his rule. The municipal governments of the classical age—for such they were in fact—passed at last under the dominion of Rome, which gives us the picture of a vast administrative organisation employing local authorities as the instruments of its working. The originally autonomous city was ultimately reduced to take commands, even as to the smallest details, from the Emperor and his officials.1 Some place for local co-operation was allowed under the earlier Empire, and up to the last the expenditure of towns was distinct and separate from that of the Imperial government.2

Mediæval society shows a movement towards the revival of local privileges. In all European countries the cities succeeded in acquiring a large amount of freedom in dealing with their own affairs. In some countries—as Italy—they ultimately attained independence, and in all they were enabled to apply their resources for purposes of local interest. One of the principal features of the steadily growing consolidation of States in modern times has been the reduction in power of the various semi-independent bodies within the State.3 Provincial liberties have been curtailed, and particular immunities, whether of towns, districts, or associations, have had to give way to the rule of uniform rights and duties. With great varieties in the process in different countries, the same general result has been reached by the absorption of all independent political forces in the single organ of the State. This point was sooner attained in England than in France, and in France than in other Continental States, but except where a federal system has preserved the authority of one group of bodies, it is now accomplished in all civilised societies.

The establishment of a controlling and legally omnipotent government, though it marks an important stage in political growth, is nevertheless accompanied by some disadvantages. However desirable it may be that the powers of a nation should not be weakened by the existence in its midst of powerful bodies in a position to frustrate the attempts of its rulers to act with vigour and decision in a given way, and however much society may suffer from the absence of political cohesion, it is not conducive to the interest of the nation to concentrate all administrative authority in a single centre. The gains from centralisation may be great, but to obviate the evils that accompany it a wise decentralisation is also requisite. Having secured political unity, it becomes the task of the statesman to so distribute the functions of government as to obtain the best political and financial results. The earlier historical movement that has led to combination needs to be supplemented and corrected by the rational process of division of duties. All modern societies have to see whether their present institutions strike the mean in this respect, and if not, how they can best attain it.

§ 5. The relations of the administrative organs become more complex as States increase in size. A small society has no need of intermediate political forms between the lowest unit and the State, but in countries with the area and population of the great European powers or the United States something more is wanting. Between the ‘parish’ or ‘township’—the ‘primitive cell’ of the political organism—and the central government there are found one or more bodies essentially subordinate to the latter, but of greater range and larger resources than the former. Thus France has the canton, arrondissement, and department; Prussia the district, the circle, and the province; England, the union and the county; the United States, the county and the state or ‘commonwealth’; and in each nation a different class of duties is assigned in proportion to the size and importance of the particular body.

The complexities of local government and finance have in some countries been increased by the irregular and almost haphazard method of expansion adopted. Instead of following a definite and orderly plan, each special need has been met by a special creation. This natural but unfortunate method of procedure is characteristic of English and, in some degree, American legislation. Where a new local duty has been marked out, a new area with a separate board has been formed, ideas of uniformity or co-ordination being almost ostentatiously disregarded. The outcome in England has been, according to Mr. Goschen's often-quoted phrase, ‘a chaos as regards authorities, a chaos as regards rates, and a worse chaos than all as regards areas.’1 Something similar is the case in a few American States. ‘In many of our commonwealths,’ says Professor Seligman, ‘there are separate local taxes for almost every purpose of local expenditure. In New Jersey, e.g., we find no less than forty such separate taxes.’2 The reason for this confusion is only discoverable by considering the usual conception of local governing bodies; they were regarded rather as associations for a particular end than as delegations of the public power, and it is in fact true that the smaller subdivisions do approximate more closely to private groups in proportion as their sphere of action is reduced. The generally unsystematic character of English legislation also favoured this extreme multiplication of local functions arranged on no definite plan.

Political organisation, developed on perfectly logical principles, would offer a decided contrast to the multiplicity of arrangements just described. It would be symmetrical and convenient to a degree that no country—not even France—can lay claim to at present. In actual political life, perfectly adjusted plans of the kind are inapplicable. Constructive legislation is hindered by the nature of the materials that are at hand. The correct and well-fitted plan will not work by reason, first of all, of the varying circumstances of different districts. Rural areas are suited for a simple kind of local government that would utterly fail if applied to towns or cities. The latter require a more elaborate and careful system; new administrative problems are constantly arising;3 their expenditure is sure to be much greater, and even if part of it be what is called ‘productive,’ and likely to afford counterbalancing receipts, there is still a greater amount of energy and toil required in working their finances, and special provisions are needed in order to guard against abuses.1 In many countries, however, backward agricultural districts are often transformed in a few years into seats of manufactures and commerce, making alterations in the form of local government essential.2 Some particular interests are also so important as to need special treatment. The management of harbours, river navigation, and drainage, or great public works created at the cost of the State, may have to be placed under bodies formed to represent the interests chiefly concerned, and they must be kept apart from the general system, and so far mar its completeness.3

The necessity for attending to geographical boundaries tends to prevent even an approximation to divisions with equal areas or population, and special local habits and customs act in the same direction. But the greatest check in this direction arises from constitutional restraints. Perfectly unified governments, such as those of France and England, are seemingly free from this defect. There is nothing in English law to prevent Parliament from abolishing the division into counties and parishes, and substituting a new one in its place. The whole machinery of municipal administration might at the same time be handed over to a central board with an official staff.4 The federal countries—Germany, Switzerland, the United States—are differently situated. In their case the power of constitutional legislation is distributed in a more complex manner, with the intention and result of checking its frequent exercise. Such ‘rigid’ constitutions—as they have been happily called—give a permanence to particular local divisions that prevents the powers of administration being divided in accordance with theoretical conceptions. A Swiss Canton or American State holds a legal position essentially different from that of a County or Department. It is prior in order of time to the central government, towards whose creation it may be said to have contributed, and it is entitled to object to measures affecting its existence.1 Whatever be the reasons in favour of this system—and we need not undervalue them—it is a fatal barrier to orderly and proportionate distribution of functions. Delaware and Rhode Island, insignificant both in population and area, hold the same place as the great States of New York, Pennsylvania, and Texas; Bern, with more than half a million of people, is only equal to Uri, with less than one-thirtieth of that number.

Difficulties of the kind just noticed are not in reality so serious as they at first appear. To begin with, the intractableness is found in one only of the minor groups or subdivisions; the others can be easily adjusted. Congress cannot, indeed, redistribute the areas of New York and New Jersey without the consent of both of those States, but either State can rearrange its counties and municipalities as it pleases; the important cities of New York and Brooklyn have been consolidated into greater New York by the legislature of the State. Therefore, within each State a reorganisation of local government is possible. Again, by taking extreme cases an unfair impression is produced. The average State or Canton (say Wisconsin or Freiburg) is a convenient body to interpose between the national government and the smaller local groups. There is, besides, a tendency towards adjustment between the habits of a people and its indigenous institutions. The Americans and Swiss have by usage become fitted for their particular systems, which therefore work with greater ease. The distribution of the several German States is more irregular, and illustrates, as noticed before, the powerful influence of historical conditions. The principal anomaly is due to the preponderance of Prussia, compared with the very small States that form part of the empire. The internal local government of Prussia is, however, based on a well-proportioned system.1

§ 6. Applying our results to the financial question of expenditure, and its proper division, we commence with the central government. Its claims to disburse the larger part of the total public revenue are unquestionably strong. It is the representative of the nation. Other bodies exist under it, and to relieve it of undue toil, but ‘the State,’ in the popular sense of the term, is prima facie the agent in charge of all public duties. It is at once clear that all general interests ought to belong to its province. What concerns the whole community may indeed, for other valid reasons, be delegated to localities, but the fact that a public function concerns all is a weighty reason for entrusting it to the central government. A smaller body, no matter how liberal its constitution may be, cannot take the same ground. Even an absolute ruler is more likely to regard the welfare of the whole society than the representative assembly of one part of the nation's territory, while the highest security for due attention is obtained by the representation of all districts in a national legislature. This attitude of the central government is partly the consequence of the wider view that it is almost compelled to take, but it is also partly due to the higher intelligence and skill that it has at its disposal. For tasks in which these elements are of importance, the superiority of the central administration is generally apparent. A third circumstance in many cases favours the centralisation of certain classes of state duties—those namely in which unity and co-ordination are required. Though division of labour is beneficial, its combination is no less so, and public duties that need combination will naturally be placed under a single control. It would be too much to assert that these conditions have completely determined the actual sphere of the national government in modern countries; it would be a gross exaggeration to say that they have done so consciously. There is, however, much truth in the doctrine that the actual forces which they describe have generally had a powerful effect.

The sphere of local agencies in directing expenditure can be indicated by reference to conditions strongly contrasting with those just described, which make it expedient to call into play the administrative energies of the smaller territorial bodies. As the central power guards the general interest, so do the representatives of localities best attend to their particular interests. ‘That people manage their own affairs best’ is not universally true, but it has sufficient truth to justify the entrusting of local matters to the several localities affected. A second case in which local is superior to central administration occurs wherever minute supervision is required. Central authorities, though possessed of superior skill and intelligence, often fail through the difficulty of regulating from a distance operations that need unfailing attention and watchfulness. It is to this circumstance that we must attribute the almost universal devolution of the smaller parts of economic administration, as it is to it that we probably owe the origin of the attempts at decentralisation on the part of the general government. Finally, it is expedient to place the charge of public duties in the hands of the smaller bodies, when diversity rather than unity is needed. Some of the forms of state action are not suitable for being conducted on a uniform pattern. Special conditions and habits have to be taken into account, so that the very tendency to adopt different methods becomes a benefit instead of an injury. We thus reach the result, that if attention to the general welfare, the command of higher intelligence and skill, and the power of unity in action are advantages possessed by the central government, regard to local interests, attention to details, and possibilities of judicious variety in practice will be best secured by local management.

Like conditions help to determine the functions of the intermediate public organs. A county administration has the same superiority over a parochial one that the national one has over it, and it is inferior in the same respects. An American State holds a similar position in respect to the smaller local divisions. Its sphere of action has to be limited in both directions by reference to the general principles already noticed. When we come to such important divisions as the State of New York or the administrative county of London, restrictions on their functions are dictated rather by considerations of national unity than by defects of organisation. The position of the larger German States—Baden and Saxony, and still more Bavaria and Würtemberg—in the distribution of power can hardly be settled by reference to principle. It will rather depend on a compromise between their claims to complete self government and the need for greater unity of the empire.

§ 7. Taking up in order the different forms of public expenditure, we find it easy to understand the reasons for making the military and naval forces a national charge Security is the greatest general interest of a society; the appliances and organisation necessary for successful defence tax severely the highest powers of human intelligence; and unity of management is of great advantage in warfare. Consequently the cost of war and preparation for it always comes from the national budget. Germany and Switzerland still preserve some traces of the older independence of their component parts, but the German forces are in fact completely under imperial control, and their cost is defrayed from imperial funds.1 One of the most decisive marks of union between hitherto independent States is the formation of a common army.

The cost of Justice also seems most fitly to belong to the general expenditure. It figures in all national budgets, but some of the charge may be thrown on localities. In a Federal State the subordinate courts are usually reserved by the separate units, but the Judiciary of the union becomes a general charge. The reason of this division is plainly historical, and as there is no pressing necessity for complete unity in the judicial organisation, it is allowed to continue. The importance of distinguishing between federal and state law is a further ground for separating the central and local courts. Uniformity in law and in its administration is such a benefit to a society that, unless under special circumstances, it is advisable to place it in the hands of the national government. Efficiency, too, is increased by removing the judges from the distracting influence of local feeling that is sure to affect them when they are appointed and paid by the district in which they act.

Police, and the treatment of criminals, cannot be definitely assigned to either department. On the one hand, it is certainly advantageous to have these matters arranged on general principles. All members of the nation are interested in the preservation of internal order in every part of their country. No district should be allowed so to relax its prison administration as to offer inducements to a criminal class to congregate within it;2 but on the other hand, the benefits in closer supervision and greater economy when the duty is entrusted to localities are a considerable set-off; besides, the principal interest of good order is found in the case of those resident in the district. A practical solution is generally discovered in a division of the duties, combined with regulations as to the distribution of the burdens imposed.

Administrative duties have also been divided, and though, in most countries, no attempt has been made to settle the partition on intelligible principles, usually in conformity to the guiding conditions indicated above. Where wide general interests, requiring a high degree of skill from those who control them, are involved, the central government has been the acting body. In smaller and more detailed matters the local governments have undertaken the task.

The relief of distress was primarily a local duty. During the development of the English Poor Law, previous to 1834, the whole system of management was left to the small unit of the parish, and though this arrangement led to much irregularity, it afforded examples of the best method of administration, which were utilised by the reformed system.1 Local administration and charge do, however, give rise to difficulties; in particular the question of the domicile or ‘settlement’ of those relieved becomes a constant subject of dispute. ‘The birthplace and dwelling of the foremost peer,’ says Mr. McNeil-Caird, ‘the birthplace and dwelling of Newton, Shakespeare, Milton, or Burns were never investigated with half the eagerness, or a tenth of the expense, that is freely spent as to the birth and residence of a pauper.’2 The injustices attending the distribution of the cost are always perplexing, but local direction and management under central regulation presents, on the whole, the least objectionable method.

In dealing with education, it is at once obvious that elementary teaching has a closer relation to separate localities, resembling, in this respect, poor-relief. Particular circumstances so far affect it that there is reason for making it, at least in part, a local charge; but it is also a general interest affecting the well-being of the whole society, and requiring for its proper working a great amount of trained intelligence, which can be best supplied by the central government. The higher grades of education do not admit of the same degree of localisation. Universities in especial bear a distinctly national character, and are therefore, so far as they receive public aid, rightly a national charge. Other appliances for instruction and the promotion of culture are provided both from general and local sources, though it is hard to determine what should be the exact position of each in the matter.

Wherever the support of religion is a public function, it is met from the national budget, or at least by national endowments, the cases where local bodies pay for religious services being simply compensation for work done, as in the case of union chaplains, &c.

The principle of general or particular interest explains the division of the economic duties of the State. What affects the whole society is done by the central government; what is specially needed by a locality or minor division is usually done by it. Here, however, there are exceptions. Works too extensive for the resources of a district are undertaken by the central administration, or aid is given to the subordinate authorities that direct and manage them. In this department of expenditure the smaller bodies are more likely to become embarrassed than is the central state authority. Their available funds are not of such vast extent, and change more speedily in amount owing to their limited area. Local administration, besides, in reference to public works is more liable to suffer from the private interests that affect all public ceremony.1 The modern credit system, however, affords facilities for expenditure based on a pledge of the property of the district that will not be felt at once, but will prove a continuous charge. It is in respect of this so-called ‘reproductive’ outlay that the difficulties of local finance are at present most serious.

Finally, with regard to what we have called constitutional expenditure, the boundary line is plain and simple. Each part generally pays for its own outlay. Members of the central executive and legislature are paid from the central budget. The officials and subordinate legislators of states, cantons, or municipalities are paid from the budget with which they are connected. As an exception, the charge of all elections is sometimes a local one, but it is so on the ground that it is really a local interest.

§ 8. It thus appears that on a broad view, and with full allowance for the influence of previous history and special circumstances in each case, there is a tendency to distribute functions, and therefore expenditure, in accordance with the principles that we have seen in operation. Some additional reasons for particular forms of distribution may be noted here: they are really expansions of those already pointed out.

First, particular duties are often given to, or withheld from, local bodies on the ground that they are well or ill suited, as the case may be, to bring the cost of the service home to those who benefit by it. This, however, is merely an application of the principle that particular interests belong to those concerned in them, and a further reason for that policy. The division of control over outlay, so as to secure justice in the apportionment of the burden, can be realised in another way, viz. by a readjustment of receipts between the central and local governments. A further ground for limiting local duties is sometimes found in the existing division of general and local taxation. Where, as in some countries, local revenues are rigidly restricted in amount, it is evidently impossible to place duties involving much extra cost on them. Here, too, the true explanation is found in the narrowness of the local interest that has led to the limitation on its taxing power, and it can be remedied, either by removing the restraint, or, as in recent English legislation, by a transfer of part of the general revenue. By dexterous use of the latter method it is possible to combine the great aim in expenditure—the maximum return for outlay with that in the collection of revenue—a just distribution of burdens.1

§ 9. Some further characteristics of local finance in relation to expenditure require attention. We have seen the classes of duties that local bodies deal with, and that they are mainly of an economic character, at least in so far that advantage and cost can be somewhat definitely measured. This feature suggests, as we saw, a comparison with private economic associations; and though the resemblance is closest in the industrial domain,2 it also appears with regard to expenditure. There is, however, one essential difference. The private company is formed on a voluntary basis. No one is compelled to enter it against his will; a local governmental body has compulsory powers, and is therefore more particularly in need of being kept within bounds in its action, and of being compelled to act when circumstances require it. Some of the duties in its charge are general state tasks, delegated for motives of convenience. These it cannot be allowed to neglect. Otherwise provisions for poor relief, education, or police of the highest value might be rendered utterly useless by hostility on the part of the local administrators. In other cases, where the task is of purely local interest, as e.g. water-supply, a minority of the inhabitants may suffer from the ignorance or carelessness of the majority, when also there is ground for interference by the central power. Such cases make supervision and regulation of the various divisions a necessity of good government. To insist on the discharge of certain functions, to prevent an undue extension of others, and, finally, to protect the interests of individuals against encroachments by local authorities, becomes an important state work.1 An organisation connecting the local and central bodies is needed, and has been developed in most countries. The English Poor Law Board—becoming later on the Local Government Board—is a good example. So are the many Commissions in the American States; while similar results are attained in another way by the bureaucratic systems of France, Germany, and Italy. The need of securing due discharge of duties imposed, avoidance of expenses in directions not allowed by law, and moderation in the exercise of expenditure, even on lawful objects, has brought about a system that shows in the clearest way how all expenditure, local as well as general, is really one, and has to be combined in order to judge correctly of the pressure of the State and its organisation on the national resources.

The value of this conception of the unity of state services in helping to form a more accurate idea of the amount of public expenditure will be better realised by reference to the following table:—

notes

Some writers on finance have included in their discussions an examination of the finance of ‘State Confederations’ (Staatenbünde) and also of Colonies,1 but neither seems entitled to a distinct place. There is a decided difference between a federal State and a confederation of a group of States. The former is a true political unit, and one of the points of unity is financial; the latter can be resolved into its component parts, each with a separate financial system. The resources of a confederacy are always derivative, and are obtained from the separate States. The old German Bund (1815–1866) may be contrasted with the existing German Empire as effectively illustrating this essential distinction.

But though in general the line of division is a clear one, some difficulty occurs—as is so often the case in political and social inquiries—in respect to societies in a transitional condition. The American Confederation in the period 1776–89, and the Swiss Confederation, 1816–1848, may be taken as examples. In such instances we find a new financial organisation in course of development, the older bodies being gradually merged in a new and larger whole. The best method of treatment is to start from the consideration of the separate parts and show how they become effectively combined in the natural course of events.

The financial position of such a composite State as Austria-Hungary is another difficult question; but here, again, the parts take precedence of the combination, which is strictly dependent for its revenue on the contributions of its components. The revenue of Austria-Hungary is formed from expenditure by Austria or Hungary. A further consideration to be borne in mind is the determination of the amount of contribution on the basis of treaty or contract, which will presumably be calculated in proportion to the benefit received by each portion. The whole arrangement is therefore one of international rather than public law.

Like considerations are applicable to Colonial finance. It is perfectly correct to combine the central and local finance of the United Kingdom into a single whole. A similar attempt with the British, Canadian, and Indian financial systems would be absurd.1 The conditions of unity do not exist. The very conception of a financial system depends on the existence of the single State which has created it. Any departure from this fundamental principle must produce confusion.

CHAPTER VIII

some general questions of expenditure

§ 1. State outlay, like that of the individual, may be distinguished into normal or ‘ordinary,’ and abnormal or ‘extraordinary.’ These terms almost explain themselves, but may be thus contrasted. Normal expenditure is that which recurs at stated periods and in a regular manner; it is accordingly capable of being estimated and provided for. Extraordinary expenditure has to be made at indefinite times and for uncertain amounts, and it cannot be reckoned for with any approach to accuracy. The distinction is not always applied in the same way,1 and indeed the boundary line is not to be quite sharply drawn. Most heads of outlay vary from time to time, and any increase may so far be regarded as extraordinary, the ‘ordinary’ charges being those that, like the English Civil List, are fixed for a long term. In practice, however, very close estimates can be made of probable expenditure, small increases in some directions being compensated by savings in others.2 To use the distinction to the best advantage, we shall confine it to marking the difference between the usual expenditure and unanticipated extra demands, arising in most cases from fresh calls on the State. We should describe the usual annual expenditure on military and naval forces, the cost of justice and education, as normal or ‘ordinary.’ The cost of a war, or expenditure for the relief of distress in a sudden emergency, is, on the other hand, plainly ‘extraordinary’ or abnormal. No French financier could have foreseen the burdens that the Franco-German war of 1870–1 would impose on his country; nor, though the probability of disturbance was recognised in the United States for some years before the Civil War, could there be any calculation of its expense.1 Even after the outbreak of a war the difficulty of forecasting expenditure is very great. The first estimate by the Chancellor of the Exchequer for the expense of the South African War was £10,000,000, part of which would, he held, be recovered. Eighteen months later, he announced that the cost incurred up to that date reached £150,000,000. In like manner it is not open to the English Government to provide beforehand for Irish distress, or for Indian administrators to say whether their finances will be disturbed by famine. War and—in backward countries—distress approaching to famine are events that do recur, and though it is not possible to forecast their effects on public expenditure for short periods, they ought to be taken into account in the general financial scheme. The famine fund of the Indian Government was a recognition of the correctness of this principle, and though the cost of war does not admit of the same mode of treatment, it is sound policy to reduce liabilities in time of peace, so as to secure some relief in the extraordinary charge in the time of war.2

It thus appears that, by taking a sufficiently lengthy period into consideration, the separation between normal and abnormal outlay may be so attenuated as almost to disappear. The conception is a vague one. ‘It indicates,’ as Cohn remarks, ‘an undeveloped stage of economic thought,’1 to be replaced by the more careful estimation of the future. State economy expands both in bulk and duration. The expenditure of e.g. England under the Tudors was likely to show ‘extraordinary,’ i.e. unusual, elements in matters that are at present well within the prevision of the Chancellor of the Exchequer. When the outlay is measured by thousands, a variation in hundreds is serious; but when it reaches millions, changes of thousands are trifling, besides being balanced through savings in some other parts of expenditure. There is also in modern States a greater facility for foreseeing and, so to say, ‘discounting’ the future. The refined financial mechanism by which public borrowing is carried out enables ‘extraordinary’ expenditure for a short period to be transformed into ‘ordinary’ expenditure for a long one.

Still, the development just noted does not remove completely the dividing-line between the two classes of expenditure. We shall find later on2 that both on financial and political grounds it is eminently desirable to have the estimates and results of national finance set forth fully and in unity at short intervals, usually in practice annually. But during such a period it must sometimes happen that the amount to be paid out of the National Exchequer will be much above the average, and it follows as a matter of course that the expenditure is then ‘abnormal.’ What modern finance can accomplish is to secure a more even distribution of the pressure.

Another point for consideration is found in the fact that what is at first extraordinary may soon become ordinary expenditure. At the outbreak of war the cost of the army and fleet will be greatly increased, giving rise to abnormal outlay, but after a time, say after the first year, a probable estimate of the expenses to be incurred in the prosecution of the war will not be so difficult. The financial history of England affords several illustrations. During the century and a quarter from 1688 to 1815 there were the following war periods: 1688–1697, 1702–1713, 1718–1721, 1739–1748, 1756–1763, 1776–1783, 1793–1802, 1803–1815. At the commencement of each period expenditure was greatly increased, but when the state of hostility became a settled one, it was possible for, and therefore incumbent on, the Minister in charge of the finances to present the outlay on war as part of the ordinary expenditure. Under such conditions the charge for war became the normal charge of an abnormal period.

Abnormal expenditure also frequently occurs in a somewhat different way, as in the case of durable public works or other improvements. It may be a part of state policy to erect extensive public buildings; to carry out a system of fortifications, of railroads, or canals; to drain and plant waste lands; to promote colonisation, or to develop an industry that requires the aid of fixed capital. Innumerable examples of such forms of expenditure are found in connexion with local government: the acquisition of the industries engaged in supplying large towns with water and light will at once occur. Outlay of this kind is, in mercantile phraseology, ‘chargeable to capital, not to revenue,’ and is clearly abnormal. The method almost invariably adopted is to meet the abnormal outlay by an abnormal receipt, viz. borrowing; or, to put the point in another way, to turn the extraordinary expense of a given year into the ordinary one of interest on debt.1

Much ingenious argument has been advanced in favour of borrowing for all such extraordinary expenditure, on the ground that it is in substance a creation or investment of capital, which is an asset to be placed against the new liability.1 The plausibility of this doctrine in its extreme form arises from failing to notice the different effects that may follow from different forms of state expenditure.

§ 2. For understanding the point it is necessary to separate state outlay into ‘productive’ and ‘unproductive,’ using these terms in the sense given to them by Adam Smith.2 The former does, in fact, secure a return in the shape of material goods possessing value, and it may be said that expenditure of this kind is admissible even by the aid of loans. The general category of productive expenditure will, however, be found to need further analysis. It is not at all difficult for the central and local governments to expend a great deal in obtaining articles that possess value but yet will not yield revenue. For instance, the many buildings existing in the United Kingdom for the meetings of legislative bodies, sovereign and subordinate—from the Houses of Parliament down to the smallest town-hall—are certainly embodiments of value, but do not, except in very rare cases, bring in a return. They are ‘consumers’ capital,’ and their cost must be supplied from other sources. In contrast to the foregoing are those forms of wealth that return a revenue by their use as ‘producers’ capital.’ Municipal gas and water works belong to this class; so do the Continental state railways. The policy of expenditure on such works is plainly to be judged, partly at least, as a question of investment. Public bodies may succeed in realising good value for their outlay. It is perhaps on the whole best to divide expenditure into ‘economic’ and ‘non-economic’ rather than into productive and non-productive; outlay for the purpose of securing future revenue being economic, while that which will not have this result is non-economic.3 The expediency of economic outlay is really a question closely connected with the formation of state property and the (so-called) private revenue, and has to be treated under that head.1 Non-economic outlay includes the procuring of material goods that are not productive capital, as well as the cost of those public services that take no tangible form. It may be, and often is, more necessary than pure economic expenditure, but it cannot be regarded as a creation of capital. National security and honour, the promotion of culture and education, may be better than wealth, but they are not wealth, and their cost is so far a deduction from the stock or accumulated wealth of the society. They belong to consumption, not to production, and the outlay on them has to be limited by economic considerations. Thus this case is closely parallel to that of the individual, whose expenses, for enjoyment, general education, &c., reduce his economic resources, and have to be limited by the amount of his income.

Some expenditure, both of individuals and of public bodies, may prove to be indirectly productive. What a person spends on recreation may so improve his health, both physical and mental, as to make his labour more efficient. The State may likewise, by its maintenance of a powerful army and navy, or an active police, increase the production of wealth, and in practice all public expenditure has this amongst other aims in view.2

§ 3. Though public and private expenditure have so many points of resemblance, there is one very important difference. The individual's income is formed by the returns on his property and the reward of his exertions. Public income or revenue is to some extent composed of similar constituents, but in modern times it is mainly derived from contributions levied compulsorily on the members of the society: that is to say, state income or revenue is derivative, and is dependent on national income; local public revenue is in like manner derived from the revenue of the community in its locality.

This connexion of public and national revenue has been recognised from the earliest days of finance: it is to it that we owe in great measure the commercial policy of Europe in the sixteenth and seventeenth centuries. The Physiocrats also accepted it, as Quesnay's famous maxim ‘pauvres paysans, pauvre royaume; pauvre royaume, pauvre roi’ shows. It is an essential doctrine of modern theory, though there is not perfect agreement on the question whether it is on ‘net’ or ‘gross’ national revenue that state income depends.1 There can be no doubt that a small nation, with little accumulated wealth, cannot adopt the same scale of outlay as a larger and wealthier one, and one of the rules of good finance is to observe moderation in the demands of the State on its citizens. Beyond this general precept no definite result has been reached. Some writers have suggested a percentage limit for state outlay. Justi regards 16 per cent. as the average, 25 per cent. as excessive. Hock states 15 per cent. as the upper limit. Leroy-Beaulieu, who confines his discussion to the amount of taxation, arranges the charge on national income for state ends in grades: 5 per cent. he thinks light, between 5 and 10 per cent. moderate, over the latter figure heavy, and when 15 to 16 per cent. is reached it is almost impossible to increase it.2 Any attempt to settle once for all the proper proportion of public expenditure to national income is necessarily vitiated by the different elements to be taken into account; such as (1) the purpose of the outlay; if it has an economic end a larger amount may be taken, since it is expected to yield a direct return, and even if not for economic ends, no decision can be made until the urgency of the want is known. A nation engaged in a conflict perhaps involving its national existence is justified in expenditure that would in ordinary times be imprudent. (2) The amount of the national income is also a factor to be considered. Expenditure requiring 10 per cent. of the annual income of India would be much more burdensome than if 30 per cent. were to be required in England or the United States. (3) The distribution and the forms of wealth, though less in importance, have some effect on spending power. The bounds of outlay in any given case can only be ascertained by trial, though it is plain that the agreement of the writers referred to above supports the belief that 15 per cent. of the national income is too large an amount to appropriate for state objects, unless in very exceptional cases.

§ 4. Other methods of measuring the proper amount of state expenditure are still more doubtful. We might take the proportion to area as a guide, were it not for the fact that the extreme differences in the value of land in different countries, as also the varying proportions that other forms of wealth bear to land, make this test fallacious. The amount of accumulated wealth, as estimated in modern statistical inquiries,1 might be used, but we shall find that income (not property) is the fund out of which in ordinary cases expenditure has to be met, and the relation of income to property varies. A very commonly used index is the charge per head of population, though for this purpose it is far inferior even to the amount of property. An attempt to measure the comparative pressure caused by expenditure in India and in the Australasian Colonies, based on taking the charge per head, would give the astonishing result that it was about nineteen-fold heavier in the latter.2

Such considerations lead to the belief—which indeed ought to be obvious—that there is no mechanical mode of judging the sufficiency or the legitimacy of public expenditure, a belief that is strengthened by remembering that local expenditure must be added to that of the central government before the full pressure can be known, and that a series of complicated calculations is needed to apportion the combined charges over the several districts.

Fortunately the question of expenditure in all its forms does not present itself as a single problem. It would be quite hopeless to attempt to prepare a budget of outlay for any country without the aid of the material collected during previous experience. The great mass of expenditure is taken as settled, and it is only the particular changes for each year that have to be weighed in order to estimate their probable advantage. This method of treatment simplifies the issues very much. In the language of modern economists, it is ‘final’ rather than ‘total’ expenditure that needs the financier's attention.1

§ 5. The usual form that deliberation has to take is that of considering the advisability of increased expenditure. Theoretically it is of course equally possible to debate the benefits of retrenchment, but in nearly all modern States outlay is steadily increasing. The older doctrines of economy and frugality have disappeared, and in nearly every direction proposals for new exertions on the part of the State are put forward.2

First as to the facts: we may take a few typical examples. English expenditure in 1833 was 48¾ millions, in 1898–9 it was over 108 millions, or an increase of nearly 60 millions. But as 1833 marks the lowest point of English general expenditure, it will be fairer to take another set of examples given by Mr. Gladstone.

‘The gross expenditure of the State was in 1842–3 £55,223,000, and the local expenditure in the three kingdoms was £13,224,000, making a total in round numbers of £68,500,000. In 1853–4 the total state expenditure was £55,769,000, or very nearly the same amount as in 1842–3, and the local expenditure £15,819,000; making together in round numbers £71,500,000, instead of the £68,500,000 which was the amount in 1842–3. In the year 1859–60 the gross state expenditure had grown from £55,769,000, which it was in 1853, to £70,123,000. The local expenditure, no doubt actuated by a spirit of honourable rivalry, had increased in the same period from £15,819,000, which it was in 1853, to at least £17,458,000, and probably something more; the total expenditure for the year 1859–60 thus reached £87,697,000 [?]. Accordingly it appears that in the eleven years from 1842–3 to 1853–4 the expenditure of the country under the two comprehensive heads which I have mentioned increased at the rate of 4½ per cent., nearly the whole of the increase being local; while in the six years which have elapsed between 1853 and 1859 it became much more mercurial, and increased at the rate of 22½ per cent., by far the larger part and greater rate of increase being now imperial.’1

To complete the illustration, we may state that for the year 1879–80 the national expenditure had risen to £82,184,000 (or, deducting the imperial contributions for local purposes, which came to £3,396,000, £78,788,000), and the local expenditure to £61,174,000, making a total of £139,962,000, e.g. an increase over 1859–60 of almost 60 per cent.; that in 1889–90 the national expenditure was £86,083,000, and the local expenditure £67,120,000, giving a total outlay of £153,203,000 (or, deducting imperial contributions to the amount of £2,470,000, £150,733,000), being an increase of 82¼ millions over the expenditure of 1842–3, i.e. 120 per cent.; and finally, as already shown, that in 1898–9 the national expenditure was £108,150,000 and the local £79,300,000, i.e., a total of £187,450,000, or an increase of 25 per cent. over the expenditure of 1889–90.

France presents a similar movement. In 1820 the general expenditure was 906 million francs, by 1860 it had reached 2,084 million francs, or much over double; more precisely, 130 per cent. The expenditure for 1899 exceeded 3,589 million francs, or a growth since 1860 of over 72 per cent.1

The Italian expenditure of 1861 was 812 million lire: the estimate for 1901–2 is 1,728 million lire, an increase of 916 million lire, giving a growth in 40 years of 112 per cent.

The Prussian budget in 1849 was 282 million marks; in 1865 it had grown to nearly 507 million marks. Since the formation of the North German Confederation (1866) and the German Empire (1871) the increase has continued, the actual expenditure in 1889–90 was 1,831 million marks, and the estimates for 1902–3, 2,350 million marks. The Prussian Budget for 1901 is 2,614 million marks.2

The smaller German States exhibit like features. Bavaria spent 32 million marks in 1819–20; the expenditure for 1889 was 260 million marks, and the estimated expenditure for 1893 came to 306 million marks.

In Austria, Russia, and even in small States like Belgium, we find the same general tendency towards increased outlay. In the last-mentioned country, whose administration has been well conducted, the expenditure in 1835 was 87 million francs; for 1890 it was 417 million francs, making almost a five-fold increase. For 1900 the expenditure was estimated at 451 million francs.

So well established is the general fact of increasing outlay—and whoever doubts it need only run over the examples just given—that even conservative writers on finance, such as Roscher and Umpfenbach, lay it down as a general law of progress;1 and they explain it by reference to the increasing demands made by society on the modern State. ‘What judgment should we pass,’ asks the former, ‘on a government that, after the manner of the Middle Ages, did not trouble itself about the health, mental training, maintenance, or enriching of the people?’ And so far there is no doubt that the intensifying of state duties is one cause of the almost universal increase. In previous chapters we have seen how the cost of defence, of administration, and the minor needs of civilisation have gone to swell the growing totals of modern budgets, and in each case special causes have appeared that went far to explain the final result.

Before collecting these, it may be well to correct to some extent the impression that increasing figures of outlay are apt to produce. Leroy-Beaulieu remarks2 that one cause of the general increase is to be found in the depreciation of the precious metals. As expenditure is estimated in terms of money, any change in the value of the circulating medium should be taken into account, and the application of some test as to the reduced purchasing power of money would considerably alter the figures for the earlier part of the period that we have taken, i.e. from 1820 to 1870, but for the last thirty years the correction would act in the other direction. Increases in outlay since 1873 would certainly mean more than the amount as measured in money, so that we cannot place much stress on this part of the explanation of increase. Another element is, however, important. In most countries population is growing, and national income grows with it; and in the exceptional cases where, as in France, population is stationary, income is increasing. It is not, therefore, certain that the proportion of public outlay to national income has become greater. Moreover—and this is the most important consideration—the extension of the economic activity of the State in certain directions has been accompanied by a passage of special industries from private to public management. As a necessary consequence, public expenditure and income are both increased without the real pressure on the people becoming greater. It may be that in this tendency there lies, in Roscher's phrase, ‘ein communistischer Zug,’ and it is plain that the transfer in this manner of all industries means the establishment of socialism pure and simple. But apart from its economic reactions, a writer on finance is not entitled to absolutely condemn this movement. His duty is, however, to point out that comparison between the expenditure of a State with large industrial enterprises in its charge and one without them is illegitimate unless due correction is made. To take a simple illustration, it is plain that if the State purchased the English railways, and the accounts entered into the national budget (as they should), both expenditure and income would be largely increased. This has actually happened in Prussia, and explains a large part of the increased outlay in that country.1

Notwithstanding these extenuations, there has been, we believe, an increase in expenditure that is not balanced by receipts from the property of the State, and this larger outlay may be attributed to the following causes:—

(1) The cost of war and preparation for war. We need not repeat the details already given on this subject,2 but we ought to emphasise the general fact. The annual military and naval expenditure of Europe approaches £300,000,000, and the disturbance to industry, the apprehension of hostilities, and above all the interest on debts incurred for the most part for the purpose of war, considerably increase the burden.3 As if to enable us to judge of its effects, a test case has been provided in the condition of the United States, which further shows that it is not war, but the necessity of constant readiness for it, that affects most injuriously the economic interests of nations.1

(2) A second cause is to be found in the extension of administrative action. To maintain a large staff of competent officials considerable outlay is needed, much of it necessarily wasteful. It may be that a great deal of official work does with advantage to society what men are too busy or too careless to do for themselves. Perhaps also it checks some moral and social evils, but, financially speaking, it is undoubtedly costly, and if the end could be otherwise gained it would be an economic benefit.

To these causes many would add a third—the progress of democracy.2 It is argued that a widely extended suffrage lowers the standard of legislatures, and that under the influence of socialistic ideas the expenses of the State are increased. There is probably some truth in this doctrine. The ‘new radicalism’ is not desirous of economy in expenditure,3 and it may be freely conceded that ‘democratic finance’ is remarkable for its disregard of principles and its utter incapacity to measure financial forces; but on the whole it cannot be said that Russian finance, which is certainly not democratic, is much superior in these respects. Nor is it plain that English finance before the Reform Act of 1832 was worthy of commendation. The socialistic element which has an injurious effect on finance is not an essential part of modern democracy. The technical administration of revenue and expenditure is also likely to suffer while under the control of an untrained democracy. But allowing all this, the real enemy of sound finance is ignorance on the part both of rulers and ruled, and this is unfortunately too common under all forms of government.

§ 6. Any discussion of public expenditure that neglected to notice its influence on national and social economy would be incomplete. The State, through its central and local organs, is by far the greatest purchaser of goods and employer of services: it can in this way powerfully influence prices and wages, and through that influence affect the distribution of wealth. The sum of £150,000,000 annually disbursed (after allowing for the amount that goes as interest on loans, which operate on the money market) must both by its great amount and its changed direction alter the structure of the British national industries. Demand for commodities determines the direction that production will take, and consequently the form of labour in many cases depends on the policy of the State; so also do the rates of remuneration and the conditions of employment.1 The economic systems of Germany and the United States owe their different features largely to the special direction of state activity in each country. The technical arrangements for the supply of commodities for public requirements are a serious consideration for administrators, owing to their ulterior effects. Government manufacture is liable to the evils of expense and inferiority in quality of products, but the alternative method of purchase in the open market, necessarily carried out through agents, is not free from similar evils. In particular, the result of giving contracts at the lowest tender has been vehemently assailed by reformers as tending to lower wages.2 The direct employment of services or labour by the State gives rise to further complications. Hiring on the ordinary system and at the market rate is impossible in the case of the higher officials, while for military and naval services special conditions of engagement are needed. The great extent and variety of the general Civil Service make the determination of its proper remuneration a question of much difficulty. To avoid the political evils that short tenure—as in the American system—causes, its members ought to be permanently employed. Permanence in state service soon affects private employers, who will have to give either like security of tenure or better pay.1 In every part of national life this influence of state expenditure is felt, and is becoming greater.2

The great and increasing importance of state outlay does not, however, afford a presumption that the movement is advantageous. The current of modern sentiment runs as strongly at present in favour of state action as it did fifty years ago against it, but neither tendency can be its own justification; both have to be judged on the grounds of reason and experience. Some popular arguments for state expenditure may be at once dismissed. Perhaps the crudest is that which regards the State as affording employment, and imagines that if war and the other conditions which call for state services were to cease, there would be no field for the labour of those now employed as soldiers, policemen, and officials. This obvious fallacy arises from entirely overlooking the previous existence in private hands of the funds collected by the State as its income, and which would afford like employment, but on other lines: the best practical refutation is, however, found in the ease with which the enormous expenditure of the United States during the Civil War was reduced at its conclusion, and the military forces absorbed in various industrial employments.3 Expenditure of itself is plainly not a good; it has to be judged by its object, i.e. by the benefits obtained in return for the sacrifices made. By taking this view we avoid the opposite fallacy that all state outlay is bad, or at all events that the less the expenditure the better. This doctrine, though accepted by Say and Ricardo,1 is palpably incorrect, since it takes no account of one of the two factors in the problem. It is not true that the cheapest article is the best, nor is ‘the cheapest State’ the most serviceable. That state organisation is the best and really the cheapest which, all elements of the question being taken into account, gives the greatest amount of benefit to its citizens and provides best for the future progress of the nation.

APPENDIX.

On the Classification and Guiding Maxims of Public Expenditure.

The rapid development of financial study in recent years has led to a careful examination of the more backward divisions of the subject, in order to bring them into scientific form. The theory of state expenditure has naturally attracted a large part of this fresh energy. The undue neglect of the earlier English and French writers2 has been replaced by rather elaborate critical discussion. But it is nevertheless true that the difficulties of the question have not by any means been removed. No one has as yet propounded a system of arrangement and a body of rules applicable to public expenditure which could claim to be of the same character and fundamental importance as those established for public revenue, and particularly for taxation. This failure is undoubtedly due to the peculiarities of the subject-matter, and is closely paralleled by, if not in a sense identical with, the case of the theory of consumption in Economics, as contrasted with that of production or distribution.

There is, however, some advantage to be obtained by considering the suggestions put forward by the able writers who have endeavoured to throw further light on the matter.

First, we may notice the ingenious development of a conception, presented in a less elaborate form by Cohn, which appears in Professor Plehn's textbook.1 This system groups the several kinds of expenditure with reference to the benefit that they confer. From the great class of expenditure which confers ‘a common benefit on all citizens’ there is a transition through the intermediate forms of outlay that (1) are special, but treated as common, and (2) confer both special and common benefit to that class which confers ‘only a special benefit on individuals.’ There are thus four sections or heads of expenditure, each of which makes a separate category, and it is claimed that on this basis a satisfactory—and the only logical—classification can be established.2

At the first glance the arrangement appears to be convenient, but even a cursory study suffices to bring out its defects. Perhaps the most obvious is the immense difficulty of assigning the various items of outlay to the prescribed categories. May it not be truly said that all expenditure is for the public and general interest? Otherwise it should not exist. Again, it is impossible to exclude the element of special advantage, even in the case of the first class. There are surpluses of utility accruing to some individuals from the expenditure for national defence or internal security. Thus the four classes may be reduced to one—the third in order.3

Still more serious is the fact that the allotment will vary according to the views of the arranger. Expenditure that one writer would put under a particular head will be assigned a different place by another. The classification—to state the point definitely—rests on a subjective rather than an objective basis. This would seem, of itself, enough to condemn it as a scientific solution of the problem. Prof. Plehn, indeed, in his treatment of the contents of the different classes, supplies examples which support this criticism. Thus, e.g. pensions as the recognition of service belong to class one, but when they are improperly bestowed they come under class two. How hopeless it would be to apply such a test the history of the English Pension List proves.4 In truth, the test of graduated benefit is as unsatisfactory as one of graduated disutility would be for taxation.

Another theory is given in the work of Prof. Adams, in which the functions of the State are regarded as, after due analysis, affording a clue to the law of public expenditure. Governmental functions may be analysed into three classes—protective, commercial, and developmental. This classification also permits the framing of general laws as to the relative movement of the different groups. The cost of the protective function will decline. while that of the commercial one will probably, and that of the developmental one will certainly, increase with the progress of society.5

In this case also the difficulty of determining the proper head to which the several concrete items of expense are to be assigned is encountered. There is no doubt that what some writers would describe as protective outlay others would call developmental. J. S. Mill showed long ago that there is no clear-cut line between the institutions and qualities that conduce to maintain order and those that promote progress,1 and in the same way expenditure for protection helps development. Commercial expenditure, again, is justifiable only as contributing to present well-being or future progress.2 An equally unsatisfactory feature of Prof. Adams' discussion is found in the laws of movement which he formulates for the several classes. To lay down dogmatically that protective expenditure declines in the progress of society is hardly warranted by facts. If any proposition can be confidently laid down respecting the course of expenditure in the near future, it is that military and naval expenditure will increase more than in proportion to other outlay—a statement that will probably be as true of the United States as of the great European powers. Prof. Adams', like Prof. Plehn's, classification fails to present the characteristics of a grouping, logical and in accordance with fact.

More scientific than either of the preceding attempts is the treatment of public expenditure adopted by Prof. Nicholson in his recent treatise.3 After dwelling on the fact that expenditure must be regarded as co-ordinate with revenue, he classifies the forms of expenditure by reference to amount of revenue obtained in return for the services rendered. Thus the following classes may be distinguished: (1) expenditure without any direct return of revenue; (2) expenditure indirectly beneficial to revenue; (3) expenditure with partial direct return; (4) expenditure with full return or surplus profit.

Under this system the greater part of expenditure in every given State can be easily and conveniently grouped, but the difficulty remains that the dividing line is not always clearly marked, e.g. there may be doubt as to the inclusion of a particular item under head (1) or (2). Still more important is the question whether the classification is one which brings out the really essential differences in different kinds of expenditure and places these separate groups in their proper relation. It must never be forgotten that public expenditure is one division of the social consumption or using of wealth, and has, therefore, to be treated on the same principles as other forms of consumption. But it would hardly be allowable to classify the forms of private consumption by reference to the amount of income obtained in connexion with each. We could not get beyond the broad division into ‘productive’ and ‘unproductive’ consumption, which is not very illuminating as to the real character of the many sections of private outlay.

In truth, the forms of public expenditure are determined by the various needs of the State, and thus it appears that the consideration of these several wants in their concrete manifestation is, so far as inquiry has yet gone, the most convenient and instructive way of discussing this class of financial problems. No ingenuity of analysis can remove the subject of public finance from the domain of Political Science, which, in turn, takes its starting point from the institutions and activities of the State.

Similar difficulties beset the framing of general canons of expenditure. Beyond the broad rule of aiming at the maximum result, it is not easy to reach any important conclusions by the deductive method. Nor does it seem probable that the canons of taxation can, as Prof. Nicholson believes, be employed as a guide in developing equally fundamental maxims for expenditure. There are, no doubt, certain common principles running through the whole public economy, as the laws of Supply and Demand affect most economic questions. In respect to expenditure there is, however, the influence of the needs of the society, which are in a sense extra-financial. This is the element of truth contained in the view of Leroy-Beaulieu and others, who refuse to include the question of expenditure in their treatment of finance.1

If scientific principles of expenditure are developed in the future, it will be by (a) the use of the marginal doctrine applied to the last increments of outlay in each particular direction,2 and (b) the more critical examination of the actual processes by which the public economy is carried on. At all events, a long time must elapse before any rules claiming the authority that the Smithian canons of taxation have acquired can be elaborated.

[1]E.g. by Mr. Spencer, Principles of Sociology, Part ii.

[1]See his Province of Jurisprudence Determined, and for earlier statements of the same truth, Hobbes, Leviathan, ch. 18; Bodin, De Republica, Bk. i. ch. 8.

[1]§ 109.

[2]Political Economy, 543–4 (1st ed).

[1]‘Each public department stands prepared to give the most confident reasons why it is absolutely necessary to keep up the scale of its expenditure to the exact point at which it now is.’ Parnell, Financial Reform, 100.

[2]The events of the closing years of the 19th century both in England and the United States abundantly illustrate this statement.

[1]I.e. allowing only necessary expenses for the individual, anything above being manifestly profit.

[1]Cp. the difficulties of the United States, in the years immediately preceding 1891, with their surplus revenue.

[2]Prof. Adams argues in favour of a deficit (Public Debts, 78–83); but the three reasons which he gives in support of his position are derived from a one-sided view of the financial experiences of the United States referred to in the preceding note. They are wholly inapplicable to other countries. The authority of Peel and Gladstone—so great on all practical matters of finance—may be quoted in support of the rule given in the text. ‘The training I received from Sir R. Peel was that the right and sound principle was to estimate Expenditure liberally, to estimate Revenue carefully, to make each year pay its own expenses, and to take care that your charge is not greater than your income.’ Buxton, Mr. Gladstone as Chancellor of the Exchequer, 157, and cp. the whole chapter.

[1]Marshall, Principles of Economics, i. 137.8 (3rd ed.).

[2]Roscher, § 109; Wagner, i. 9–16; Geffcken in Schönberg, 6.

[3]Principles, Bk. v. ch. 1, § 1. Cp. ch. 11, passim.

[4]§ 109.

[5]See Appendix to ch. 8 for a fuller discussion of this point.

[1]Supra, Intr. chap. ii. for the effect on financial theory.

[2]Strictly true only of England, and in a much less degree of France.

[1]Wealth of Nations, 286.

[2]Ingram, History of Pol. Econ. ch. 5.

[1]See specially the latter's Theory of Legislation (’Principles of the Civil Code’).

[2]Principles, Bk. v. ch. 1, § 2.

[3]Principles, Bk. v. ch. 11, § 7.

[4]Liberté du Travail.

[5]Principles of Political Economy, Bk. iii. ch. 2. Elements of Politics, ch. 10.

[1]Theory of the State (Eng. Trans. 2nd. ed.), 320–1. Cp. also Wagner, i. 76, Cohn, §§ 34 sq.

[1]Voyage of the “Beagle,” 229–230.

[1]Cp. Cohn, Book i. chaps. 1, 2, for a general view of the financial aspects of social development. Also Vocke, Abgaben, &c. Part i.

[1]Principles, Bk. v. ch. 11, § 16.

[1]Wealth of Nations, 289, cp. 296.

[2]See tables at end of this chapter.

[3]This statement is amply confirmed by the growth of expenditure in the past ten years. But cf. the view of Adams, Finance, 56–7.

[1]See infra, Bk. i. ch. 8, § 1. Cp. Wagner, i. 417, sq. Roscher, § 119.

[1]In some cases Adam Smith saw clearly enough that division of labour was not always desirable. Cp. Wealth of Nations, 217 with 327.

[1]Bk. xiii. ch. 17.

[1]See Wagner, i. 427, for a full list.

[2]Cairnes, Political Essays, 199–255. On this point his judgment is for once supported by the agreement of Cliffe Leslie [Essays (1st ed.), 128–47], whose opinion is the more valuable, as it was formed after personal study of the Prussian system, and was in opposition to his earlier belief.

[1]Supra, ch. i. § 2.

[2]Geffcken in Schönberg, 53.

[1]Leslie, Essays (1st ed.), 143. See Wagner, i. 426, for a directly opposite view.

[1]This plan has been advocated by Sir C. Dilke, Problems of Greater Britain, 380.

[1]Though naval expenditure is usually much less than that required for military purposes, yet the English naval estimates for each of the five years, 1895–1900, exceeded those for the army, as the subjoined table shows. This was of course due to the peculiar situation of the British Empire, with its territories spread over the various regions of the globe. The South African War has for the time removed this anomaly, but the return of peace may recreate it.

[1]Giffen, Growth of Capital, 145. Cp. ‘Wie die produktive Technik des Jahrhunderts ihre Kehrseite hat in der Technik der Zerstörung, so wird die erstere tributär gemacht für die letztere, und je ergiebiger sie ist um so mehr muss sic abgeben..... Die hiermit gebotene Aussicht ist nicht erfreulich; sie ist aber auch nicht so trostlos, wie sie meist dargestellt wird,—unter der Voraussetzung nicht, das bei jeder betheiligten Nation der Fortschritt des Militärausgaben von der fortschreitenden Productivität der Volkswirthschaft begleitet ist wie bisher.’ Cohn, § 390. For the supposed stimulus to industry, see Sir F. Abel's presidential address to the British Association at Leeds, Report (1890), 25.

[2]Bk. ii. ch. 3, ‘The Industrial Domain.’

[3]Leslie, 140, who adds some striking instances.

[1]Cairnes, ut sup. 223.

[2]Leslie, 141.

[3]i. 416 sq.

[1]For an admirable statement of the evils of war see the essay on ‘The Evolution of Peace,’ in Lawrence, Essays on International Law, 234 sq.

[2]Giffen, Essays in Finance (1st Series), 1–55, gives an estimate of the cost of that war.

[3]See Note at end of Chapter.

[4]The exemption of private property at sea from capture is the most obvious and desirable reform in this direction.

[1]Farrer, State and Trade.

[1]Maine, Ancient Law, ch. 10; Early Institutions, chs. 9 and 10; Jenks, Law and Politics in the Middle Ages.

[2]Cp. Maine, Early Law and Custom, 185 n.

[3]If the fees were so large as to leave a surplus after paying salaries and other expenses, ‘Administration of Justice’ might have to appear in Book ii. as one of the departments of ‘State Industry.’

[1]The statement in the text does not exclude the levying of fees for various legal acts. This side of the question is considered infra, Bk. II. Ch. iv., and Bk. IV. Ch. viii. The most important field for levying legal fees is in connexion with Commercial Courts. Traders as a special class may not unfairly be required to defray the expenses of the tribunals that they use.

[2]Promotion on the Continent is said to be from the bench to the bar, a complete reversal of English ideas.

[1]Thus we find ‘Police of commerce,’ ‘Police of grains,’ and even the ‘Police State,’ for a system of paternal legislation. See Dictionary of Political Economy, Vol. III., Art. ‘Police,’ for a full account of the different uses of his term.

[1]See Du Cane, The Punishment and Prevention of Crime, chs. 1–3.

[1]For theories of punishment see Bentham, Theory of Legislation; also T. H. Green, Philosophical Works, ii. 486–511; Bosanquet, Philosophical Theory of the State, 275 sq.

[1]E.g., the restraints so forcibly criticised in Turgot's Éloge de Gournay could not exist now. Turgot, i. 266–270.

[1]Farrer, State and Trade, and Cunningham, Economics and Politics, both describe this movement, but with divergent sentiments.

[2]For the United States, see Bryce, American Commonwealth, ch. 91. For the English Colonies, Dilke, Problems of Greater Britain, 508.

[3]Farrer and Cunningham, as above. For vigorous protests against the tendency, see H. Spencer, State and Man; the recent work, A Plea for Liberty; and the publications of the Liberty and Property Defence League; also Léon Say, Socialisme d'État.

[1]For a statement of these causes, Goschen, ‘Laissez faire and Government Interference,’ Addresses, 59–84.

[1]Ricardo, Works (ed. McCulloch), 58–9; Malthus on Population (8th ed.), 428 sq.

[1]‘Every society, upon arriving at a certain stage of civilisation, finds it positively necessary for its own sake ... to provide that no person ... shall perish for want of the bare necessaries of existence.’ Fowle, Poor Law (1st ed.), 10, who regards this as the ‘general principle’ and ‘cause’ of poor-law legislation.

[1]Sidgwick, ‘Economic Socialism,’ Fortnightly Review, Sept. 1886.

[2]Bk. I. ch. 3, § 6.

[3]Political Economy, 526.

[1]See J. E. T. Rogers, Economic Interpretation of History, 487.

[1]In an interesting article on ‘Old Age Pensions’ (Economic Review, iii. 475–85), Mr. Phelps shows the effective working of private charity in supplementing and modifying the rigour of the legal provision.

[2]Droit au Travail, quite different from the Droit du Travail.

[3]Mr. C. Booth's Endowment of Old Age contains the best statement of the case for old-age pensions. See especially chap. vi. for the financial aspects of the subject. Mr. Booth contemplates calmly the reimposition of the sugar duty, increased taxation on tea and ‘drink,’ 3d. additional on the income-tax, with ‘an adjustment of death duties in reserve.’ It may be fairly asked what resources would remain for use in case of the outbreak of war, with its inevitable pressure on the national earning power. The additional inquiries by the Commission on ‘The Aged Poor’ (1895) and the Departmental Committee on pension schemes, also the evidence taken by Mr. Chaplin's Committee, appear to establish the immense difficulties in the way of any general pension scheme. The effect on the British finances of the South African War proves the justice of the criticism made in this note on Mr. Booth's proposals.

[1]Addresses, 113 sq.

[1]The attitude of the Physiocrats on the subject of education is remarkable, and helps us to understand their general conception of state policy. It was not so much interference, as injurious interference that they opposed; but they felt that all state action had elements of evil in its disturbance of voluntary action, and in its expense. Turgot, ii. 502–551, Mémoire sur les Municipalités, said to be the composition of Du Pont de Nemours. Cp. Schelle, 362 sq.

[1]Wealth of Nations, 329–30. An argument also urged by Malthus, Essay On Population (8th ed.), 437 sq.

[1]Provision of this kind was made for Ireland in the Intermediate Education Act, 1878.

[2]Secondary education is likely to become an increasing charge on the State, owing to the general desire to ‘organise’ it and supply it to all who may desire to obtain it.

[1]‘The improvements which in modern times have been made in several different branches of philosophy, have not the greater part of them been made in Universities.... The greater part of Universities have not been very forward to adopt those improvements after they were made, and several of those learned societies have chosen to remain ... the sanctuaries in which exploded systems and obsolete prejudices found shelter and protection after they had been hunted out of every other corner of the world.’ Wealth of Nations, 323.

[1]Cp. Cohn, § 150. The donations of Mr. Carnegie and such bequests as those of Mr. Rhodes are recent instances of this tendency.

[2]See his quotation from the latter (History of England, ch. 29), whom he describes as ‘by far the most illustrious philosopher and historian of the present age.’ Wealth of Nations, 331.

[1]‘The revenue of every established church ... is a branch, it ought to be observed, of the general revenue of the State, which is thus diverted to a purpose very different from the defence of the State.’ Wealth of Nations, 341.

[2]‘Congress shall make no law respecting an establishment of religion.’ First Amendment to U.S. Constitution. Some State constitutions contain a similar provision. Bryce, American Commonwealth (2nd ed.), ii. 570–1.

[1]Introduction, chap. 2.

[2]Wealth of Nations, Bk. v. ch. i. part 3, art. 1, 303 sq. Cp. Turgot's statement of Gournay's views in the ‘Éloge,’ i. 279.

[1]Bk. ii. ch. 3; Bk. iv. ch. 8.

[2]E.g. the Indian and Canadian Posts and most of the Continental state railways.

[1]Book iv. ch. 7.

[2]The fact that the Anglo-Indian Government has adopted a policy of nonintervention, so far as trade and commerce are concerned, is the more remarkable, since if ever there were a case where rulers might be supposed to be fitted by superior wisdom and insight to direct their subjects, this would be one. But cp. Bk. ii. ch. 3, § 3, for the treatment of industry.

[3]Wealth of Nations, 213.

[4]See Quarterly Journal of Economics, Oct. 1890, 44–69 (‘A Century of Patent Law,’ by Chauncey Smith), for the effects of the United States patent laws.

[1]On the economic effects of exhibitions, see Cherbuliez, Précis de la Science Économique, ii. 31–33; Droz, Essais Économiques, 454–7.

[2]This seems more properly to belong to the subject of the ‘public domain,’ as it usually gives a surplus. See Bk. ii. ch. 2, §§ 8, 9.

[3]The depression in agriculture has led to increased state assistance in most European countries. Denmark and Würtemberg are noticeable instances. The Irish ‘Department of Agriculture’ and ‘The Congested Districts Board’ are attempts of a similar kind.

[4]H. C. Adams, Public Debts, 317–342.

[1]Cp. Fawcett, Indian Finance. For a vigorous defence, see Strachey, The Finances and Public Works of India (1869–1881).

[2]For the position of the King's revenues, infra, Bk. ii. ch. 2. Cp. Roscher, §§ 9, 117; Wagner, i. 401 sq.

[3]A comparison of the cost of the English Monarchy and Parliament with that of the United States President and Congress shows that the latter is on the whole more expensive. This curious circumstance is the consequence of the non-payment of the members of the English Houses. Admirers of the American system would remark that British peers and M.P.'s obtain indirect rewards that are still less to the advantage of their country.

[1]Leroy-Beaulieu, i. 267 sq.; Wagner, iii. 432–4, 607–10.

[1]Supra, Bk. i. ch. 4, § 4.

[2]‘Es ist vor allen Dingen der Reichthum historischer Veranlassungen und historischer Besonderheiten, welcher diese Verschiedenheiten erklärt.’ Cohn, § 115. Cp. Thorold Rogers, Economic Interpretation of History, ch. 22.

[3]Tocqueville, Ancien Régime, Livr. ii. ch. 2 (Eng. Trans. 40 sq.).

[1]The correspondence between Trajan and the younger Pliny instructively illustrates this dependence. See Bury, Student's Roman Empire, 440–2.

[2]For the division of expenditure between the state treasuries and the towns see Humbert, Essai sur les Finances, i. 209, 389–401, 411–417.

[3]Roscher, § 156; also his Ackerbau, §§ 5 sq.

[1]Local Taxation, 190.

[2]Finance Statistics of the American Commonwealths, 108.

[3]The prominence that the question of municipal trading has assumed is a good illustration.

[1]Rules limiting expenditure, and so raising a barrier against abuses, are in such cases very useful, and seem to be growing in favour both in the United Kingdom and the United States.

[2]The number of new towns that have sprung up in England, Germany, and above all in America, during the last fifty years, makes this point important.

[3]The Harbour and Dock Boards, very common in England, elected under special franchises and with power to levy tolls, are a good example.

[4]Every one knows that Parliament will do neither of the things mentioned in the text, but the limitations on its action are moral, not legal, and consist in the fear of exciting opposition on the part of the people, and in its own sentiments, i.e. they are external and internal. Cp. Dicey, Law of the Constitution, Lect. ii.

[1]‘No new State shall be formed or erected within the jurisdiction of any other State, nor any State be formed by the junction of two or more States or parts of States, without the consent of the legislatures of the States concerned as well as of the Congress.’ Constitution of U.S., Art. iv. section 3. Cp. Art. 78 of the German Constitution for an analogous provision.

[1]See the instructive articles on ‘Local Government in Prussia,’ by Professor Goodnow, Pol. Science Quarterly, iv. 648–666, and v. 124–158; and the same writer's Administrative Law, Bk. iii. ch. 7.

[1]Bavaria and Würtemberg are the only States that keep an appearance of independence, but in war the allegiance of the Bavarian troops is due to the Emperor, and her contribution towards expenses is compulsory. In Switzerland, though part of the forces are cantonal, the first claim on their services belongs to the Federal Government, and the principal outlay is by it. In 1876 it was about six-sevenths of the whole.

[2]‘It would not be a matter personally indifferent to the rest of the country if any part of it became a nest of robbers or a focus of demoralisation, owing to the maladministration of its police; or if, through the bad regulations of its gaol, the punishment which the courts of justice intended to inflict on the criminals confined therein (who might have come from, or committed their offences in, any other district) might be doubled in intensity, or lowered to practical immunity.’ J. S. Mill, Representative Government, 116.

[1]See Report of the Commission of 1832, 232–260.

[2]Local Government and Taxation, Cobden Club Essays (3rd Series, 1875), 143.

[1]Bk. i. ch. 1, § 2.

[1]Cp. Bk. iii. ch. 6, § 7.

[2]As in the case of municipal gas or water works; Bk. ii. ch. 3.

[1]Roscher classifies duties of local bodies as (a) State, (b) compulsory local, and (c) optional local. § 157. Cp. Wagner, i. 96 sq.

[1]Stein, i. 64, 76–81. Wagner, i. 79, includes the first, but not the second kind of Colonial finance. For the latest treatment on the subject, see Flora, Le Finanze degli Stati Composti.

[1]A good illustration is supplied by the Australian Colonies. Previous to 1901, Victoria and New South Wales were quite separate, and their financial systems could not be scientifically combined. Now they are parts of the Commonwealth of Australia, though it will be some time before the financial arrangements are duly adjusted. A confederation of the British Empire may afford another example on a grander scale.

[1]For the different uses, see Wagner, i. 135 sq; Cohn, §§ 157–9.

[2]The English budget estimate of expenditure for 1889–90 was £85,967,000; the expenditure for that year was £86,083,000; an error of less than one-seventh per cent. Supplementary estimates are, of course, excluded.

[1]The direct cost of the war of 1870–1 to France has been estimated at £234,000,000. Giffen, Essays in Finance (1st Series), 1–55. That of the American Civil War at £1,800,000,000. Wells in Cobden Club Essays (2nd Series), 488. Mr. Bolles gives £1,238,000,000 as actually paid out up to 1879. Financial History of U.S., 241 sq.

[2]‘The amount of revenue raised in time of peace ought to be greater than the expenses for a peace establishment, and the overplus applied to the discharge of debts contracted in former wars.’ Hamilton, National Debt, 7; see Bk. v. ch. 7, § 4.

[1]§ 157.

[2]Infra, Bk. vi. ch. 3.

[1]The theory of public debts and borrowing is treated in Bk. v. chs. 5, 8. In local finance we shall see that borrowing is in such cases the only course open, as otherwise the funds could not be obtained, owing to the restraints on local taxing powers.

[1]See on this point Bk. v. ch. 5. C. Dietzel appears to be the originator of the theory. He is followed by Stein and partly by Wagner.

[2]Wealth of Nations, Bk. ii. ch. 3.

[3]The term ‘productive’ has received such hard treatment, and is so closely connected with the idea of material wealth, that it seems, on the whole, better to use a more distinctive term.

[1]Bk. ii. ch. 3.

[2]Supra, Bk. i. ch. 6, § 1.

[1]Schaffle and Schmoller have both suggested that ‘net income’ is not the only source of public revenue. Cp. Bk. iii. ch. 2, §§ 6, 7.

[2]For Justi see Roscher, Geschichte, 463. See also Hock, 35. Leroy-Beaulieu, i. 127 sq., esp. 133.

[1]Such as those of Sir R. Giffen De Foville, and Pantaleoni, for England, France, and Italy respectively.

[2]Victorian Year Book, 1887–8, i. 203, where a table of comparative taxation is given. In India and Australasia the proportion of tax to non-tax revenue is almost the same (40 per cent.), and the rate per head in India for 1885–6 was 3s., while averaged over the Australasian Colonies it was £2 17s.

[1]Thus in framing the English budget for 1894 the principal points for consideration were: (1) the propriety of increasing the naval estimates beyond the amount required in the preceding year; and, should extra expenditure be decided on, (2) its legitimate amount, which was held to be £3,126,000 out of £95,458,000.

[2]During the Parliamentary Sessions 1880–2, out of 576 financial proposals, 556 were for increase of expenditure, only 20 for reduction.

[1]Budget Speech of 1860 in Financial Statements, 119.

[1]See Léon Say, Les Finances de la France, iii. 1–31, for an admirable statement and criticism of this movement.

[2]There are, however, items of expenses and receipt between the Empire and Prussia which reduce each amount in 1902–3 by 348 million marks.

[1]Roscher, § 110; Umpfenbach, 38.

[2]ii. 159.

[1]The estimated expenditure on the Prussian State Railways in 1902–3 is 883 million marks, besides the part of the total debt due to their purchase. The receipts, however, are estimated at 1,416 million marks.

[2]Supra, Bk. i. ch. 2.

[3]Neymark, Les Dettes Publiques, 89.

[1]The policy of expansion adopted by the United States since the war with Spain will almost certainly bring them under the influences that have affected the finances of European States.

[2]Leroy-Beaulieu, ii. 169 sq.

[3]The contrast between the doctrines of The Radical Programme (ch. 8, ‘Taxation and Finance’) and those of Cobden, Bright, and George Grote is very extreme.

[1]Hermann, Staatswirthschaftliche Untersuchungen (2nd ed.), 465, indicates this very clearly.

[2]C. Kingsley, Cheap Clothes and Nasty.

[1]On this point cp. Prof. Foxwell's article in Claims of Labour, 254. For further observation of state dealings with labour, see Bk. ii. ch. 3, § 20.

[2]The belief that the State should be a model employer is rapidly gaining ground, as the partial adoption of the eight-hour day and the acceptance of the Trade Union rate of wages show.

[3]Wells in Cobden Club Essays (2nd Series), 491. Cp. Adam Smith's remarks on the absorption of ‘more than a hundred thousand soldiers and seamen,’ disbanded at the close of the Seven Years’ War, in the ranks of industry. Wealth of Nations, 196.

[1]‘The golden maxim of M. Say, “that the very best of all plans of finance is to spend little, and the best of all taxes is that which is the least in amount.’ Ricardo, Works, 145.

[2]See Introduction. ch. i. § 2.

[1]Plehn, Public Finance, Part i.

[2]Cohn, §§ 79–91; Plehn, 28–32.

[3]Prof. Nicholson puts this criticism most effectively. Principles, iii. 373.

[4]Even the annual pension grant of £1,200 for literary services has been the object of keen criticism, and in some cases the grants have been quite undeserved.

[5]Adams, Finance, Part i.

[1]Mill, Representative Government, ch. 2.

[2]For further criticism on this point see the reviews of Adams' work by Prof. Seligman (Pol. Science Quarterly, xiv. 134–5); and the present writer (Economic Journal, ix. 435).

[3]Principles of Pol. Economy, III. chs. 15, 16.

[1]Introduction, ch. i. § 2.

[2]Supra, Bk. i. ch. 8, § 4.