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 THE ELEMENTS 
 
 OF 
 
 PUBLIC FINANCE 
 
 INCLUDING 
 
 THE MONETARY SYSTEM OF 
 THE UNITED STATES 
 
 BY 
 
 WINTHROP MORE DANIELS, M.A. 
 
 Professor of Political Economy in Princeton University 
 
 3<^e.<^9; 
 
 NEW YORK 
 
 HENRY HOLT AND COMPANY
 
 Copyright, 1899, 
 
 BY 
 
 HENRY HOLT & CO.
 
 HT 
 
 TO 
 
 Cbarles m, fflbCBlpin 
 
 WITH TRUE REGARD 
 
 %
 
 PREFACE. 
 
 The present volume owes its origin to the want the author 
 experienced in finding a suitable text for his classes. Such 
 treatises as were at hand proved unsuitable for one or the 
 other of two very different reasons. Either their treatment 
 of financial theory was too detailed, or the scope they 
 allowed to public finance was too narrow to include certain 
 subjects — such as our currency system — which I thought fit 
 to discuss in a somewhat practical manual. 
 
 So manifold are the obligations I am under to various 
 writers on finance that I shall make no attempt to enumer- 
 ate them all in this place. I have indicated in the foot- 
 notes the sources from which I have drawn much of my 
 material, and have added, here and there, an appreciative 
 comment. It would be unfair, however, not to mention the 
 great assistance I have derived from the writings of Bus- 
 table, Seligman, and H. C Adams. The latter's Science ef 
 Finance had not issued from the press when my manuscript 
 went to the printer, and consequently I have been able to 
 insert only a few cross-references to this excellent work 
 while correcting my proofs. I am under special obligations 
 to my friend, Professor Stockton Axson, for his kindly and 
 valuable assistance in reading the proof. 
 
 W. M. D. 
 
 Princeton, May 15, 1899. 
 
 V
 
 TABLE OF CONTENTS. 
 
 PAGE 
 
 TxTRODUCTiON. — Public Finance, its Nature I 
 
 History of Financial Systems 7 
 
 PART I. 
 
 GOVERNMENT OUTLAY. 
 
 CHAPTER 
 
 I. Theories OF Public Expenditure 25 
 
 II. Expenditure IN THE United States 34 
 
 PART II. 
 
 GOVERNMENT INCOME. 
 
 I. Taxation, its Essential Nature 53 
 
 II. Taxation, its Real and Apparent Burden 63 
 
 III. Taxation, ITS Equitable Distribution 79 
 
 IV. Taxation, its Practical Efficiency 92 
 
 V. State Taxation (Mainly Direct) iii 
 
 VI. Federal Taxation (Internal Revenue) 130 
 
 VII. Federal Taxation (Customs Duties) 153 
 
 VIII. The Income Tax 181 
 
 IX. Public Income from Quasi-Economic Sources 207 
 
 X. Extension of the State's Contractual Income 224 
 
 XI. Municipal Monopolies 265 
 
 PART III. 
 
 TREASURY MANAGEMENT. 
 
 I. Government Borrowing, OR Public Credit 285 
 
 II. Relation of the Federal Treasury to Our Mone- 
 tary System 315 
 
 _ III. Budgetary Legislation 344 
 
 Appendix 375 
 
 I NDEX 379 
 
 vii
 
 INTRODUCTION. 
 
 I. 
 
 The Definition of Public Finance. — No little ingenuiry 
 has been expended by philosophical jurists to imprison 
 " within the ring fence of a restrictive definition " tl:e 
 essence of government. Not infrequently these defini- 
 tions appear to the ordinary inquirer as ' hypostatized 
 abstractions,' — adequate perhaps to purposes of political 
 theory, but foreign to the every-day experience of the 
 market-place. It is not surprising, therefore, that at- 
 tempts have been made to define government in terms 
 which, if lacking in philosophic comprehensiveness, are 
 at least capable of being tried by the facts of actual civic 
 life. " Whatever else it may be," says Mr. John Fiske,^ 
 " the government is the power which taxes. ... If '.ve 
 are in any doubt as to what is really the government of 
 some particular country, we cannot do better than to 
 observe what person or persons in that country are 
 clothed with authority to tax the people." Ruskin^ 
 sounds much the same note where he dubs the ' thing ' 
 called a ' government ' " an apparatus for collecting and 
 
 ^ Civil Government in the United States, p. 7t 
 •Fors Clavigera, III., p. 237.
 
 2 INTRODUCTION. 
 
 spending money." These rough-and-ready descriptions 
 of government may not exhaust its significance, but they 
 do emphasize the most conmion, perhaps the most char- 
 acteristic, feature of this pohtical entity. The collection 
 and expenditure of money is, of course, not so much the 
 end of government, as the means whereby it accom- 
 plishes its ultimate purposes. The study of this essential 
 prerequisite to all governmental activity is the domain 
 of Public Finance. 
 
 Public Finance,^ therefore, we may define as the 
 study of the collection and expenditure of funds legally 
 devoted to public ends. It will naturally embrace the 
 most prominent effects, political and economic, which 
 result from the exercise of this all-important govern- 
 mental function. This definition recognizes the coercive 
 character of revenue collection and expenditure. This 
 does not imply that personal unwillingness on the 
 part of the subject always attends upon financial ad- 
 minstration, but indicates that the field of public finance 
 lies wholly within the domain of positive law, and 
 
 ^ The word finance comes from the Latni Unis. through two 
 mediaeval derivatives, finatio and financia. These latter by meton- 
 ymy (where the period of indebtedness was used for the debt 
 itself) meant the payment of indebtedness, and are analogous 
 to the early use of our English word fine. In the sixteenth 
 century finance was used synonymously with money in France, 
 while in Germany the word finance fell into bad philological 
 company and became equivalent to extortion. Sec Schunberg, 
 Handbuch der Pol. Oek., III., p. 7. Finance is used to-day in 
 I-2nglish with no little latitude in meaning It is sometimes 
 used either alone or in connection with some other term to 
 cover the monetary, commercial, or industrial sphere. Mr. 
 Gififen entitles his shorter miscellaneous writings Essays in 
 Finance. When finance is ciualified by the term public there 
 can be little question as to its exact connotation. It is worthy 
 of note that finance is used both in the singular and in the 
 plural. Used in the singular it not infrequently denotes the 
 art of financial management, whereas the plural generally ap- 
 plies to th^ state of a nation's resources,
 
 PkACTlCAL BEARINGS OF PUBLIC FINANCB. 3 
 
 excludes purely voluntary contributions or payments, 
 such as public subscriptions, for example, or contracts 
 between private individuals or corporations. 
 
 Practical Bearings of Public Finance. — The objection 
 has been urged to formal and systematic treatises on 
 finance that finance is essentially an art, that it is not 
 subject to rule and precept, that success in this sphere 
 cannot be taught, and that the financier, like the poet, 
 is born, not made. There is in this a trace of truth. 
 There were eminent financiers before finance was ever 
 regarded as a science. Moreover, the mere study of the 
 general principles of the science can no more make a 
 great financier than the mere study of politics can create 
 a Bismarck. At the same time there is a well estab- 
 lished body of facts, economic and financial, which go 
 far to equip the statesman for dealing with questions of 
 a financial nature. Not only have many of the most 
 famous financiers been careful students of the general 
 theory of finance, but they have frequently enriched 
 the theory itself, Turgot and Peel are instances in 
 point. Our chief need to-day, however, is not to equip 
 financial experts, but to instruct public opinion. It is 
 necessary to dissipate the idea that finance is a matter of 
 occult fortune or clever juggling. It is essential that a 
 self-governing people should vmderstand that there are 
 certain well ascertained and comparatively simply prin- 
 ciples to which financial legislation and practice must 
 conform, unless disaster is deliberately invited. " Fi- 
 nance," as M. Leroy-Beaulieu says, " has a terrible 
 fashion of avenging itself upon governments by whom 
 it is ignored or defied." ^ 
 
 Even when it is admitted that there is a sufficient basis 
 of fact upon which financial generalizations may be built, 
 
 * Science des Finances, I., preface to the fifth edition, p. viii.
 
 4 INTRODUCTION. 
 
 there prevails not infrequently the impression that at 
 best the subject is largely devoid of interest. The field 
 has no attraction for the general public. An old adage 
 has associated death and taxes in their quality of certain 
 recurrence, and most people try to think as little of the 
 one as of the other. Taxes are commonly thought to be 
 the most dismal part of ' the dismal science/ and the 
 trail of statistics is over them all. 
 
 And yet finance is not lacking in practical or theoretical 
 interest. It is preeminently one of the things that " come 
 home to men's business and bosoms." Consider first the 
 bearing of finance upon the income of the individual citi- 
 zen. Mr. Robert Luce in an essay ^ upon this subject 
 says : " It can be proved that the average American 
 citizen works one month out of the year for the sake of 
 being governed. In other words, taxation takes one 
 twelfth of his earnings. This average American is the 
 head of a family of five persons, earning a thousand 
 dollars a year. He pays thirty of this into the national 
 treasury, thirty into the state, county, city, or town 
 treasury, and at a moderate estimate twenty-three dollars 
 more for the indirect cost of collection. The total, equal 
 to one month's earnings, does not affect the question of 
 the equitable distribution of the burden, but emphatically 
 shows the importance of the question." We are not here 
 concerned with the exactness of this estimate nor with 
 the data on which it is based. But granting it to be ap- 
 proximately true, it emphasizes the significance of an 
 understanding of public finance for the taxpayer. 
 
 M. Leroy-Beaulieu has undertaken an estimate of the 
 part of the income of the nation which is absorbed by 
 taxation in certain countries of Europe. He finds that 
 in Belgium taxes take from six to six and a half per cent. 
 
 ^Public Opinion, 1892, p. 51.
 
 THEORETICAL BE/t RINGS OF PUBLIC FINANCE. 5 
 
 of the public income ; in England, seven and three 
 quarters per cent. ; in France, eleven per cent. ; and in 
 Italy, fifteen or sixteen per cent.^ Let the importance of 
 financial legislation and administration be thus brought 
 home more directly to the taxpayer, and the subject will 
 be invested with far greater importance than it now 
 obtains. 
 
 Theoretical Bearings of Public Finance. — Not alone 
 for the man of affairs does the study of finance have a 
 controlling interest. The historian and the sociologist 
 can ill afford to dispense with its study. This is very 
 commonly recognized in the domain of historical investi- 
 gation. A fairly definite insight into the life of any 
 period must include some knowledge of the social dis- 
 tinctions in which the financial system was rooted, and 
 which in turn it helped to perpetuate. 
 
 The student of constitutional liberty does not need to 
 be told of the dominant role played by financial issues in 
 modern politics. These issues have been not only the 
 unfailing source of party strife ; they have been as well 
 the formative influences in constitutional growth. 
 
 But aside from the purely historical import of the sub- 
 ject, finance has for the acute observer of shifting social 
 currents an interest not inferior to that excited by any 
 other social movement. The lines of social cleavage 
 run to-day substantially parallel with lines of wealth. 
 Those, moreover, who regard the present economic con- 
 stitution of society as evil are only too apt to look upon 
 the tax power as the readiest implement of reform. The 
 inequalities of the law of competition they would correct 
 by the equity of expropriation. This employment of the 
 tax power may possibly be justified up to a certain limit. 
 The governmental assumption of certain natural monop- 
 
 * Science des Finances, I., p. 133.
 
 6 'INTRODUCTION. 
 
 oHes may be warranted upon grounds of public utility.* 
 But thoroughgoing Socialism or Collectivism would 
 probably deny that any limit upon the tax power is justi- 
 fiable which stops short of the proximate realization of 
 their distributive ideal. It is right here that the sociolog- 
 ical side of finance becomes of prime importance. The 
 present constitution of private property has been chal- 
 lenged. Whether this institution can or ought to be 
 changed ; if so, to what degree ; whether the distribution 
 of the social dividend can be effected upon another basis 
 than the present one ; — these are the points of contact 
 between Collectivism and the industrial constitution of 
 modern society. In short, the battle-field where Social- 
 ism will not improbably assail the conservative forces of 
 society lies within the domain of finance. Thus its study 
 acquires a larger scope and afifords a more extended out- 
 look. It remains no longer the mere technique of tax 
 collection and expenditure, but joins the theoretical 
 moral and political sciences, and extends its speculations 
 beyond the world of the Present into the society of the 
 Future. 
 
 Relation to Cognate Disciplines. — There are two roads 
 by which the study of finance may be approached — 
 through the province of Political Economy or through 
 that of Law.2 The first is the English method ; the latter 
 is the method of the typical German publicist. If the 
 former be adopted, finance will be classed as a branch of 
 applied Economics. If the latter alternative be chosen, 
 finance will be viewed as a department of Administration. 
 This divergence in classification illustrates the different 
 
 ' Cf. SidgTvick, Principles of Political Economy, p. 408; also 
 Hadley, Economics, p. 397 sq. 
 
 ' Cf. Bastable, Public Finance, p. 7. (Note. — All references to 
 Bastable's Public Finance are to the second edition.)
 
 THE MODERN FINANCIAL CONSTITUTION. 7 
 
 historical origin and development of the science in the 
 two countries. Self-government in England involved 
 the necessity of a popularly evolved and approved system 
 of taxation. Hence the necessity of an economic justi- 
 fication of legislation which affected the taxpayer's 
 purse. In Germany, on the contrary, the power of the 
 Crown has imposed from above a financial regime upon 
 the subject ; and in consequence the perfecting of admin- 
 istrative machinery was the task of the beaurocracy. 
 Adam Smith typifies the English view, as Stein repre- 
 sents the German conception of the subject. Whichever 
 classification be adopted for the sake of convenience in 
 the logical distribution of the content of knowledge, 
 there can be no essential difiference of opinion as to the 
 relation of cognate sciences to the science of Finance. 
 To adapt the abstract formvilse of theory to given con- 
 ditions the fullest historical knowledge of the concrete 
 conditions is necessary. Statistical data when accessible 
 are as indispensable here as elsewhere in the domain of 
 practical politics. Economics must largely furnish the 
 premises wherever the eft'ect of financial action upon 
 material welfare is involved ; and Ethics must not infre- 
 quently constitute the court of final appeal where issues 
 of justice and social duty arise. 
 
 II. 
 
 THE HISTORICAL DEVELOPMENT OF FINANCE. 
 
 The Modem Financial Constitution. — An economic 
 system varying endlessly in non-essentials, but identical 
 in its general outlines, is to be found in every advanced 
 industrial nation of to-day. This system has been
 
 8 INTRODUCTION. 
 
 variously named and described. Perhaps the term Fac- 
 tory System, while not entirely unobjectionable, is as 
 adequate a title as has been suggested. It covers, how- 
 ever, but one side of modern economic life. We may 
 use the term, nevertheless, to connote the vmiversal 
 features of the industrial constitution of the present. 
 These invariably recurring characteristics may be 
 summed up in Prof. Marshall's phrase ' Freedom of In- 
 dustry and Enterprise.' ^ This is, however, only the sub- 
 jective side of the matter, and serves chiefly to con- 
 trast it with the restrictive features of an earlier economic 
 era. 
 
 The objective side of this system cannot be portrayed 
 in a single phrase, but it may be provisionally described 
 as embracing the modern productive process, with its 
 vast and complex aggregate of capital, directed by 
 the captains of industry, each commanding his bat- 
 talion of the industrial army. It is prosecuted under a 
 regime of minutely specialized employment, and it in- 
 volves to an incredible extent the delicate yet effective 
 application of credit. All this necessitates numberless 
 social adaptations, of which the concentration of popula- 
 tion into cities and the perfecting of transportation 
 facilities are perhaps the most prominent. Such, in 
 briefest detail, is the industrial system with which we are 
 to-day familiar. Whatever be its permanence or merit 
 is not here the question. Friend and foe are at one, how- 
 ever, in the description given of its general features. But 
 the point to be insisted upon is this, that analogous to 
 this economic system we find in all these nations, with 
 countless varieties in detail, it is true, a substantially 
 identical system of public finance which we may term 
 the modern financial constitution. The general outline 
 
 * Principles of Economics, Third Edition, Vol. I., p. 8.
 
 THE MODERN FINANCI/iL CONSTITUTION. 9 
 
 of this system of finance must first be set forth, and its 
 historical development must then be reviewed. 
 
 The first characteristic feature to be noted is the normal 
 and calculable field of governmental activity. When war is 
 the normal state of affairs, or where war is so frequent 
 as to preclude the assumption of undisturbed industry 
 for any considerable .length of time, prevision as to gov- 
 ernmental expenditure is largely impossible. It is only 
 when the transition has been made from ' militarism ' to 
 ' industrialism,' to use Mr. Spencer's terms, that reason- 
 ably accurate prevision can be made as to the probable 
 expenditure of the government. It needs no extensive 
 acquaintance with history to see that the present is in 
 general an era of peace as compared with previous cen- 
 turies. Universal disarmament, it is true, seems very 
 largely a Utopian ideal, perhaps an ' iridescent dream.' 
 Universal international arbitration also may have long 
 to wait for its perfect realization, but fortunately our 
 century has not been in the main one of ' wars and 
 rumors of war.' We normally assume that the coming 
 year will be one of peace, or at worst a continuation of an 
 armed neutrality ; and on the basis of this assumption we 
 predict the immediate future of the state's financial activ- 
 ity. Statistics, it is true, afford us the immediate data 
 for our calculation, but these very statistics depend 
 largely for their validity upon the continuance of those 
 peaceful conditions which prevailed while they were 
 collected. Politics, it is safe to predict, will never 
 become an exact science in the degree that certain of 
 the physical sciences are said to be exact. But when, 
 as has sometimes happened, a finance minister can pre- 
 dict for the coming year both expenditures and receipts 
 within a fraction of one per cent., in a total of hun- 
 dreds of millions, the degree of quantitative precision
 
 lo MTkODUCTlOH. 
 
 required to constitute an exact science does not seem to 
 be altogether unattainable. 
 
 The second distinctive feature of the modern financial 
 constitution is the periodic exaction of money from citizens 
 for the support of the state. This conception seems to us 
 moderns natural and indeed inevitable. The fact is that 
 this annually enforced exaction of money from citizens 
 is historically of comparatively recent origin. In times 
 of classical antiquity the natural assumption w^as that the 
 citizen ought not to be expected to pay taxes. The citi- 
 zen was the beneficiary of the state, not its financial sup- 
 port. Revenue came from those who were not citizens, 
 from subject allies or conquered dependencies. " Of 
 whom," said our Lord, " do the kings of the earth take 
 tribute ? of their children or of strangers ? " ^ And 
 the answer " Of strangers " came as naturally as though 
 this were a first axiom of political philosophy. Such 
 indeed it then was. Originally, then, the citizen was not 
 ' taxed ' at all, — at least in the modern sense of the term. 
 Even when taxes as we know them had been definitely 
 instituted, their very names not infrequently show that 
 they were in a sense voluntary offerings or contributions 
 rather than legal exactions. Thus in early English his- 
 tory taxes were called ' grants,' ' aids,' ' benevolences,' 
 ' subsidies.' ^ Moreover, when taxes were exacted from 
 the citizen as a matter of legal right, such exactions origi- 
 nally were not regularly recurrent, but occasional. They 
 were imposed not annually, but upon the occasion of 
 pressing need. They were regarded as tiding the gov- 
 ernment over some special exigency or danger, and were 
 at first sometimes repaid. In all these particulars taxa- 
 tion, as we know it, is distinctly a new historical product. 
 
 *Matt. 17 : 25. 
 
 ^ Cf. Ely, Taxation in American States and Cities, p. Z7> for 
 an American parallel.
 
 THE MODERN FINANCIAL CONSTITUTION. n 
 
 Thirdly, /'o^»/ar control over publicincome and expenditure 
 is another mark of the modern financial system. Modern 
 finance is as new as modern representative government. 
 Constitutionalism itself is, as Prof. H. C. Adams^ re- 
 marks, essentially the control over the public purse by 
 the property-owning classes. This implies, of course, 
 that these classes exert through their representatives, or 
 in spite of them, a substantial control over taxation and 
 expenditure. This is in large part the substance of 
 political liberty as known to English history. To be sure 
 it frequently masks under the guise of Equality or 
 other political cloaks. It uses now this political watch- 
 word and now that, but its design has been always the 
 same. The EngHsh Revolution of 1688 was, in fact, 
 but the registration of the supremacy of the com- 
 mercial and industrial order. Modern democracy has 
 indeed operated at times to restrain the open avowal 
 of this purpose that the Haves, not the Have-nots, shall 
 control the purse, and has even succeeded now and then 
 in setting it at naught. But the principle still persists, 
 though it finds its defence largely in constitutional limita- 
 tions upon the spending powers of extravagant legisla- 
 tures 2 or in judicial vetoes upon measures menacing the 
 rights of property. 
 
 Lastly, the universality of public credit must be 
 reckoned among the noteworthy attributes of the financial 
 constitution of to-day. The significance of the late rise of 
 public credit and of its extension parallel with the growth 
 of the political power of the propertied classes consists 
 in the fact that " when property owners lend to the gov- 
 ernment they lend to a corporation controlled by them- 
 selves." 3 Public debts are in reality mortgages upon 
 
 * Public Debts, p. 8. 
 
 * Cf. Bryce, American Commonwealth, Ch. XLIII. 
 •H. C. Adams, Public Debts, p. 9.
 
 la INTRODUCTION. 
 
 all the industries under the taxing power of the debtor 
 government. The interest on these debts ordinarily can 
 be paid only by taxation. Some substantial security 
 against repudiation is a condition necessarily precedent 
 to the employment of public credit ; and this security 
 originated and consists in tlic political power of the 
 propertied classes. Hence the origin of this last charac- 
 teristic of modern public finance. 
 
 Financial Systems of Classical Antiquity. — That the 
 uniform features of the financial constitution of modern 
 states are no historical accident needs hardly to be 
 proved. But to show exactly how the modern system 
 came to be what it is, and the better to understand its 
 unique nature, it will be useful to understand in 
 broad outline the financial regimes of other and earlier 
 times. The first political experiments worthy of study 
 on the part of us moderns are those of the city-states in 
 Greece, especially those of Athens. Here as elsewhere 
 the question of securing material support for the state 
 depended in great part upon the economic and political 
 environment. The growth of industry was hampered 
 by various causes. The institution of slavery, itself the 
 outcome of war, created a subject class frequently more 
 numerous than their masters. To this class most indus- 
 trial pursuits were relegated. Thus a social odium was 
 attached to labor, and consequently the energy of the 
 ruling caste was largely diverted from industrial chan- 
 nels.^ The division of labor was but rudimentary. The 
 family organization of industry largely prevailed. This 
 involved the cultivation of agricultural estates by means 
 of slave labor, and the fabrication of goods for the use of 
 the family, including the slaves and dependents of the 
 ruler of the household. The main outlet for commercial 
 
 * Ingram, History of Political Economy, p. ii.
 
 FINANCIAL SYSTEMS OF CLASSICAL ANTIQUITY. 13 
 
 enterprise was foreign commerce, for which the Greeks 
 were famous. But the trading and industrial spirit did 
 not flourish until the times of decadence, and was viewed 
 askance by the most enlightened minds of that day. 
 Upon such an economic basis no enduring financial 
 superstructure could be built. The springs of modern 
 revenue are to be found in modern industry. To 
 this there was no counterpart in Greece. Revenue 
 therefore came primarily from tribute. The Confederacy 
 of Delos, for example, of which Athens was nominally 
 the president but really the master, furnished about sixty 
 per cent, of the city's revenue. The rental of state lands 
 and mines — especially the silver mines of Sunion — to- 
 gether with port dues and court fines furnished the resi- 
 due. The liturgies, which were nominally voluntary 
 contributions made by wealthy citizens to provide for the 
 city public games and spectacles, were in reality ex- 
 actions upon the rich enforced by the ever impending 
 social sanction of Ostracism. But no regular taxes were 
 laid in Athens until after the Peloponnesian war, when 
 the true Athenian spirit had largely decayed, 
 
 Rome repeats in large measure the story of Athenian 
 finance, except on a broader scale. In Rome the seeds of 
 slavery were implanted at the time of the earliest con- 
 quests over neighboring states. The free peasantry, 
 which had originally been the bulwark of the Roman 
 state, gradually disappeared. The severity of the mili- 
 tary service, coupled with the largesses of corn imported 
 from tributary provinces, led to the sale and the subse- 
 quent unification of the small Italian farms, and trans- 
 formed the free peasantry into the proletariat of the 
 capital. Nor did industry or navigation have for the 
 Latins the attractions they had for the Greeks. " In- 
 dustry, commerce, and navigation were mostly in the
 
 14 INTRODUCTION. 
 
 hands of strang-ers. The Italians themselves had no 
 natural liking or aptitude for those pursuits which were 
 the delight and glory of the Greeks, the Etruscans, and 
 the Carthaginians. Nor was this the case only in the 
 period of their earlier antiquity. The same habits pre- 
 vailed when the city of Rome had become the centre 
 of a power that ruled the world." ^ In Rome, therefore, 
 revenue came mainly from tribute. Direct property taxes 
 were all but unknown under the Republic after 167 B.C. 
 Even in the time of Cicero they were exceptional, and 
 were not infrequently repaid. If enforced military ser- 
 vice be regarded as virtually a tax, the distribution of 
 the burden of such taxation was grossly unjust. The 
 public lands rented to the rich were let at a nominal rate. 
 Moreover, the small farmer, who when absent on mili- 
 tary service, had no slaves to till the soil, found the sacri- 
 fice imposed upon him crushing in its severity. When 
 Rome, like Greece, had sacrificed liberty for security, 
 regular taxes first appeared. Thus a heavy land and 
 poll tax prevailed under the empire. Farmed as it was 
 by the rapacious publicans, it destroyed the very sources 
 of wealth. By its severity whole districts were depopu- 
 lated and their cultivation was frequently abandoned. 
 The entire process of taxation illustrates how ignorance 
 of finance and economic decay, each in turn a cause 
 of the other, cooperated to disintegrate the empire. In 
 general we find that instead of a normal and periodic 
 activity so characteristic of the state of to-day there pre- 
 vailed a haphazard policy equally characteristic of the 
 state of classical antiquity. Between the modern and 
 the ancient exercise of governmental function lay all the 
 difference between a steady legitimate business voca- 
 tion and the ups and downs of a gamester. Instead of 
 
 'Ihne, History of Rome, Vol. IV., p. 216.
 
 FEUDAL FINANCE. 15 
 
 counting upon peace as a normal condition of industry, 
 there was the ever-impending shadow of war. The 
 forces of the antique world were always in unstable equi- 
 librium. A small displacement, instead of tending to 
 minimize itself, tended to overthrow the tottering fabric 
 of the state. Prevision was only a vague preparation 
 for apprehended danger; a probable forecast of income 
 and expenditure on the part of the state was impossible 
 so long as the state was constantly in danger of having 
 to hazard its all for bare existence. Taxation, therefore, 
 as we now use the term, as a self-controlled and periodic 
 contribution exacted from the citizen for the support of 
 the state, was then practically non-existent. It was un- 
 known in the period of self-government in the ancient 
 state, and only its prototype appeared in the final period 
 of Roman imperialism. Forced periodical exactions 
 did prevail, but between these levies and modern 
 taxation there are perhaps as many points of contrast as 
 of resemblance. Finally, public credit was then virtually 
 unknown, inasmuch as the conditions necessary for its 
 emergence had not appeared. 
 
 Feudal Finance. — There supervened upon the disso- 
 lution of the empire an economic twilight which pre- 
 vailed for centuries. The universal industrial torpor 
 enforced by the separatist tendencies everywhere prev- 
 alent prevented the development of any extensive and 
 enduring financial polity. Agriculture was practically 
 synonymous with industry. Labor was performed by 
 serfs whose condition, while superior to that of the slaves 
 of classic times, was far from enviable. They were 
 personally free, but bound to the soil they tilled. The 
 exchange of products was exceptional, money deahngs 
 were rare ; all sorts of mechanical trades, save the rudest 
 handicrafts, were unknown. There prevailed a ' natural
 
 l6 INTRODUCTION. 
 
 economy ' with points of likeness to the family system 
 of Greek industry, but without its political enlighten- 
 ment and without its culmination in city life. Under 
 such conditions finance was practically the ordering of 
 income and outgo within these numberless agricultural 
 principalities. It was farming and housekeeping on a 
 great scale. The feudal analogue to the financial legis- 
 lation of the present is to be found in the Capitularies 
 of Charlemagne, the greatest landlord of his day. These 
 were practically nothing but directions to his overseers 
 for the management of his estates. The feudal view of 
 finance was just the opposite of the modern idea of the 
 citizens supporting the state by means of self-willed 
 taxes. In feudal times the lord supported his subjects. 
 He held a claim to their services and their lands. By 
 right and custom the serf owed to his lord so many days 
 of labor per week. The higher vassals owed personal 
 service in time of war. In fact no less than in theory, 
 the lord defended and supported his subject vassals. 
 There was no distinction between the treasury of the 
 prince and the public treasury, and originally the only 
 congener to modern taxes was the customary service 
 rendered to the lord of each petty domain. Later, when 
 commerce began again to expand, the territorial princes 
 established their claim to certain regalian rights of coin- 
 age, and of tolls on market, bridge, and highway, but 
 until the era of municipal life there was no approach to 
 the public finance of to-day. With the free cities came 
 the dawn of a better day. 
 
 Early Municipal Finance. — Americans easily incline 
 to the belief that city growth menaces a nation's healthy 
 political life, and political salvation is thought to be of 
 the country. In this we generalize perhaps too readily 
 from our own rather dispiriting experience of the last
 
 E/1RLY MUNICIPAL FINANCE. 17 
 
 fifty years. At all events, whatever limited application 
 this idea may have for the present time (perhaps more 
 limited than most of us suspect), we ought not to forget 
 that in earlier times the seed of liberty on the continent 
 of Europe was preserved mainly in the cities when the 
 rural regions were given over to a hopeless despotism. 
 The germ of constitutional liberty was fostered and de- 
 veloped not in the country, but in the town. 
 
 The cities of western Europe boasted various his- 
 torical origins. Not infrequently a temporary market- 
 place in the vicinity of a cathedral or other religious 
 establishment formed the nucleus of the future city. The 
 temporary market became permanent. The authority 
 of the territorial superior, lay or clerical, was not infre- 
 quently disputed or thrown off altogether. Walls sprang 
 up around the clustered dwellings. Grants of privileges 
 were accorded by a compliant prince, or purchased from 
 a necessitous suzerain, or wrung by force from an obsti- 
 nate overlord. The imperial leanings of the cities were 
 not infrequently the outcome of municipal rebellion 
 against the claims of their immediate local sovereigns. 
 Local autonomy, however, was secured in one way or 
 another until a substantial power of self-government be- 
 came the heritage of the Free Cities. Europe was then 
 throbbing with the pulsations of a new industrial life. 
 The wealth and power of the cities grew apace. The 
 famous Hanseatic League (1250) has been justly termed 
 the precursor of the modern industrial state. It lacked 
 only the element of contiguous territory. It made 
 treaties and equipped navies and waged wars like a 
 sovereign power. 
 
 All this was but the reflection of the growing influence 
 of the new Estate, — that of the industrial classes. Natu- 
 rally enough the domestic and foreign activities of the
 
 1 8 INTRODUCTION. 
 
 cities implied the necessity of adequate revenue. This 
 was forthcoming from the wealthy burgher class, the 
 dominant order in these municipalities. Citizenship had 
 not then been shorn of its eminent attributes. It was 
 not merely a paraphrase for territorial residence. It was 
 a badge of status. It implied ordinarily the headship 
 over a household, an honorable rank in the gild coun- 
 cil, a position of influence in civic affairs. ' With a 
 great price ' some had purchased this freedom. And 
 these, equally with those who were ' free-born,' were not 
 of the stuff quietly to see their property disposed of, even 
 in the service of the city, without exercising over such 
 expenditure a very considerable degree of control. 
 
 Taxes in the towns were at first self-willed grants. 
 They soon became regular instead of occasional. Many 
 of the refinements of later financial systems were antici- 
 pated in the ordering of these mvmicipal exchequers. 
 Taxes were levied on polls, on buildings, even on articles 
 of consumption ; and city debts were founded. Condi- 
 tioned by the age in which it flourished, municipal 
 finance was the forerunner of modern finance, except 
 that the system had found a footing only in isolated cen- 
 tres, instead of permeating the entirety of a territorial 
 state. England's task it was to secure for a nation what 
 the cities had secured for themselves alone. 
 
 The Development of Financial Constitutionalism in 
 England. Norman Finance. — The historical signifi- 
 cance of English finance dates from the Conquest 
 (1066). Feudalism in England antedated the Norman 
 invasion, but the foundations of a strong central govern- 
 ment are traceable to that event. Land was synony- 
 mous with wealth and power, and the unification of land 
 tenure effected by the Conqueror had a momentous in- 
 fluence in more than one direction. The king wa? the
 
 THE EXCHEQUER SYSTEM. 19 
 
 universal landlord. All land vested ultimately in him, 
 Domesday book was at the same time the record of 
 land-titles and the basis of tax-apportionment. Taxes 
 were but little more than the payment of rent to a royal 
 landlord, England thus presented the most thorough- 
 going example extant of a rigorous feudal regime. This 
 state of society is graphically described by Bishop Stubbs 
 as " a graduated system of jurisdiction based on land- 
 tenure, in which every lord judged, taxed, and com- 
 manded the class next below him, in which abject slavery 
 formed the lowest, and irresponsible tyranny the highest, 
 grade, in which private war, private coinage, private 
 prisons took the place of imperial institutions of govern- 
 ment." 
 
 The Exchequer System, — The financial administra- 
 tion of the realm was unified under a single royal board 
 or commission — the Exchequer,^ The members of this 
 body were generally ecclesiastics of the king's house- 
 hold — the chancellor, the treasurer, and others. Indeed 
 the Exchequer was originally not so much a separate 
 tribunal as it was the king's council, the curia regis, in 
 fiscal session,^ The importance of this institution lay in 
 the unification and simplification of English fiscal ad- 
 ministration thereby efifected. The mould was cast into 
 which the molten metal of constitutionalism was later 
 to be poured. 
 
 The early sources of the royal income were manifold.^ 
 The ferm of the county, or land-tax, was exacted by the 
 sheriff, himself a royal publican. The towns paid 
 
 * The name originated from the chequered cloth which 
 covered the table at which moneys were received. Cf. Stubbs, 
 Cons. Hist., I., p. 407. 
 
 ^ Stubbs, Cons. Hist., I., p. 418. Its records exist from the 
 time of Henry H., so that we have the sources of much of Eng- 
 land's financial history for a period of six hundred years. 
 
 "Stubbs, Cons. Hist., I., pp. 410-415,
 
 to INTRODUCTION. 
 
 tallage. The king's court extended its jurisdiction so 
 as to acquire additional fees for the crown. The feudal 
 dues were required from time to time of the king's vas- 
 sals; and no small part of the royal revenue came from 
 * reliefs ' paid upon the succession to estates, from ' fines,' 
 and from the sale of offices. 
 
 The Origin of Popular Control over Taxation. — Like 
 all English constitutional developments the growth of 
 popular control over taxation was exceedingly gradual. 
 In Scutage may be found its remote origin. Henry II. 
 in the prosecution of his continental wars found that a 
 feudal army was often an uncertain weapon of aggres- 
 sion. The vassals of the king at the expiry of the 
 wonted period of their annual service insisted upon the 
 right of returning to their homes. In this predicament 
 it is said to have been the famous Thomas Becket who 
 suggested to the king the project of a mercenary army 
 whose pay might be derived from the commutation of 
 the feudal duty of personal service into a money pay- 
 ment. This payment in lieu of service was called scu- 
 tage, or shield-money ; ^ and upon this basis of compact 
 followed a series of changes so important in their out- 
 come that Thorold Rogers dubs Becket " the Father of 
 Parliament and scientific finance." Toward the close of 
 the twelfth century additional revenue was needed to 
 raise funds for the Crusades. To apportion the tax 
 properly among the holders of personal estate there were 
 instituted in connection with these extraordinary levies ^ 
 local bodies of assessment. Gradually these boards of 
 assessment were led to claim that their assent was neces- 
 sary to the validity of this levy. From feudal despot- 
 
 * Green, Short History of the English People, p. 136. 
 'The Assize of Arms (1181) and the Saladin Tithe (1188). 
 See Dowell, Hist, of Taxation and Taxes, Vol. I., p. 59 sq.
 
 THE ORIGIN OF POPULAR CONTROL O^ER T^X/tTION. 2 1 
 
 ism there had emerged first the vassal's right to make a 
 money composition for the service once due in person, 
 then local boards of assessment which gradually became 
 possessed of the power of refusing their assent to royal 
 impositions. " The whole subject of taxation," to quote 
 Bishop Stubbs ^ again, " illustrates the gradual way in 
 which king and people were realizing the idea of self- 
 government. The application of a representative scheme 
 to the work of assessment, and the recognition that the 
 liability of the payer was based on his own express con- 
 sent, either to the grant itself or to the amount of his 
 own contribution, mark a state of things in which the 
 concentration of local interests in one general council 
 was all that was needed to secure the taxpayer from arbi- 
 trary treatment on the part of either the sovereign or his 
 ministers." 
 
 The first popular statement of the essence of consti- 
 tutional liberty is ordinarily traced to Magna Cliarta ^ 
 (1215). The Crown, it appears, had been wont to amerce 
 its subjects very largely at its discretion, and against this 
 evil practice the barons at Runnymede made their 
 memorable protest. Accordingly, in the twelfth section of 
 the venerable charter the king agrees that " No scutage 
 or aid ^ shall be imposed in our realm without the con- 
 sent of the general council of our realm, except for ran- 
 soming our person, at the knighting of our eldest son, 
 and once at the marriage of our eldest daughter; and on 
 these occasions there shall be paid no more than a 
 reasonable aid." The charter itself was afterwards an- 
 
 ^ Stubbs, Cons. Hist., Vol. I., p. 629. 
 
 " Stubbs, Select Charters, p. 298. An English version will be 
 found in the Appendix of Mr. John Fiske's Civil Government. 
 
 'Aids were taxes exacted by the lord from his vassal. The 
 three customary feudal aids are here mentioned.
 
 32 INTRODUCTION. 
 
 nulled, but this essential principle was caught up and 
 reaffirmed in subsequent royal charters, so that popular 
 control over the exactions of the fisc became the bed- 
 rock of the English constitution. 
 
 The Extension of Control over Taxation. — Subse- 
 quent English history is very largely the reiteration and 
 actualization of the right of self-government. The 
 power of the throne varied with the character of its suc- 
 cessive occupants and with the changing external politi- 
 cal environment. But the seventeenth century saw the 
 principle of control over taxation firmly entrenched 
 against further successful attack. The action of 
 Charles I. in raising taxes by means of the Ship Writs 
 was not an actual violation of early usage, though the 
 precedents he followed had been made obsolete by cir- 
 cumstances. It was primarily a colossal political blun- 
 der. Illegality of procedure on the king's part may 
 have been technically absent; but the strength of Hamp- 
 den's case (1637) lay not so much in its impregnable 
 legal position as in the tremendous popular feeling which 
 stood behind it. It was the king's inability to read \h?. 
 signs of the times, to understand that his subjects' loy- 
 alty to him was second to their attachment to their 
 property, that caused Charles to lose both his crown and 
 his head. The Restoration was but the restoration of 
 a reigning family, not of an outgrown theory of govern- 
 ment; and when, as the outcome of the Revolution of 
 1688, William was called to the throne, ' commercial 
 constitutionalism ' had become once for all the unques- 
 tioned law of the land. A mercantile people had come 
 to the consciousness of itself. The political power of 
 property was res judicata. The conditions were present 
 for the emergence of a national debt, and that significant 
 phenomenon promptly appeared.
 
 THE GROIVTH OF CONsriTuTlOMALlSM. i^ 
 
 The Growth, of Constitutionalism. — Self-government 
 has been the heritage of EngHshmen abroad as well as 
 at home. The American colonists brought it with them 
 across the Atlantic. Indeed our own struggle for inde- 
 pendence was but the reafhrmation of the old prin- 
 ciple which the British Crown had been forced long 
 before to acknowledge in its own realm. The war upon 
 the colonies was in reality an attack upon the constitu- 
 tional freedom of Englishmen in a new habitat. The 
 attitude of the mother country as well as of the colonies 
 with respect to the principle at issue varied most illogi- 
 cally from time to time even after the struggle had begun. 
 But the truth is now clear that the asserted right to tax 
 the colonies, whatever its legal justification, was but a 
 futile attempt to impose upon Englishmen beyond the 
 seas a yoke which neither they nor their fathers had 
 been able to bear. The outcome of the American Revo- 
 lution therefore was the dissolution of the political unity 
 of English-speaking people; but it was none the less 
 the maintenance of the inviolate sanctity of their com- 
 mon political creed. How deep-seated was the Ameri- 
 can conviction as to the real nature of the issue involved 
 was seen in the unfailing promptitude with which the 
 control of taxation and expenditure was asserted in the 
 fundamental law of the various commonwealths, no less 
 than in the two great federal charters — the Articles of 
 Confederation and the Constitution. However far we 
 may be from the perfect realization of this control over 
 the public purse — and in the domain of municipal life we 
 are not infrequently mulcted with little shadow of right 
 — the violation of this principle is attempted only under 
 the forms of law or through the disguise of fraud. 
 Formal acquiescence in the rule of popular control over 
 the spending of public moneys is at least the external
 
 24 INTRODUCTION. 
 
 obeisance which the most cynical of our modern poli- 
 ticians never fail to pay to the political traditions of their 
 race. 
 
 In France the Revolution of 1789 effected the first 
 general acknowledgment of the right of popular control 
 over national income and expenditure. Not infrequently 
 since that time has this right in France been abridged 
 or abrogated, but after its many oscillations between 
 Csesarism and Anarchy the French nation seems to have 
 returned to the settled point of political equilibrium. 
 Upon the continent of Europe generally it was not until 
 after the various revolutionary movements of 1848 that 
 constitutionalism in its modern sense secured any sub- 
 stantial triumphs. Even now the stability of the liberal 
 order is threatened no less by Absolutism than by Col- 
 lectivism. Within the present generation Bismarck has 
 been able to defy the mandate of the legislature in 
 Prussia, although he hastened to obtain amnesty for this 
 act when at the height of his military success over Aus- 
 tria.^ But though menaced on this side and on that, the 
 dominance of the property-owning classes in modern 
 governments is a fact of the first order of importance. 
 Together with the normal and peaceful functioning of 
 modern governments and the vast extension of public 
 credit, it forms one of the pillars of the edifice of modern 
 finance. 
 
 ' Leroy-Beaulieu, Science des Finances, II., p. 15.
 
 PART 1. 
 
 GOVERNMENT OUTLAY. 
 
 CHAPTER I. 
 THEORIES OF PUBLIC EXPENDITURE. 
 
 An individual who determined upon his expendi- 
 ture before estimating his income would be charge- 
 able with counting his chickens before they were 
 hatched. Yet this seemingly inverted procedure is war- 
 ranted when the statesman is considering the subject of 
 public finance, and for the following reason: Broadly 
 speaking, the state has the power through legal coercion 
 to force its income up to a point equal to its requisite 
 expenses. The individual does not ordinarily possess 
 this power, and he must consequently regulate his living 
 by his current means. " The private person must . . . 
 regulate his expenditure by his income: the state regu- 
 lates its income by its expenditure. . . . The individual 
 says, ' I can spend so much ' : the finance minister says, 
 * I have so much to raise.' " ^ 
 
 The vast majority of all state enterprises cost money, 
 and consequently state expenditure is practically co- 
 extensive with state action. Hence it follows that the 
 
 ' Bastable. Public Finance, p, 42. Bastable, however, qualifit s 
 this statement materially.
 
 26 THEORIES OF PUBLIC EXPENDITURE. 
 
 question of the proper field of public expenditure is prac- 
 tically identical with the question, what should the state 
 do and what should it leave alone, or, as it is sometimes 
 more formally put, what is the ' sphere ' of the state ? 
 
 There are various ways of ' determining ' this. 
 There is the ' high priori ' method, which starts 
 from supposed axiomatic grounds and proceeds de- 
 ductively until it throws the meshes of its logical net 
 upon some concrete forms of state activity. There is 
 the ' low posteriori ' process, which hopes by the endless 
 sifting of ' facts ' ultimately to establish some generaliza- 
 tions which may serve at least as empirical maxims of 
 statecraft. Lastly, there is the so-called ' historical ' so- 
 lution of the vexed problem. This imports into the 
 question the conception of the gradual evolution of state 
 functions, and not infrequently uses the hackneyed 
 analogy of an ' organism ' to illustrate the presumable 
 growth of the body politic. All these modes of proce- 
 dure doubtless serve a useful end. Their combination 
 may perhaps enable us to construct a valuable theory of 
 the province of government. But whatever the method 
 adopted, the concrete outcome in the case of each suc- 
 cessive political philosopher is generally determined by 
 the particular forces which have specially operated 
 upon him. If we disregard chronological sequence, we 
 can readily form a theoretical catena which progressively 
 magnifies the sphere of the state from zero to infinity. 
 Bakounine, Spencer, Adam Smith, J. S. Mill, Roscher, 
 Wagner, and Marx form such a series in which each name 
 serves to indicate a new departure in a curved path which 
 ultimately slides off on the tangent of Collectivism. If 
 we avoid the ' falsehood of extremes ' we shall find a 
 very general acquiescence in the belief that there are 
 some things which state action is likely to effect with a
 
 PRACTICAL SOLUTION OF THE QUESTION. 27 
 
 balance of advantage in any society. These things are 
 of " such a nature that the profit could never repay the 
 expense to any individual or small number of individuals, 
 and which it, therefore, cannot be expected that any in- 
 dividual or small number of individuals should erect or 
 maintain." ^ On the other hand, none but the Collec- 
 tivists will deny the general truth that there are many 
 other things which individual enterprise can best be in- 
 trusted to secure. But sharply to draw a line of de- 
 marcation between these contiguous provinces, even 
 when concrete circumstances of time and place are taken 
 into consideration, — this is the crux of political specula- 
 tion. 
 
 Practical Solution of the Question. — Happily for us 
 we are not required to solve this theoretical question in 
 advance of enjoying the benefits of an organized polity. 
 The oft-recurring issue with which we must practically 
 grapple is the advisability of concrete extensions of pub- 
 lic expenditure. Some vague presumption for or against 
 such a policy may result from the general theory of state 
 functions which we hold. But there is much sense in Pro- 
 fessor Ritchie's remark 2 that "when any measure of state 
 action is proposed there is little advantage to be got by 
 asking whether this is the sphere of the state, or 
 whether it is meddling with the sphere of the individual. 
 As if every one could tell beforehand, without any par- 
 ticular experience, what these spheres were. They are 
 what we think they ought to be ; and they are not neces- 
 sarily mutually exclusive. It is much better to ask the 
 utilitarian question, ' Is this particular measure expe- 
 dient in the case ? ' " The best working hypothesis, 
 therefore, seems to be this: that in general proper public 
 
 ^Wealth of Nations, Bk. V., Part III. 
 * Principles of State Interference, p. 107.
 
 «8 THEORIES OF PUBLIC EXPENDITURE. 
 
 outlay is such as is normally made by governments at 
 present, and that any proposed extensions of expenditure 
 (retrenchment is almost too good to hope for) must each 
 be judged on its own account. This may seem like 
 practically begging the whole question, but it is not so 
 in reality. State outlay is, on the whole, the result of 
 political experience. That it normally embraces such 
 and such objects, and normally excludes certain other 
 objects, is good ground for the presumption that such 
 state action is in substantial harmony with the political 
 and social environment. " Other things being equal," 
 says Bagehot, " yesterday's institutions are the best for 
 to-day." 
 
 This modest solution of the problem seems also to in- 
 clude within itself whatever truth or import may lie in 
 the doctrine of ' historical relativity ' — " that the prov- 
 ince, and therefore expenditure, of the regulating organs 
 of society will vary at different stages of social prog- 
 ress." 1 
 
 The tests of any proposed extension of expenditure 
 cannot be reduced to rule. Sir James Fitzjames 
 Stephen ^ suggests for any proposed law the three fol- 
 lowing common-sense criteria: Is the object arrived at 
 good ? will the proposed means attain it ? will they 
 attain it at too great expense or not ? The third prin- 
 ciple will sometimes bar out mere cheapness as a con- 
 trolling consideration. In public economy, no less than 
 in private, niggardliness is often worse than waste. 
 Other conditions remaining the same, however, we may 
 agree with Ricardo ^ in lauding " the golden maxim of 
 M. Say that the very best of all plans of finance is to 
 
 * Bastable, Public Finance, p. 48. 
 
 * In Liberty, Equality, Fraternity, p. 137. 
 •Works, p. 14s (McCulloch's edition).
 
 THE OBJECTS OF PUBLIC EXPENDITURE. 29 
 
 spend little, and the best of all taxes is that which is 
 least in amount." ^ 
 
 The Objects of Public Expenditure. — The classifica- 
 tion which we adopt of the objects upon which govern- 
 ments spend money will be determined by various 
 considerations. One classification will best represent 
 the historical growth of public outlay, another will best 
 show the division of state expenditure in a particular 
 nation, and still a third will be found most useful when 
 we attempt to collate and compare the expenditures of 
 dift'erent governments upon analogous objects. In 
 order to trace the historical growth of state expenditure 
 we may conveniently adopt the fourfold division of out- 
 lay upon War, Internal Security, Industry, and what, 
 for want of a better name, has been denominated Social 
 Well-being. In earlier times the citizen rendered per- 
 
 ' Sax and others of the Austrian school allege, if I rightly 
 understand them, that the Austrian theory of value gives us a 
 scientific basis for public expenditure. An individual who will 
 secure the maximum satisfaction from his income must derive 
 from the last (i.e. the least important or esteemed, not chron- 
 ologically the latest) dollar spent in one line an amount of 
 enjoyment equal to that secured by the last dollar in all other 
 avenues of outlay. The last dollar spent for theatre tickets must 
 give an amount of enjoyment exactly equal to that obtained from 
 the last dollar spent for tobacco. If this is not the case the 
 ' economic man ' will shift a part of his outlay from one cate- 
 gory to another, say from tobacco to theatre tickets, to 
 maximize his enjoyment. Inasmuch as the citizen's income 
 goes partly for the things he buys himself and partly (in taxes) 
 for what the state buys for him, taxation should be so adjusted 
 that for the marginal dollar that is taken by way of taxation 
 the return in satisfaction should be exactly equal to that ob- 
 tained by the marginal dollar spent privately. This appears to 
 me to be undeniable, and if by implication the older theorists 
 denied the fact, they were doubtless grieviously at fault. But 
 how to determine where the margin between private and state 
 outgo is to be drawn, or how, admitting that this task is accom- 
 plished, to persuade Tom, Dick, and Harry that the respective 
 bounds of state function and private action have been properly 
 meted out — on these points our Austrian friends do not greatly 
 enlighten us.
 
 30 THEORIES OF PUBLIC EXPENDITURE. 
 
 sonal service in the army, and took part in the adjudi- 
 cation of quarrels between members of his own tribe. 
 These occupations have become speciaHzed at present, 
 and these services are generally rendered by specially 
 deputed public agents who are paid from the public 
 treasury. Still there remain traces of the earlier state 
 of things. Some military services, for instance those of 
 our commonwealth militia, are rendered largely without 
 special remuneration. This was formerly the case \vith 
 all military service. Various civil oflfices are still held 
 by non-salaried officials. Not until society had de- 
 veloped economically did the state make any extensive 
 outlay upon industrial interests. But the establishment 
 of weights and measures, the enforcement of commer- 
 cial contracts, the coining of money, the granting of 
 patents, the protection of shipping interests, the en- 
 couragement of certain favored industries, and latterly 
 the supervision of the conditions of labor, have every- 
 where become public charges. More recently still have 
 modern states begun to expend funds upon a rapidly 
 extending circle of social interests of which education 
 is the most prominent and by far the least questionable. 
 This category serves as a sort of drag-net for all public 
 functions which cannot be classed under the head of 
 Defence, Internal Security, and Industry. It includes 
 the care of the defective, delinquent, and indigent classes, 
 the provision of public luxuries and amusements, ana' 
 in some states the portentous establishment of industrial 
 pensions. 
 
 The Universal Growth of State Expenditure. — That 
 public expenditure is everywhere on the increase is in- 
 disputable.^ A certain increase with the growth of 
 
 ' Bastable, Public Finance, pp. 133-138, for a statistical pres- 
 entation of the recent increase of expenditure in different states;
 
 THE UNiyERSAL GROIVTH OF STATE EXPENDITURE. 3^ 
 
 numbers was of course to be expected. But the expan- 
 sion of public outlay seems to be much more rapid than 
 the general growth of population. Though the limits of 
 this treatise will not warrant a statistical presentation of 
 the case, it seems not improbable that the increase in 
 public charges has been relatively greater than the nor- 
 mal increase in the typical national income, even after 
 making all due allowance for the general rise in prices 
 and for the increased expenditure by the state upon 
 projects formerly intrusted to individual enterprise. 
 But more than this is true. " The current of modern 
 sentiment runs as strongly at present in favor of state 
 action as it did fifty years ago against it." Nor is there 
 any difiference except one of degree in the practice of 
 English-speaking peoples and other peoples whom we 
 are inclined to regard as especially devoted to the fetich 
 of paternalism. The only difiference is that the original 
 impulse with us was popular in its character: in the 
 typical continental state, on the contrary, the movement 
 originated largely with the governments. Nor are 
 Americans a whit behind England in this movement. 
 Mr, Bryce ^ tells us that " the new democracies of 
 America are just as eager for state interference as the 
 democracy of England, and try their experiments with 
 even more light-hearted promptitude " ; and he cites 
 overwhelming evidence in proof of his contention. 
 
 Our political doctors have frequently analyzed the 
 causes which universally have increased public outlay, 
 and in general they agree in their diagnosis, though 
 they frequently dififer in the emphasis they put upon 
 the cooperating factors. Some, like Leroy-Beaulieu 2 
 
 also Roscher, Finanzwissenschaft, § no; also H. C, Adams, 
 Science of Finance, p. 87 sq. 
 
 *The American Commonwealth, Ch. XCI. 
 
 * Science des Finances, Vol, II., Ch. VI,
 
 32 THEORIES OF PUBLIC EXPENDITURE. 
 
 and Colin, 1 lay the greater pari of the gnilt upon the 
 head of ' democratic finance,' which they apparently 
 would make the scapegoat of modern politics. Social- 
 ism and Nationality — the latter being the growing con- 
 sciousness of national unity and its immoderate 
 exaltation — are jointly responsible, Prof. H. C. Adams - 
 thinks, for the phenomenon in question. " A quickened 
 moral sensitiveness and philanthropic sympathy," to- 
 gether with the discernment of greater benefits which the 
 organized power of government can secure, constitute, 
 in Mr. Bryce's opinion, the main causes of the move- 
 ment. Others attempt only a more superficial analysis, 
 and ascribe the increase to the growing costliness of the 
 technical apparatus, especially that of armament, which 
 governments must purchase. Some allege that the 
 raised standard of living which necessitates an increase 
 in the salaries of state functionaries is largely respon- 
 sible for the increase. In the domain of municipal gov- 
 ernment in the United States a part of the increase must 
 doubtless be attributed to the old-fashioned sin of steal- 
 ing. The public funds of our cities seem to have a 
 singular tendency to become the spoil of what Adam 
 Smith dubbed * that crafty and insidious animal ' called 
 ' a politician.' 
 
 Perhaps the sanest conclusion is that all these causes, 
 in varying proportions, operate in modern states to 
 produce increased public expenditure. It is diflficult, 
 however, to make any rigid classification of these forces, 
 inasmuch as they insensibly blend into each other. 
 Nationality, when it becomes a mania, unceasingly de- 
 
 * Nationalockonomie, II., § 46. 
 
 * Public Debts, p. 14. In his recent Science of Finance, 
 p. 94 sq., Professor Adams denies that taxation absorbs an in- 
 creasing fraction of the public income. For the opposing vi^w 
 §ee Bastable, Public Finance, p. 137 .J^.
 
 THE UNIVERSAL GROWTH OF STATE EXPENDITURE. 33 
 
 mands costly experiments in the equipment of armies 
 and navies. It thus lessens the productive energy avail- 
 able for ordinary industry, on the one liand, and creates 
 a class fed at the public crib, on the other. Tlius the 
 military establishment first arms Socialism with a valid 
 complaint, and then furnishes it with a vicious model. 
 New Socialism is but old Militarism ' writ large.' If it 
 cannot provoke a foreign war, it sets itself promptly to 
 the work of internal spoliation; if temporarily precluded 
 from purchasing battle-ships, it consoles itself with sub- 
 sidizing beet-culture and other equally important in- 
 terests. Both tendencies naturally coincide in their ad- 
 vocacy of extended grants of pensions. The normal 
 trend of modern economic life, moreover, does operate 
 undoubtedly to raise the standard of living, and thus 
 necessitates higher salaries for public officials. City 
 growth also involves inevitably increased expenses for 
 police, for the construction and maintenance of streets, 
 for the supply of water, and for the thousand and one 
 necessities of urban life. And not infrequently a sensibly 
 relaxed control over public officials increases the cost of 
 government. It would be markedly hasty to pronounce 
 dangerous all increased outlay. At the same time it is 
 proverbially easy to spend other people's money, and 
 legislators no less than electorates need frequently to be 
 reminded of the fact.
 
 CHAPTER 11. 
 EXPENDITURE IN THE UNITED STATES. 
 
 Federal, State, and Local Expenditure. — In no 
 modern state does the expenditure of the central or na- 
 tional government comprise more than a part, though 
 frequently a great part, of the total public outlay. The 
 various local governments are charged with making 
 supplementary expenditures which are devoted to inter- 
 ests mainly of a local nature. The assignment of certain 
 functions to the national government and to the sub- 
 ordinate governments respectively, is determined in each 
 state by its own constitution. We find, therefore, great 
 variety of detail in the classes of charges which are de- 
 frayed in various states, now by the central and now by 
 the local governments. Perhaps no general law can be 
 laid down to explain the apportionment of expenses to 
 be borne by each, except the rather vague statement 
 that strong centralizing tendencies and the absence of 
 vigorous local self-government tend to throw the greater 
 part of this financial business upon the national govern- 
 ment.^ 
 
 Under our Constitution certain powers are delegated 
 to the federal government, and certain other powers are 
 
 ' Bastable, Public Finance, p. 123, note, where it is estiinated 
 that the ratio of local expenditure to central expenditure in 
 France, Italy, Great Britain, and the United States is 22, 25, 43, 
 and 61 per cent, respectively. 
 
 34
 
 FEDERAL, STATE, AND LOCAL EXPENDITURE. 35 
 
 reserved to the commonwealths and to such local units 
 of administration as the commonwealths may create. 
 Thus the line between federal and non-federal expendi- 
 ture is drawn by our organic law. Two jurisdictions, 
 the one federal and the other that of the commonwealth, 
 cover the same territory. Thus it comes about that both 
 the national government and each commonwealth for it- 
 self maintains a civil establishment embracing executive, 
 legislative, and judicial departments. Beyond this du- 
 plicated civil establishment a broad line of demarcation 
 between federal and non-federal expenditure may readily 
 be drawn. The expenditures of the federal government 
 are made mainly for national purposes. Here are in- 
 cluded the expenses of the federal military and naval 
 establishments; the former covering the improvement of 
 harbors and rivers, the latter the cost of constructing 
 new vessels of war. Besides these charges the interest 
 on the national debt, the payment of federal pensions, 
 the maintenance of the postal service, and certain other 
 miscellaneous objects, among them the Indians, sum- 
 marize the remaining items resting upon the federal 
 budget. 
 
 Non-federal expenditure, on the other hand, embraces 
 the appropriations made by the commonwealths and the 
 various local governmental units. These local govern- 
 ments include the counties, municipalities, townships, 
 and school districts. This non-federal expenditure goes 
 for purposes of state or local importance, such as educa- 
 tion, the interest on state and local indebtedness, the 
 support of charitable, penal, and reformatory institutions, 
 police, lighting, the construction of such public works 
 as streets, sewers, bridges, and waterworks, the pur- 
 chase of parks, and the like. 
 
 The total expenditure by governments in the United
 
 36 EXPENDITURE IN THE UNITED STATES. 
 
 States is over one billion dollars per annum. The per 
 capita sum expended in 1890, excluding postal expendi- 
 tures, which were largely reimbursed by postal receipts, 
 was $13.65.^ It is a matter of no little interest to notice 
 how the various governments, federal, state, and local, 
 participate in the expenditure of this enormous aggre- 
 gate. 
 
 The Eleventh Census 2 contains the following table of 
 expenditures made in the United States in 1890: 
 
 National government, including postal service $352,218,614 
 
 States, territories, and D.C., except for public schools 77,105,911 
 Counties, except for public schools, partly estimated 114,575,401 
 Municipalities, except public schools, partly estimated 232,988,592 
 Public schools 139.065,537 
 
 Total $915,954,055 
 
 A minute's scrutiny of these figures will show that 
 about forty per cent, of our gross public expenditure is 
 made by the federal government. This is a relatively 
 smaller proportion of the total expenditure than we find 
 made by the central government in Great Britain or in 
 the continental states. It serves, however, to emphasize 
 the dominant role which the federal government plays 
 in our constitutional economy. Compared with the an- 
 nual outlay of the national government, the expenditure 
 of any single state or municipality shrivels into insignifi- 
 cance. The next fact to be noticed is the comparatively 
 small financial importance attaching to our common- 
 
 ' See U. S. Census of 1890, volume on Taxation and Valua- 
 tion. These figures, prepared by IMr. J. K. Upton, special agent 
 of the Eleventh Census, are particularh' useful. 
 
 'Volume on Taxation and Valuation. The separate itemi- 
 zation of expenditures upon public schools was necessitated in 
 part by the fact that certain commonwealths raise school funds 
 by a state tax. The funds so raised are applied to the main- 
 tenance of schools in the various localities within the state.
 
 FEDERAL, STATE, AND LOCAL EXPENDITURE. 37 
 
 wealth governments. Less than one tenth of the total 
 expenditure goes to defray the cost of the common- 
 wealth governments. The truth is that our states have 
 been shorn of most of their financial prestige. They still 
 retain their constitutional prerogatives. They are still 
 the fountain of authority from which the financial powers 
 exercised by local governments are legally derived. But 
 they are themselves of secondary moment as compared 
 with the federal government on the one hand or with the 
 aggregate of local governments on the other. In the 
 magnitude of their expenditure several of the common- 
 wealth governments are overshadowed by the great 
 municipalities within their borders. 
 
 The third fact that the statistical table indicates is the 
 growing prominence of local and especially of municipal 
 finance. From an historical standpoint so marked a 
 contrast between federal and state finance is very note- 
 worthy. The net ordinary expenditures of the federal 
 government during the first decade of its existence aver- 
 aged something over four millions of dollars annually. 
 The aggregate commonwealth expenditure must have 
 been nearly as much. In 1842 the net ordinary expendi- 
 ture of the federal government was $24,361,336. In 
 that same year the aggregate commonwealth indebted- 
 ness was over two hundred millions, upon which the an- 
 nual interest must have been equal to almost half of the 
 total federal expenditure per annum. 
 
 It is true that 1842 marked the culmination of the in- 
 ternal-improvement mania on the part of the common- 
 wealths, and so the figures used in the comparison of 
 state and federal expenditure for that year may be re- 
 garded as abnormal. Still the wholesale embarkation of 
 the commonwealth governments upon enterprises of that 
 nature was significant, and heightens the contrast be-
 
 38 EXPENDITURE IN THE UNITED STATES. 
 
 tvveen their daring initiative in earlier times and their 
 severely curtailed powers in that direction to-day. The 
 growth in the relative power of the federal government 
 and the rapid increase in our urban population have 
 become commonplaces long since. But the past and 
 present financial activity of the federal, the state, and the 
 local governments, as shown in the recent Census re- 
 ports, give another striking confirmation of these politi- 
 cal and social tendencies. 
 
 Analysis of Federal Expenditure. — The tabulated 
 summary employed in official reports of federal expen- 
 ditures is divided into seven sections which cover re- 
 spectively the cost of the civil establishment, the military 
 establishment, the naval establishment, the Indian ser- 
 vice, pensions, the interest on the public debt, and the 
 postal service.! Most of the items are self-explanatory, 
 and but a word need be said in elucidation of the others. 
 The civil establishment includes the salaries paid to the 
 officers in the executive, legislative, and judicial depart- 
 ments of the civil service, the cost of foreign intercourse, 
 public buildings, the collection of the revenues, the ex- 
 penses of the District of Columbia, the inevitable deficit 
 in the postal revenues, and a host of miscellaneous ex- 
 penses. The military establishment includes not only 
 the current expenses of the maintenance of the army, 
 but (as already mentioned) the improvement of rivers 
 and harbors, the erectic)n of forts and coast defences. 
 
 Similarly the naval establishment comprehends the 
 construction of new vessels as well as the current ex- 
 penses of the navy. The postal service is not entirely 
 self-supporting. Such revenue as is received by the 
 
 ' The Annual Reports of the Secretary of the Treasury and 
 the Treasurer of the United States give detailed accounts of 
 federal receipts and expenditures.
 
 ANALYSIS OF FEDERAL EXPENDITURE. 3^ 
 
 post-office department goes to defray the cost of the 
 postal service; the remaining deficit is made good by 
 appropriations which are charged to the civil establish- 
 ment. 
 
 Carefully to analyze the various appropriations of the 
 federal government would require an amount of space 
 which the limits of this work will not permit. There 
 are, however, several salient features of which some 
 notice must be taken. Briefly put, these questions 
 relate to the salaries paid to the higher officers of 
 the government, the decreased interest charge, the in- 
 creased cost of the navy and of war pensions, and the 
 likelihood of increased federal expenditure generally. 
 
 A paid legislature such as our Congress is necessarily 
 an expensive body.^ The payment of legislators is 
 based on the democratic idea of keeping open the door 
 of political preferment to men of ability who are not 
 rich. The number of salaried legislators makes the 
 aggregate expense of our national legislative mill much 
 greater than where legislators serve gratuitously, as in 
 England. It is also characteristic of democracies, as 
 Roscher ^ observes, that while the average pay of their 
 public functionaries is high, there is less difference in 
 the pay of the higher and lower ranks than in monarchic 
 or aristocratic countries. The effect, therefore, is two- 
 fold : not only are the legislatures in democratic states 
 a heavy charge upon the revenue, but the comparatively 
 moderate pay of the legislators serves to attract rather 
 mediocre ability. The " cheap coin of honor " may 
 serve in part to eke out the scantiness and the uncer- 
 tainty of political preferment, but at the same time the 
 temptation to corruption lurks in the underpayment of 
 
 * In 1896 the cost of Congress was $7,736,610. 
 
 * Finanzwissenschaft, p. 503.
 
 40 EXPENDITURE IN THE UNITED STATES. 
 
 hig-h officials. It is to-day tolerably certain that the 
 highest officers under the federal government are badly 
 underpaid. Especially is this true of the Cabinet secre- 
 taries, the federal judges, and the members of Congress, 
 Persistence in this policy of niggardly remuneration out 
 of deference to supposed democratic principles must tend 
 increasingly to allure into politics little men for whom 
 the present remuneration is adequate, or wealthy men 
 for whom any cash remuneration is a matter of com- 
 parative indifference. The need of increased pay, more- 
 over, is more urgent in the judicial department than in 
 the legislative and executive departments, where the few 
 great political prizes will always attract a large number 
 of aspirants into the arena of politics. 
 
 The recent marked increase in naval expenditure dates 
 from 1889. From 1886 down through 1894 there was 
 a steady increase in the outlay upon this head, the 
 charges advancing from $13,907,887 to $31,701,293 per 
 annum. In 1897 they mounted to $34,561,546, and since 
 the recent war they have tended upwards, the estimates 
 for 1900 being over $47,000,000. The view one takes of 
 this form of government expenditure will be determined 
 by his view of the probable use of the navy in future. 
 That our ships and armament were antiquated and needed 
 replacement can hardly be denied. But where the 
 process of increasing the navy will stop is another ques- 
 tion. If we are to pursue the quiet policy of doing our 
 share of policing the world's waters, of enforcing our 
 own revenue laws, of having an armament sufficient for 
 defensive operations and large enough to serve as a nu- 
 cleus of an enlarged navy in case of need, we ought to 
 follow a conservative policy in this regard. If we are 
 to assume an aggressive attitude in our foreign policy, 
 to engage readily in international complications, and
 
 AN/tLYSIS OF FEDERAL EXPENDITURE. 41 
 
 generally to play the role of enfant terrible in the family 
 of nations, swollen naval outlay is the proper means to 
 attain such an end. 
 
 The most marked changes in federal expenditure dur- 
 ing the last thirty years have been the decrease in the 
 interest paid on the national debt and the portentous 
 increase in the payment of war pensions. The other 
 items of expenditure have shown only a slow variation. 
 The diminution in the interest charge has been due to 
 the rapid reduction of the debt's principal. The sur- 
 pluses over current expenditures have been applied in 
 great part to the extinction of the government's bonded 
 obligations. Thus in 1867 the payment on interest ac- 
 count was $143,781,591, or over seventy per cent, of the 
 net ordinary expenditures. In 1893 there was but 
 $27,264,392 paid in interest, an amount less than eight 
 per cent, of the net ordinary expenditures for the same 
 year. During the year 1897-8 interest charges absorbed 
 $37,585,056. The policy of debt payment will be dis- 
 cussed in another place. Whatever be said of our fed- 
 eral revenue system as a whole, if it yielded surpluses 
 above current expenditures, there could be no wiser 
 policy pursued than applying these surpluses to expunge 
 the national debt. 
 
 Federal pension expenditure is a far less gratifying 
 branch of national finance. As the interest charge has 
 diminished, war pensions have steadily increased, so that 
 if the national debt as well as the disabilities and loss of 
 life incurred during the war be regarded as the joint re- 
 sults of that struggle, the annual charge is to-day as 
 heavy as it has ever been.^ From the close of the civil 
 
 * In 1867 the aggregate expenditure for pensions and interest, 
 was less than 164 millions of dollars; in 1898 the aggregate was 
 over 147 millions. These figures are based on the reports of
 
 4a 
 
 EXPEUDITURR IN THE UNITED STATES. 
 
 war until 1880 pensions never absorbed more than 
 thirty-five millions in a single year. In 1880 pension 
 expenditure increased by over twenty millions, and 
 reached the sum of eighty-seven millions in 1889. Con- 
 gress still pursued its liberal policy with the following 
 results: 
 
 1890 106 millions expended. 
 
 1891. 
 1892. 
 
 1893- 
 1894. 
 
 1895- 
 1896. 
 
 1897. 
 
 1898. 
 
 124 
 134 
 
 159 
 141 
 
 141 
 
 139 
 
 141 
 
 147 
 
 The increase of pensioners on the rolls was as follows: 
 
 1889 489.725 
 
 1890 537,944 
 
 1891 676,160 
 
 1892 876,068 
 
 1893 966,012 
 
 1894 • 969.544 
 
 1895 970.524 
 
 1896 970,678 
 
 1897 976,014 
 
 1898 993.714 
 
 Whatever may be thought of our present pension 
 policy there is one thing undeniable, that if our pension 
 policy to-day is nothing more than adequate and just, 
 
 the Secretary of the Treasury. It must be borne in mind that 
 the latter reports are made on a gold basis, whereas prior to 
 1879 paper currency was below the gold par.
 
 ANALYSIS OF STATE AND LOCAL EXPENDITURE. 43 
 
 our pension policy for the first twenty years after the 
 civil war was niggardly in the extreme. Indeed, if one 
 had no evidence other than the pension rolls, one might 
 readily draw the conclusion that there had been since 
 i860 two wars of about equal magnitude, the latter tak- 
 ing place some time in the early nineties. It is no 
 hazardous assertion that the consensus of conservative 
 opinion holds our present pension expenditure to be 
 exorbitantly extravagant and excessive. The discour- 
 aging feature about it all is the cowardly subservience 
 of both political parties to the clamant pretensions of 
 the advocates of extended grants. Nor is it less de- 
 plorable that for this evil as for so many others time 
 seems to be the only remedy. To repulse invaders from 
 the public crib is indeed difficult, but to expel them when 
 once they have battened thereat is all but impossible. 
 
 Upon the general question as to how rapidly federal 
 expenditure in the aggregate is likely to increase, little 
 or nothing of value can be said. Some increase is to 
 be expected with the growth of population. More is to 
 be feared from the adoption of some of the many schemes 
 of ' improvements ' so called which are being broached 
 in various quarters. Besides the normal expenditure of 
 government there is always the danger of war, which so 
 frequently throws financial calculations to the winds. 
 Economy has never been a striking virtue of legislators, 
 and if the future reproduces the past there is little to 
 warrant any golden expectations in this department of 
 finance. 
 
 Analysis of State and Local Expenditure. — Reference 
 has already been made to the different objects upon 
 which federal and non-federal expenditures are made. 
 There still remains the task of separating the latter into 
 commonwealth expenditure proper and local expendi-
 
 44 EXPENDITURE IN THE UNITED STATES. 
 
 ture. Here again the subsidiary character of what is 
 strictly state outlay becomes manifest. Less than fif- 
 teen per cent, of the non-federal expenditure in 1890 
 went to defray the expenses of the comonwealth govern- 
 ments. In one way, perhaps, this statement unfairly 
 emphasizes their financial insignificance. More than 
 fifteen per cent, of the total amount of the non-federal 
 revenue received is taken in by the commonwealths, but 
 they in turn hand over a great part of these receipts to 
 the local units of government. Thus in 1890 the com- 
 monwealth receipts amounted to $116,157,640, while the 
 expenditures aggregated only $77,105,911. The differ- 
 ence between these sums was for the most part turned 
 over to the local governments, for which the common- 
 wealth acts as a sort of tax-collector. 
 
 Strictly to separate the objects upon which the com- 
 monwealths and the local governments respectively 
 spend their money is impossible. Not infrequently both 
 contribute to the same object, as, for example, to edu- 
 cation; and not infrequently the line of division between 
 state and local expenditure in one state is not identical 
 with the line drawn in another. Outside of this common 
 territory, however, the commonwealths defray the ex- 
 penses of their own civil establishment and the state debt 
 charge, and very generally bear the brunt of such public 
 burdens as the care of the defective classes, the deaf- 
 mutes, the blind, and the insane; the cost of reforma- 
 tories, the state militia, and the expenses of various state 
 boards or commissions, such as railroad commissions, 
 insurance commissions, tax commissions, and the like. 
 
 The cost of all other objects, mainly local, is met by 
 the various local governments. Here are included such 
 charges as education, police, the fire department, con- 
 struction of streets, bridges, sewers, lighting, water-sup-
 
 /1NALYSIS OF STATE AND LOCAL EXPENDITURE. 45 
 
 ply, and sanitation. A list taken from the last U. S. 
 Census, giving state and local expenses for 1890, runs as 
 follows : 
 
 STATE AND LOCAL EXPENDITURE, 189O. 
 
 Education $145,583,115 
 
 Roads, bridges, and sewers 72,262,023 
 
 Interest 46,649,139 
 
 Charity 39,958,816 
 
 Other salaries and commissions. . 37.552,655 
 
 New buildings 34,513,020 
 
 Police 23,934,376 
 
 Judicial, including county courts 18,721,383 
 
 Buildings and maintenance 17,950,177 
 
 Fire departments 16,423,820 
 
 Penal and reformatory 12,381,425 
 
 Lighting 11 ,363,780 
 
 Water-works 5oi7,i93 
 
 Executive 5,476,940 
 
 Legislative 3'9^7'774 
 
 Health Departments 3.280,294 
 
 Parks 2,962,697 
 
 Military 2,692,21 1 
 
 Miscellaneous 68,041 ,796 
 
 $569,252,634 
 
 •+ 
 
 Education easily leads all other charges in point of 
 magnitude, amounting to about one fourth of the total 
 non-federal expenditure. The increase in this department 
 has been very rapid, the per capita outlay upon pupils en- 
 rolled increasing from $7.99 to $11.03 i" the decade from 
 1880 to 1890. Education is much more liberally sup- 
 ported in the North and West than in the southern
 
 46 EXPENDITURE IN THE UNITED STATES. 
 
 states, the per capita expenditure in the South being 
 less than half the same expenditure elsewhere in the 
 United States. The various sections of the country differ 
 also in regard to higher education. The colleges and 
 universities of the East are largely upon private or de- 
 nominational foundations, whereas in the West, and also 
 to a certain degree in the South, the state generally sub- 
 sidizes higher education. One of the vexatious ques- 
 tions attaching to the public support of education is the 
 demand made by certain religious denominations for a 
 division of the school funds. The number of denomi- 
 nations makes religious instruction in the public schools 
 practically impossible. Non-religious education is re- 
 garded by many as substantially irreligious education. 
 Consequently their only escape is to send their children 
 to private or denominational schools. This, they claim, 
 subjects them to what is practically double taxation for 
 the education of their children. Hence they demand a 
 pro rata division of school funds. Their main conten- 
 tion may or may not be true. But even from a purely 
 secular point of view it seems deplorable that the public 
 schools give no instruction in religion. A via media has 
 been suggested which would maintain the integrity of 
 the present public school system, but would provide for 
 adequate religious instruction for all denominations. 
 The clergy, it is proposed, shall take for a certain time 
 each week the place of the regular teaching stafif and give 
 instruction in religion; this would allow each denomi- 
 nation to have its own religious instruction in the 
 schools. Moreover, it is not unlikely that such instruc- 
 tion would be given without additional expense to the 
 state, each denomination defraying the expenses of its 
 own clerical teachers. Special provision might be made 
 for such as do not desire their children to receive any re-
 
 ANylLYSIS OF STATE AND LOCAL EXPENDITURE. 47 
 
 ligious teaching whatever. Some such compromise is 
 certainly preferable to a double school establishment, 
 parochial and secular, with its attendant difficulties. 
 
 Next to education, the construction of various public 
 works and improvements absorbs the greatest share of 
 local revenues. Here are included roads, streets, bridges, 
 sewers, and the like. The policy of special assessments 
 seems to be a rough approximation to justice in dis- 
 tributing the charges for local improvements between 
 such property owners as are specially benefited thereby 
 and the general public.^ 
 
 Next in order of size, comes the payment of interest 
 upon the indebtedness of the states and local govern- 
 ments. The principal of this indebtedness amounted in 
 1890 to $1,135,210,442.2 Ten years before it stood at 
 $1,123,278,647. The increase in the last census decade 
 therefore has been comparatively slight, and the per 
 capita indebtedness has actually decreased from $22.40 
 to $18.13. The outlook on this account is accordingly 
 reassuring. If the productive assets of the state and local 
 governments be taken into consideration, the amount of 
 their indebtedness becomes still less serious.^ The only 
 remaining item of expenditure of which we need take 
 special note is that of Charity. As has been already 
 intimated, this charge for the support of the insane and 
 physically defective classes falls mainly on the state gov- 
 ernments. Poverty is relieved mainly by the local 
 governments. These objects are liberally provided for. 
 
 ^ Rosewater, Special Assessments, pp. 137-145. 
 
 'Its distribution is as follows: (U. S. Census, 1890, Pub- 
 lic Debt.) 
 
 State debt $228,997,389 
 
 County debt 145.0^8,045 
 
 Municipal debt 724,463,060 
 
 School district debt 36,701,948 
 
 'Ely, Taxation in American States and Cities, p. 514, notf,
 
 48 EXPENDITURE IN THE UNITED STATES. 
 
 Mr. Bryce ^ has cited " the influence of a quickened 
 moral sensitiveness and philanthropic sympathy " as one 
 of the main causes which have operated to increase ex- 
 penditure generally. And certainly it is operative in this 
 particular province of public spending. " The sight of 
 preventable evil," he tells us, " is painful and felt as a 
 reproach. He who preaches patience and reliance upon 
 natural progress is thought callous. The sense of sin 
 may, as theologians tell us, be declining; but the dislike 
 to degrading and brutalizing vice is increasing: there is 
 a warmer recognition of the responsibility of each man 
 for his neighbor, and a more earnest zeal in works of 
 moral reform." 
 
 Upon the general subject of the future of municipal 
 and state expenditure more can be said than upon the 
 same question when raised in connection with federal 
 finance. The reason is twofold. The functions of state 
 and local governments are less likely than those of the 
 federal government to be affected by the perturbations 
 of international politics. Secondly, the trend of constitu- 
 tional law is certain as regards spending by legislatures 
 and municipalities. Restrictions upon the use of the 
 credit of the commonwealth or the local governments, 
 as well as on their spending powers, are found in 
 most state constitutions. Such provisions are almost 
 inevitably inserted when a new constitution is framed. 
 " One feels, in reading these multiform provisions, as if 
 the legislature was a rabbit seeking to issue from its 
 burrow to ravage the crops wherever it could, and the 
 people of the state were obliged to close every exit be- 
 cause they could not otherwise restrain its inveterate 
 propensity to mischief." ^ The small aggregate increase 
 
 ^ Bryce, American Commonwealth, Chapter XCI. 
 
 * lt>i4-, Ch. XLIII. See also Ely, Taxation in American
 
 /IM ERIC AN AND FOREIGN EXPENDITURE. 49 
 
 in non-federal indebtedness between 1880 and 1890 is 
 significant. Indeed there seems some reason for hoping 
 that extravagance in state and local spending is almost 
 under control, and that whatever increase takes place in 
 future will be warranted largely by the growth of popu- 
 lation and by the necessity of meeting such new require- 
 ments as may arise. 
 
 Comparison of American and Foreign Expenditure. — 
 It remains to compare the aggregates of expenditure in 
 America and in foreign countries, and also their respective 
 allotments of money for similar public purposes. The de- 
 termination of the money sums paid out by various states 
 is a comparatively easy matter, but the inferences drawn 
 from such statistics are very liable to be misleading. It 
 is certain, for example, that the aggregate expenditure 
 in the United States, federal, state, and local, exceeds 
 the aggregate spent by any other modern state. But 
 even this tells us very little. To afford any approximate 
 basis of comparison we must determine first the per 
 capita expenditure made in various states, and then 
 translate this per capita money sum into the commodi- 
 ties it will purchase in various states. This per capita 
 amount in standard commodities must then be compared 
 with the per capita income expressed in the same com- 
 modities. Even then certain corrections must be made. 
 Allowance for compulsory military service is a correc- 
 tion of the first order of importance. Moreover, the 
 relative functions performed by various states must be 
 taken under consideration in order properly to weight 
 the balances of comparison. A state that purchases and 
 operates railroads will make a large nominal expenditure 
 
 States and Cities, pp. 508, 509. Some state constitutions forbid 
 municipal debts to exceed a certain fixed percentage of the 
 property valuation of the cities within the state.
 
 50 EXPENDITURE IN THE UNITED STATES. 
 
 for interest on the purchase-money. But the citizen of 
 that state will perhaps have the benefit of lower trans- 
 portation rates, and thus 'he state's expenditures will 
 really cover what in other c^juntries would be a part of 
 the private citizen's expenses of transportation. So 
 serious are all these difficulties that a statistical presenta- 
 tion of the relative weight of expenditure in various 
 states is liable to be vague or deceptive. Perhaps the 
 most we can venture to assert is that expenditure is less 
 heavy in newly developing economic communities, per- 
 haps because of the relative ease of obtaining a livelihood 
 than because of special economy or prudence in laying 
 out the public funds. 
 
 The question of the distribution of expenditure upon 
 different objects in various states is more readily solved. 
 Here the United States presents a contrast to most Euro- 
 pean states in spending strikingly less for defence and 
 for the interest upon its public indebtedness, and mark- 
 edly more upon education, than they. It is estimated ^ 
 that the expenditure upon public defence (mainly, of 
 course, in support of the war establishment) absorbed 
 in 1888-9 of the total public outlay in Great Britain, in 
 France, and in Prussia 12.40, 19.27, and 17.50 per cent, 
 respectively. In the United States, if we except the ex- 
 penditure on rivers and harbors (which is put ordinarily 
 among the expenses of the War Department), the total 
 cost of defence, including the building of new ships of 
 war, took but little over six per cent, of the total 
 national, state, and local expenditure in 1890. 
 
 For fear that such a showing may seem too favorable, 
 we ought to remember, first, that our geographical posi- 
 tion secures us from foreign aggression ; secondly, that 
 
 ' Conrad, Handworterbuch der Staatswissenschaften, article 
 Finanzen, Vol. III., p. 458. The estimate is Kaufmann'g,
 
 AMERICAhl y^ND FOREIGN EXPENDITURE. gt 
 
 the cost per man in the federal army and navy is very 
 large as compared with analogous expenditure abroad; 
 thirdly, that the tendency of late has been rapidly to in- 
 crease the yearly expenditure upon the navy; and lastly, 
 that the enormous pension expenditure is quasi-defensive 
 outlay. If war pensions were classed among our ex- 
 penses for defence, the absolute and relative amount in 
 money spent on that score would be greater here than 
 in any other modern state. 
 
 The total expenditure in the United States to defray 
 the interest upon public debt is in marked contrast to 
 what we find abroad. In 1890 the interest charge ab- 
 sorbed little over nine per cent, of the total. In 1888-9 
 in France the interest charge absorbed 23.74 per cent, 
 and in England 16.94 per cent, of the aggregate expendi- 
 ture. The comparison would be more notably in our 
 favor if we compared the expenditures merely of the 
 central governments in these three states. 
 
 Most gratifying, finally, is the comparison of the ex- 
 penditure which our governments and foreign govern- 
 inents make upon education. In 1890 about sixteen per 
 cent, of the aggregate outlay in the United States went 
 for educational purposes. In Great Britain less than six 
 per cent., in France less than ten per cent., in Prussia 
 but little over ten per cent, was expended upon the same 
 object in 1888-89.^ Moeover, it is noticeable that in 
 France and Germany a great portion of the sum spent 
 was devoted to higher education, whereas the great bulk 
 
 * In Prussia in 1882-3 more was spent for higher education 
 than for popular education, the cost of the latter being defrayed 
 in part by the fee system. TIic French expenditure on higher 
 education exceeded that on popular education in 1883. Roscher, 
 Finanzwissenschaft. p. 552. The French have recently begun 
 to follow the American and English procedure in regard to the 
 apportionment of funds devoted to educational purposes. 
 Schonberg, Handbuch der PoHt. Oek., p. 52.
 
 52 EXPENDITURE IN THE UNITED STATES. 
 
 of American and English expenditure goes for primary 
 education. This last comparison brings out what is un- 
 doubtedly the most promising feature in our public ex- 
 penditure. 
 
 EXPENDITURES OF THE NATIONAL, STATE, AND LOCAL 
 GOVERNMENTS IN THE UNITED STATES, 189O. 
 
 (U. S. Census of 1890.) 
 
 Pensions and other charities $146,895,671 
 
 Educational purposes and public schools i45-583,iiS 
 
 Interest on debt 82,748,423 
 
 Roads, bridges, sewers, and ditches 72,262,023 
 
 Postal service 66,259,547 
 
 Public buildings and sites ' 38,890,970 
 
 Salaries, fees, and commissions 37.552,655 
 
 Military purposes 35.537,6ii 
 
 Police 23,934,376 
 
 Judiciary 23,071,075 
 
 Public buildings and maintenance ^ 17,950,177 
 
 Executive department 16,770,801 
 
 Fire 16.423.820 
 
 Naval establishment, except for new ships 15,174,403 
 
 Penal and reformatory institutions 12,381,425 
 
 Improving rivers and harbors 11,737,438 
 
 Lighting 11,363,780 
 
 Congress and legislative 10.485,826 
 
 Constructing new war vessels 6,831,803 
 
 Indians 6,708,047 
 
 Health departments 3,280,294 
 
 Public parks and places 2,962,697 
 
 Foreign intercourse 1,648,277 
 
 Miscellaneous 109,499,801 
 
 Total $915,954,055 
 
 ^Construction and purchase separately reported. 
 
 * Construction and purchase not separ;iieiy reported.
 
 PART !I. 
 
 G0K£-??/;//.7.\T IXCOME. 
 
 CHAPTER I. 
 TAXATION : ITS ESSENTIAL NATURE. 
 
 Different Sources of State Income. -/-To meet its ex- 
 penses the government must secure ah income. This 
 income it obtains mainly in two ways — by taxation and 
 by managing certain business enterprises.^ )iOf the pub- 
 lic revenue at the present time by far the greater part 
 comes from taxes, j Certain undertakings, however, the 
 state carries on, and from them derives an additional in- 
 come. Thus the delivery of the mails and the perform- 
 ance of certain other services, such as supplying water 
 in cities, are examples of the industrial pursuits of 
 the state. Not infrequently, too, the operation of 
 the railroad system or the telegraph system is in the 
 hands of the state. Between these two generic kinds 
 of income there is one marked difference. Taxes are 
 
 * For the sake of brevity it is here convenient to regard the 
 productive property of the state as an enterprise whose yield 
 is due to state management and supervision. Public income 
 arising from fines is small and may be neglected. For a 
 thoroughgoing but somewhat complex subdivision of public 
 incfome see Seligman, Essays in Taxation, p. 303; H. C. Adams, 
 Science of Finance, pp. 219-228. 
 
 53
 
 54 T/tX/ITION : ITS ESSENTIAL NATURE. 
 
 compulsorily exacted, generally without the rendition 
 of any specific equivalent to the taxpayer, j Not so 
 with the other part of the government's income. This 
 is obtained by the state's performance of specific services 
 or its sale of specific conmiodities for money. Inasmuch 
 as this is a very connnon way for individuals to obtain 
 their living, it has been proposed to call public income 
 analogously derived the quasi-economic income of the 
 state, in contrast to the state's revenue derived from 
 taxation. Another name for this quasi-economic income 
 is contractual income, so called because such income in- 
 volves ordinarily a contract between the government and 
 the individuals who patronize public industrial enter- 
 prises. It must not be imagined because the amount 
 now obtained by taxation far exceeds the quasi-economic 
 income of the government that the latter always has been 
 of secondary miportance. Indeed in earlier times under 
 the feudal regime ^ taxes were of minor importance, and 
 the greater part of the public income was quasi-economic 
 in its origin. Moreover, it seems not at all impossible 
 that the quasi-economic income of governments may 
 take on increasing importance in the future. Certain 
 continental states derive considerable revenue from their 
 public domain and from public industries. European 
 cities frequently defray a substantial part of their ex- 
 penses by means of their quasi-economic receipts. Thus 
 Berlin from its gas works alone obtains net profit enough 
 to cover about six per cent, of the city's annual ex- 
 penses.2 Paris derives over one fifth of its revenue from 
 public services and from productive property owned by 
 the city. Some think that " we can discern a tendency 
 
 * See page i6. 
 
 ' Cf. Shaw, Municipal Government in Continental Europe, 
 pp. 471. 472.
 
 NATURE OF TAXES. 55 
 
 in taxes to occupy a place of relatively decreasing im- 
 portance even in American budgets," but this, while pos- 
 sible in municipal budgets, is very unlikely as regards 
 the federal government or the state governments.^ The 
 consideration of these quasi-economic receipts in detail 
 will follow the study of taxation. 
 
 Nature of Taxes.-I-The word taxation covers the proc- 
 esses both of collecnhg and paying taxes, and a tax is a 
 legal exaction made by the government upon its sub- 
 jects for public ends. This definition includes every- 
 thing essential to a tax — its coercive character, its 
 bearers or supporters, and its . specific purpose. ^ Mr. 
 John Fiske's definition will serve as a terse and graphic, 
 though somewhat elliptical, description : " Taxes are 
 portions of private property taken for public pur- 
 poses. 3 
 I It is absolutely essential to grasp the idea clearly that 
 \ a tax is always a burden upon some particular person 
 or persons. There never was a tax which did not saddle 
 some one with a load, nor, from the nature of things, can 
 there ever be such a tax. It is the more necessary to insist 
 upon this almost self-evident truth because certain defi- 
 nitions of taxes and much reasoning about taxation be- 
 
 * Cf. Ely, Taxation in American States and Cities, p. 49 sq., 
 for the former view; in opposition. Bastable, Public Finance. 
 p. 244; Plehn, Introduction to Public Finance, p. 276. In the 
 English financial year 1893-4. of all receipts only 6 per cent, came 
 from quasi-economic sources. In local finance the proportion 
 was about 5 to i in favor of taxes. Even in Prussia, where the 
 quasi-economic receipts yield 64 per cent, of the gross revenue, 
 they yield only 20 per cent, of the net revenue. 
 
 ^ The only exception that is likely to be taken to this defi- 
 nition will come from those who believe with the State So- 
 cialists, or with the Collectivists, that taxation has a double 
 end and includes both the support of the state and the redis- 
 tribution (in whole or part) of wealth. Cf. Wagner, Finanz- 
 ■wissenschaft, II., p. 210 sq. 
 
 * Civil Government, p. 3 sq.
 
 56 TAXATION : ITS ESSENTIAL NATURE. 
 
 fog- this indisputable fact. ) So eminent a jurist as Judge 
 Cooley 1 is misleading in this respect when he defines 
 taxes as a " contribution of persons or property . . , 
 for the support of government and for all public needs." 
 Property is always the property of some person or per- 
 sons, and consequently when private property is taken 
 by taxation the former owner sufifers the loss. Put- 
 ting this into the technical language of finance, we 
 may say the " subject," or the bearer of taxes, is always 
 a person. On the other hand, the bases on which taxes 
 are levied are numerous. In this sense it is true that 
 persons or property may contribute to the support of 
 the state; that is, taxes may be levied upon individuals 
 as such, or upon property as such, without regard 
 to its ownership. The basis, whatever it be, on which 
 taxes are levied is technically called the "object" 
 of taxation.2 But it must always be remembered that 
 when property or capital or income is said to pay taxes, 
 the immediate reference is to the basis upon which the 
 tax is levied, rather than to the bearer of the weight of 
 taxation. 
 
 / To understand the true inwardness of taxation we 
 must regard taxes from the standpoint of the taxpayer 
 both as an isolated individual and as a member of society. 
 Viewed from the first point, taxation is the abstraction of 
 a certain amount of private property from the taxpayer's 
 control. Taxes are thus regarded by him as a cost or 
 expense, an evil " in the sense that every sacrifice is 
 such." But this is only one side of the case. The tax- 
 
 *The Law of Taxation, p. 4. 
 
 * It is to be noticed that " object " as here used has no 
 reference to the end or purpose towards which taxation is 
 directed. When the "object" of taxation is rubricised under 
 an economic concept, we call the object the "source" of tax- 
 ation; e.g. capital is a " source " of taxation.
 
 NATURE OF TAXES. 57 
 
 payer's loss is not an absolute loss, such as one incurred 
 by bad debts, or by fire without insurance. As a return 
 for the property surrendered in taxes the taxpayer as a 
 citizen gets a share in the benefits of government. Con^ ,' 
 sidered from both standpoints, taxation may be regarded 
 as an enforced surrender of private property by the tax- \ 
 payer for an undivided interest in government property 
 and services. The true inwardness of normal taxation 
 then is this, — not that the taxpayer gets nothing for 
 what he pays out in taxes, but that what he gets and 
 what he pays for what he gets, are immediately 
 determined, not by himself, but by a political su- 
 perior. The social standpoint here practically coin- 
 cides with the individual standpoint. When society sur- 
 renders a part of its means by taxation it is using its 
 resources in a particular way which the government pre- 
 scribes. 
 
 Every cost, whether incurred by the individual 
 on his own account, or imposed by society at large 
 through taxation, aims at the attainment of some sup- 
 posedly desirable end. The end towards which taxation 
 looks is the maintenance of the government. The state's 
 activities are normally presumed to be beneficent. 
 Viewed in this light taxes are essentially a collective 
 payment for public services. This conception of taxa- 
 tion carries with it the doctrine of the proper limits of 
 taxation. Like any other expenditure, public or private, 
 taxation should stop where additional public outlay does 
 not secure corresponding advantages, or where leaving 
 property in the hands of the taxpayer would secure 
 greater advantages to society at large than collecting 
 such property by taxation and disposing of it for public 
 purposes. Theoretically, therefore, taxes may be too 
 low as well as too high. Experience and observation,
 
 5* TAXATION : ITS ESSENTIAL NATURE. 
 
 however, show the danger of too low taxes to be largely 
 imaginary. J 
 
 Much ingenuity has been wasted in trying to prove 
 that it is always advantageous that taxes be paid out of 
 incofne rather than out of capital. This theory, in the 
 first place, falsely suggests that income and capital are 
 distinct and mutually exclusive things, whereas they are 
 rherely distinct modes of measuring the same thing — to 
 wit, wealth. Not only are the implications of this theory 
 misleading, but its assertions are false. When tax- 
 payers actually pay taxes out of their incomes they cur- 
 tail their current private expenditures; when they ac- 
 tually pay taxes out of their capital they simply lessen 
 the amount of property they had previously amassed. 
 There is no particular reason for thinking that the former 
 course is universally to be preferred. When it comes 
 to a concrete choice between curtailing current expendi- 
 ture and trenching upon " a sacred mass of matter," it 
 may be wise to do the latter, just as, under the stress 
 of circumstances, it may be necessary to do both. 
 Legislation, moreover, must obviously be impotent to 
 prescribe which course the individual taxpayer shall pur- 
 sue. This ideal rule of taxation, therefore, proves upon 
 examination to be not always desirable if possible, and 
 not always possible if desirable. 
 
 Much fruitless controversy also has waged around the 
 proposition that net income is the only possible, or at 
 least the only permanent, source of taxation. If this 
 statement means that taxes which not only lessen cur- 
 rent expenditure, but yearly trench upon and diminish 
 private capital, will ultimately exhaust this capital and sO 
 cannot last forever, it is obviously true. But if the state- 
 ment mean, what it is frequently interpreted to mean, 
 that taxes are a junior lien on public income, and cannot
 
 FALLACIES CONCERNING TAXATION. 59 
 
 be paid until the ordinary commercial expenses of pro- 
 duction are first met, it is demonstrably false. This 
 latter position has been arrived at from considerations 
 such as these : no individual citizen, it is argued, can 
 pay taxes unless he have some income over a bare sub- 
 sistence : but what is true of one citizen is true of all 
 citizens : hence the only source of taxation in general 
 is the sum of net incomes, or, what comes to the same 
 thing practically,^ the only source of taxation is the net 
 national income. 
 
 The fallacy in this argument consists in the assump- 
 tion that there must be something in society correspond- 
 ing to what exists in each unit of society. Similarly we 
 might argue : scarcity of corn is good for the farmer 
 because it brings him good prices : but practically every- 
 body produces something: hence a scarcity of every 
 product would be good for society generally. Tacitus 
 speaks of those who create a wilderness and call it peace; 
 this plan would create a famine and call it prosperity. 
 Evidently there are certain functions performed by gov- 
 ernment, such as the protection of life and property, 
 which precondition all industrial effort. Taxes which 
 secure these services must be regarded as among the 
 necessary and fundamental costs of society's industrial 
 efforts. They must be paid even if the net national in- 
 come for the time being is turned into a negative quan- 
 tity, and even though the national capital be thereby 
 impaired. 
 
 Fallacies concerning Taxation. — If the nature of 
 taxation has been properly apprehended as a devotion 
 of a part of society's aggregate wealth to public ends, 
 
 *Cf. Roscher, System der Finanzwissenschaft, 35, p. 158. 
 ," Wir miissen praktisch als Quelle der Steuern das Rcineinkom- 
 men der Pflichtigen bezcichnen."
 
 6o TAXATION : ITS ESSENTIAL NATURE. 
 
 and justifiable only so far as the social benefits of gov- 
 ernment expenditure exceed those of private use, the 
 fallacies in which taxation is sometimes involved will 
 be readily perceived. Most of these fallacies result from 
 ignorance of fundamental economic principles. An es- 
 pecially fertile source of error is the delusion that the 
 state somehow has creative power in the domain of pro- 
 duction. This is the so-called " magic-fund delusion." 
 It finds expression, for example, in the assertion that 
 though taxation in general be an evil or a cost, yet it is 
 an advantage to those who sell their goods to the state 
 or who receive their salaries from the state. This in 
 one sense is true enough, but the implication is that 
 these goods sold and services rendered to the state are 
 over and above what would be economically in demand 
 were the state's demand for goods and services to be re- 
 duced. The positive form of this delusion is the argu- 
 ment for the public employment of the unemployed, not 
 as an occasional act of necessary charity, but on the 
 ground that such employment " makes work." 
 
 In confutation of this error, it may be said that those 
 who sell goods or who render services to the government 
 are not, in the long run and apart from temporary condi- 
 tions, specially benefited by being paid out of the proceeds 
 of taxation, unless indeed they thus get for their goods or 
 services more than they could otherwise get for them in 
 the open market. Such persons derive their incomes in 
 substantially the same way as other persons do, by pro- 
 ducing useful commodities or rendering useful services 
 for which they happen to be paid out of tnve^ instead of 
 being directly paid by their fellows. Should the govern- 
 ment take less by way of taxation and spend less for 
 goods or services, the greater amount left in the hands 
 of the community would constitute a fund out of which
 
 FALLACIES CONCERNING TAXATION. t% 
 
 ultimately these former recipients of taxes would be 
 paid. 
 
 Those who hold the idea, therefore, that they who 
 live on the proceeds of taxation somehow transform the 
 payment of taxes from a total to a partial loss, miscon- 
 ceive not only the true nature of taxation, which is a 
 sacrifice incurred to secure a desirable end, and which 
 is none the less a sacrifice because the end involves the 
 purchase of particular goods or services, but they also 
 labor under the delusion that public expenditure actually 
 creates for goods and services a demand which other- 
 wise would never exist. This is really " the great politi- 
 cal superstition " — that the state is not subject to the 
 general law, ex nihilo nihil fit. Similarly it must be clear 
 that if more property than usual be taken by taxation 
 and spent by the state on labor or goods, less will re- 
 main in the hands of the community with which to pay 
 wages or to buy commodities on private account. These 
 general truths must be qualified, of course, as to the 
 rapidity of their operation. The condition of industry, 
 the difficulty of efTecting industrial changes, and the 
 private losses arising from the inability of specialized 
 ability or specialized capital immediately to obtain 
 equally remunerative re-employment, must all be taken 
 into account. But these are secondary details after all, 
 necessary to correct the underlying truth, but not able to 
 obscure or to change it. Perhaps the best exemplifi- 
 cation of the ease with which in prosperous times vast 
 transitions may be readily accomplished is seen in the 
 sudden cessation in the government demand for services 
 and commodities at the end of the late civil war, and 
 the almost immediate and equal increase in the private 
 demand for services and goods which happily had become 
 available for purposes of peaceful mdustry. The die-
 
 6i TAXATION : ITS ESSENTIAL NATURE. 
 
 turn that " every new tax creates a new ability in the sub- 
 ject to bear it " is distinctly limited by Hume as operative 
 only within " certain bounds." It may perhaps be true that 
 taxes which threaten the very existence of large classes 
 might increase their industrial efforts.^ Normally, how- 
 ever, the greatest stimulus to increased production is 
 the assurance of freely enjoying what has been produced. 
 We cannot too thoroughly emphasize the general truth 
 that " the greatest promoter of industry is security " ^ — 
 the assurance that " whatsoever a man soweth, that shall 
 he also reap," without extortionate interference on the 
 part of his neighbors or on the part of his greater neigh- 
 bor, the state. 
 
 * Just as a fall in the rate of interest niay stimulate the frugal 
 to greater frugality. 
 
 ^ Bastable, Public Finance, p. 271 sq.
 
 CHAPTER II. 
 
 TAXATION : ITS REAL AND APPARENT BURDEN. 
 
 The Incidence of Taxation. — The payment of taxes, 
 involving as it does a diminution of such wealth as is 
 individually disposable, is commonly recognized as a 
 cost, a sacrifice, an expense. Yet certain facts might 
 seem at first hard to reconcile with this general truth. 
 For example, it must seem paradoxical at first sight that 
 some who pay money into the hands of the tax-collector 
 should be found protesting against the abolition of the 
 very laws which require of them such payments. At 
 times persons are even found agitating for an actual 
 increase in the amount of taxation imposed upon objects 
 which they themselves produce. Thus after our civil 
 war the match manufacturers decried the proposed 
 abolition of the tax on matches.^ The manufacturers 
 of whiskey in the United States have been notoriously 
 active at different times to persuade Congress to advance 
 the tax on their product.^ 
 
 It needs but the slightest reflection to convince us that 
 these demands are not prompted by public spirit. It is 
 not benevolence but self-interest which they all betoken. 
 
 ' See Seligman, Shifting and Incidence, p. 159 sq. 
 
 ^ ]\Ir. Thomas G. Shearman in his recent monograph on 
 Natural Taxation charges the Whiskey Trust with expending 
 over a million dollars to induce Congress to exempt stocks of 
 whiskey on hand when the tax on whiskey was advanced in 
 1894. 
 
 63
 
 64 TAXATION : ITS REAL AND APPARENT BURDEN. 
 
 The immediate reason for this apparent willingness on 
 the part of such producers to pay taxes is the belief that 
 what they thus pa)' out will be recouped, perhaps with an 
 additional profit, from the purchasers, who are expected 
 thereafter to pay for the taxed article a higher price. The 
 new price is commonly greater than the old price, and 
 consequently a stock of goods on hand not subject to the 
 increased rate of taxation is enhanced in market value 
 by the newly imposed tax. The apparent taxpayer, the 
 one who actually does advance money to the public fisc, 
 is by no means always the real bearer of the burden. 
 In the last resort the tax may be paid by one upon whom 
 the tax is shifted through some process of sale or ex- 
 change. Taxes are often concealed in the prices asked 
 for articles, and thus a storekeeper, as Mr. Wells says, 
 frequently keeps on hand in the prices he asks for his 
 goods " a lot of assorted taxes." 
 
 From this preliminary statement it becomes tolerably 
 evident that the burden of taxation need not necessarily 
 rest upon those w^ho in the first instance advance 
 money to the public treasury. We must distinguish the 
 nominal payer, who advances the money for taxes, from 
 the real payer, who actually bears the tax burden. And 
 inasmuch as an ideal system of taxation must have re- 
 gard to the way in which various social classes are 
 affected by taxation, it becomes imperative to study the 
 final location or " incidence " of taxes, as well as the 
 process of " shifting " by means of which the burden is 
 sometimes, in subtle ways, transferred from one person 
 to another. 
 
 The Concentration Theories of Incidence. — Most ex- 
 planations of this process of the shifting of taxes may be 
 grouped about one or the other of two opposing princi- 
 ples. First, there are those who have maintained that the
 
 THE CONCENTR/tTlON THEORIES OF INCIDENCE. 65 
 
 whole burden of taxation is shifted upon some particular 
 class in the community. Second, there are those who hold 
 that taxes are borne alike by all classes, by everybody in 
 general and by nobody in particular. This last doctrine 
 has been called the Diffusion Theory ; and by contrast 
 we might call the other the Concentration Theory. 
 The adherents of the Concentration Theory have by no 
 means agreed as to the class that was so singularly vexed 
 by taxes. John Locke, for example, held that " taxes, 
 however contrived, and out of whose hands soever ir.i- 
 mediately taken, do, in a country where the great fund 
 is in land, for the most part terminate on land." ^ The 
 proof offered in support of this contention was simple. 
 The laborer cannot bear taxes, for he lives now but from 
 hand to mouth. The trading part of the community 
 will shift taxes imposed on them by advancing their 
 prices, and as there is no one else to bear taxes but the 
 landlord, on the landlord must the taxes finally fall. 
 There seemed to be a very general agreement for a time 
 upon the comparative readiness of landowners to bear 
 the brunt of taxation. Walpole, for example, is on 
 record as saying that *' landed gentlemen are like the 
 flocks upon their plains who suffer themselves to be 
 shorn without resistance; whereas the trading part of 
 the nation resemble the boar who will not suffer a bristle 
 to be plucked from his back without making the whole 
 parish to echo with his complaints." ^ 
 
 This doctrine of Locke's that the landowner was the 
 sole supporter of taxation was virtually reaffirmed by 
 the Physiocrats, and with certain exceptions by Adam 
 Smith, although he used a somewhat different line of 
 
 ^ Some Considerations on the Consequences of Lowering the 
 Interest and Raising the Value of Coin, 1691. 
 
 ' Cf. Sinclair, History of the Public Revenue, Vol, III., 
 Appendix, p. 79.
 
 66 TAXATION: ITS REAL AND APPARENT BURDEN. 
 
 argument. The vexed question was taken up later by 
 Ricardo, whose method and some of whose conclusions in 
 this matter still command general assent. He inclined, how- 
 ever, to the belief that the profit-recipient, the manufac- 
 turer and the merchant, were the great sufferers by taxa- 
 tion. Smith is " the advocate of the landed interest," 
 Ricardo " of the moneyed interest." ^ The Concentra- 
 tion Theories are universally regarded to-day as one- 
 sided, though frequently their defect consists in the nar- 
 row and rigid assumptions on which they are based 
 rather than in defective reasoning in exploiting their 
 logical implications. Their comparative validity will be 
 involved in the formulation of the definitive theory of 
 incidence and need not detain us here. 
 
 The Diffusion Theory of Incidence. — This theory as- 
 serts that, irrespective of the payment of taxes in the 
 first instance, all economic classes alike are finally made 
 to share the burden of taxes, and that, too, in some fair 
 proportion to their respective ability. " Taxes," says Mr. 
 Wells,2 " equate and diffuse themselves, and if levied with 
 certainty and uniformity, they will, by diffusion and reper- 
 cussion, reach and burden all property with unerring 
 certainty and equality." The Diffusion Theory owes its 
 name to Thiers, the French statesman, who compared 
 this supposed propagation of the burden of taxation 
 throughout the industrial structure to the analogous 
 optical phenomenon of the diffusion of light. Tlic 
 theory owes its first vivid statement to Lord Mansfield, 
 who in 1766, in a speech upon taxing the American 
 colonies, remarked: " I hold it to be true that a tax laid 
 in any place is like a pebble falling into and making a 
 
 ^ Seligman, Shifting and Incidence of Taxation, p. 120. This 
 study of the subject is vahiable on both its historical and its 
 theoretical side. 
 
 ^ Lalor's Encyclopedia, article on Taxation.
 
 THE DIFFUSION THEORY OF INCIDENCE. 67 
 
 circle in a lake, till one circle produces and gives mo- 
 tion to another, and the whole circumference is agitated 
 from the centre." This idea of the diffusion of taxes 
 was systematically developed by Canard, a French 
 economist, in a work published about the beginning of 
 the present century.^ He compares taxation to the cup- 
 ping of a vein. This process causes no particular dearth 
 of blood in the particular vein tapped, inasmuch as the 
 adjoining veins contribute to make good the loss. 
 Courcelle-Seneuil similarly likens taxation to the influ- 
 ence of the climate or the rain which falls alike upon t'.e 
 just and the unjust. 
 
 Some one has said that it is a merit of the jests of 
 Erasmus that they can all be translated into arguments. 
 Many will doubtless feel that it is a defect common to the 
 arguments for the equitable and automatic diffusion of 
 taxation that they may all be translated into jests. This 
 whole theory rests either upon unproved assumptions or 
 misleading analogies. A candle in a dark room does not 
 equally illumine all parts of the room, however diffused 
 the candle's light. The centre of a pond is more vio- 
 lently agitated by a pebble flung therein than are the 
 more distant parts of the pond's surface. It is not al- 
 together a matter of indifference what vein is opened 
 in the process of cupping. But enough of these analo- 
 gies. Indeed the only really serious attempt to demon- 
 strate the theory of diffusion was made by Canard. He 
 asserts that every tax laid upon any particular object 
 will be borne in part by the producer and in part by the 
 purchaser. Thus, finally, the burden will be fairly ap- 
 portioned between these two typical social classes, and 
 hence throughout society at large. 
 
 ^ Principes d' Economic Politique.
 
 68 TAXATION: ITS REAL AND APPARENT BURDEN. 
 
 The Diffusion Theory, if accepted, very naturally leads 
 to optimism in the matter of taxation, assuming as it does 
 an automatic tendency in taxes towards perfect adjust- 
 ment, provided only that time be allowed for this process 
 to work itself out. As a corollary it follows that old 
 taxes, like old wine, are better than new. They have 
 equated and adjusted themselves. 
 
 Perhaps the readiest refutation of this theory and its 
 implicates is to show that one important class of taxes is 
 never shifted at all. Take the case of production under 
 monopoly conditions. Suppose A. B. has a copyright 
 upon a book for which there is a large demand. The book 
 is put upon the market at a price fixed not merely to afford 
 a margin over the expenses of publication, but so as to 
 yield the greatest net return. Not uncommonly this price 
 will be the only price which will yield the maximum net 
 profit. A higher price will diminish sales, and thus, cut 
 down the net gain. A lower price will increase the 
 sales, but not sufficiently to cover the increased expenses 
 involved in the larger outpuL. If in this case or in 
 all similar cases a moderate tax, based upon a certain 
 percentage of the net profits, be imposed, such a tax 
 cannot be shifted in whole or in part. To advance the 
 price or to lower the price are both alike economically 
 impossible. The result is that the tax diminishes the 
 monopoly profits and produces no other effects. The 
 field of monopoly production in the world of to-day is 
 already large and is rapidly growing. A theory of taxa- 
 tion, therefore, which is wholly inapplicable to so im- 
 portant an economic domain can hardly be an adequate 
 explanation of incidence. The same truth — that certain 
 taxes are not shifted — might be abundantly proved from 
 economic history. But there is hardly need of addi- 
 tional evidence to dissipate the easy-going optimism of
 
 THE DEFINITIVE THEORY OF INCIDENCE. 69 
 
 the Diffusion Tlieory. As Roscheri wisely says: "A 
 state which lays vicious taxes and trusts to the remedial 
 power of shifting takes a leap into the dark." 
 
 The Definitive Tlieory of Incidence. — Probably the 
 readiest way to cut to the heart of the current theory of 
 the incidence of taxes is to take up the discussion of 
 the simple case of a tax imposed upon the manufac- 
 turers of some particular commodity. Let us assume 
 then that the distillers of whiskey are required to pay a 
 tax of fixed amount upon every gallon of whiskey they 
 make. We may assume also for the sake of the argu- 
 ment that all whiskey is of one uniform grade and has 
 been untaxed hitherto. Now it may chance that whis- 
 key is produced under (a) competitive conditions, or 
 under {b) monopoly conditions. By the first we mean 
 that the selling price of whiskey is normally determined 
 by the expenses of producing whiskey. There may be 
 different expenses of production, according as superior 
 skill or better machinery or more advantageous location 
 is utilized. But in the long run the selling price must 
 cover the expenses of those distillers who produce at the 
 greatest expense per gallon. Unless their sales yield 
 them a living as good as similar energy would yield in 
 other lines they will abandon the distilling business. In 
 case their sales do not cover their expenses they will fail 
 and will be forced out of the business. By monopoly 
 conditions, on the other hand, we imply that the selling 
 price is determined, not by the maximum expenses of 
 production, but is set at such a figure that the sales at 
 the price fixed will yield the greatest net profit. 
 
 First, let us consider the case of competition. If a tax 
 of a dollar a gallon were suddenly imposed upon the 
 
 ^ Finanzwissenschaft, p. 182.
 
 7© T AX/IT ION : ITS REAL AND APPARENT BURDEN. 
 
 whiskey distillers, their first impulse would be to in- 
 crease the price of their whiskey to the buyer, and so to 
 saddle him with the tax. However, the distillers would thus 
 run the risk of finding- their sales shrink. Large stocks 
 would probably be left on their hands unsold. This is 
 but the exemplification of the fundamental law that price 
 and demand vary in opposite directions. It is clear also 
 that the distillers' ability to advance their prices will 
 depend largely upon the readiness of the whiskey buyers 
 to concede the increased price; or, in the technical lan- 
 guag.e of Economics, the producer's ability under the 
 given circumstances to raise the market price wi'l de- 
 pend upon the elasticity of the demand for the article.^ 
 In a community of confirmed topers perhaps the price 
 could be increased a dollar per gallon — the full amount 
 of the tax. Indeed the history of the internal revenue ^ 
 during our civil war showed pretty conclusively that, 
 gauged by the test of relinquishment, the consumers of 
 distilled spirits regard their liquor pretty much in the 
 light of a necessity. In the degree, then, that the taxed 
 article is regarded as a necessity for which there is no 
 substitute the producers will be able to shift the burden 
 upon the consumer. In the degree that purchasers in- 
 cline to lessen their use of the taxed article will the 
 producer be unable, at least at first, to shift upon con- 
 sumers the whole burden of the tax. In the one ex- 
 treme ^ the new price will be the former price increased 
 by the tax; in the other extreme the new price will be 
 for a time the same as the former price. We must by 
 no means overlook certain important collateral effects 
 of this tax we have supposed to be levied on whiskey. 
 
 ^ Cf. Marshall, Principles of Economics, Bk. III., Ch. IV. 
 ' Cf. Wells, Practical Economics, p. i8i sq. 
 ' Assuming the cost of production constant per unit of 
 product.
 
 THE DEFINITIVE THEORY OF INCIDENCE. 7^ 
 
 Where cthe producer is able to shift the whole burden 
 upon the consumer the purchasers of whiskey who buy 
 at the increased price will have a smaller portion of their 
 income than formerly to exchange for other goods. 
 Their demand for other products will usually fall off, 
 and will thus injure, at least temporarily, other lines of 
 productive enterprise. While these collateral effects are 
 sure to follow, it is difficult to predict where and how they 
 will occur. But we have a clue to the effects thus dif- 
 fused throughout a wide circle of industries when we 
 come to consider the collateral eflfects produced, when 
 our typical producers, the whiskey distillers, are unable 
 to advance their prices by the full amount of the tax. 
 Before the imposition of the tax the price received for 
 whiskey just afforded a living to those producers least 
 advantageously circumstanced. The new price is now 
 higher than the old price, but by less than the amount of 
 the tax. Consequently those distillers who were just on the 
 margin of profitable production will find that their sales 
 no longer cover their expenses. They will consequently 
 be forced to withdraw from the business. The new 
 price ^ will thereafter just remunerate such producers as 
 remain on the margin of profitable distilling. The tax 
 has become a veritable portion of the marginal expenses 
 of production which thereafter set the current normal 
 price for whiskey. In both cases, then, when the pro- 
 
 ^ The discussion in the text assumes the cost of production 
 per unit to be constant. More exactly we may say that when 
 an article is produced subject to the law of diminishing returns. 
 a diminished supply will be forthcoming at a lower cost per 
 unit; so that with the tax added the new price will exceed the 
 former price by less than the amount of the tax. Similarly, if 
 the article produced obeyed the law of increasing return;, the 
 new price would exceed the former price by more than the 
 amount of the tax. On this point see SeJigman, Shifting and 
 Incidence of Taxation, p. 147 sq.
 
 72 TAXATlOhl: ITS REAL AND APPARENT BURDEN. 
 
 ducers shift the tax without lessening the output, and 
 when they shift it, after having lessened their output, 
 the tax becomes a part of the expenses of production and 
 viust ultimately be borne by the consumer.^ The evil effect 
 upon other industries or upon the former marginal pro- 
 ducers of whiskey will be temporary, though, as Mr. 
 Cannan ^ says, " ' temporary ' depression is a very per- 
 manent thing to those who are crushed out of a trade by 
 it." Nor ought we to overlook such unnoticed collateral 
 effects as result from the decreased use of the taxed 
 article owing to its increased price. Many former con- 
 sumers must curtail their consumption. Some must 
 forego it altogether, — a result which we might contem- 
 plate with complacency as regards whiskey, but which 
 is just as liable to take place in the case of necessary or 
 useful articles. 
 
 Throughout the discussion we have been assuming the 
 existence of competitive prices. It remains to speak of the 
 incidence of taxes imposed on articles sold at monopoly 
 prices. If a tax of fixed amount, as before assumed, be 
 imposed upon each unit of the product, the monopoly 
 producer cannot ordinarily escape the pressure of taxa- 
 tion altogether. He may sometimes minimize his loss, and 
 at the same time impose on the consumer a heavy share 
 of the tax load. Let us suppose, for instance, that the 
 manufacturers of a caligraph, protected by patents, could 
 market yearly 10,000 instruments at 70 dollars apiece; 
 
 20,000 instruments at 60 dollars apiece; 
 
 30,000 instruments at 50 dollars apiece. 
 
 *The careful formulation of the theory of incidence shows 
 that such assertions as " the consumer always pays the tax " or 
 (as regards taxed imports) " the foreigner pays the tax " are 
 fallacious when unqualified, the latter indeed more frequently 
 than the former. 
 
 ' Elementary Political Economy, p. 147.
 
 THE DEFINITIVE THEORY OF INCIDENCE. 73 
 
 We may assume also that certain economies in pro- 
 duction could be employed so that the expenses of 
 production per machine would be less, the greater the 
 total output. Let us assume that the plant could turn 
 out 10,000 machines at a cost of 35 dollars per machine; 
 20,000 machines at a cost of 30 dollars per machine; 
 30,000 machines at a cost of 28 dollars per machine. 
 Under these assumed conditions we shall have the fol- 
 lowing results: 
 
 Output. Gross Receipts Expenses of Production. Net Profits. 
 
 (A) 10,000 at $70 $700,000 $350,000 $350,000 
 
 (B) 20,000 at $60 $1,200,000 $600,000 $600,000 
 
 (C) 30,000 at $50 $1,500,000 $840,000 $660,000 
 
 Under these conditions the lowest of the three prices, 
 namely $50 per machine, will give the monopoly pro- 
 ducer the greatest net profit. But suppose a tax of $10 
 per machine be imposed on the producer, then we shall 
 have the following results: 
 
 Output. Gross Receipts. Expenses of Production. Net Profits. 
 
 (A) 10,000 $700,000 $450,000 ($45 each) $250,000 
 
 (B) 20,000 $1,200,000 $800,000 ($40 each) $400,000 
 
 (C) 30,000 $1,500,000 $1,140,000 ($38 each) $360,000 
 
 Under the new conditions the highest net profit will be 
 had when the output is reduced from 30,000 to 20,000 
 (case B). The tax will have the effect of reducing the 
 profits of the producers, but at the same time the pur- 
 chasers of the machine will suffer, first, in that the num- 
 ber of would-be purchasers is cut down from 30,000 to 
 20,000; and second, in that each purchaser hereafter 
 will have to pay $60 for each instrument instead of $50 
 as heretofore. Unlike the efifect of mercy, the tax in- 
 jures " him that gives and him that takes." 
 
 Suppose, on the other hand, that the monopoly pro-
 
 74 TAXATION : ITS REAL AND APPARENT BURDEN- 
 
 ducers were taxed ten per cent, of their net profits, then 
 we should find the case to stand thus: 
 
 Net Profits as before the Tax. Diminished by the Tax. 
 
 (A) $350,000 $315,000 
 
 (B) $600,000 $540,000 
 
 (C) $660,000 $594,000 
 
 Hence the maximum net profit would be obtained by 
 maintaining the largest output and the corresponding 
 (lowest) selling price. The consumer would not be in 
 the least affected, and the monopoly producer would 
 bear the tax in its entirety.^ 
 
 We conclude, therefore, that a tax upon each unit of 
 an article produced under monopoly conditions may be 
 borne in part by the purchaser, and that there is no assur- 
 ance that the monopolist will bear the entire tax, unless 
 the tax is levied upon the net profits, or in such fashion as 
 to preclude the curtailment of the supply. 
 
 From this preliminary study of both competitive and 
 monopoly production we may draw the following gen- 
 eral conclusion: The shifting of a tax by the producer upon 
 the consumer depends on the possibility of the producer's 
 restricting the supply of the commodity or service upon 
 zvhich the tax is levied? The hindrances to restricting 
 
 ^ Practically the same effect would follow were a percentage 
 tax levied on the monopoly's gross receipts, provided, of 
 course, that the tax be not so excessive as to reduce the net 
 profits below the level of profit in competitive undertakings, 
 in which cas- some of the capital might be withdrawn from the 
 enterprise. Mr. Ralph W. Cone has called my attention to the 
 fact that for a tax of less than $6 the producer would bear the 
 entire burden. 
 
 ^ " L'impot reste a la charge de celui qui le paye, si I'objet sur 
 le,quel il est assis n'est pas susceptible de restriction. II est 
 rejete en tout ou en partie sur d'autres contribuablcs, si I'objet 
 est susceptible de restriction." — de Parieu, quoted by Roscher, 
 Finanzwissenschaft, p. 179. See also Wagner, Finanzwissen- 
 schaft, II., p. 353 sq., for a fuller statement.
 
 APPLIC/iTIOhl TO VARIOUS CLASSES OF INCOME. 75 
 
 the supply may be physical hindrances. Thus the sup- 
 ply of land in the heart of a city cannot be re- 
 stricted. ^ Sometimes the hindrance is economic in its 
 nature. Thus a tax imposed upon the profits of a, 
 monopoly product (such as the caligraph just men- 
 tioned) cannot be evaded by a restriction of the supply, 
 inasmuch as a diminished output would result in a 
 greater loss to the producer than is occasioned when the 
 producer bears the entire tax. 
 
 Application to Various Classes of Income. — If all 
 taxes were levied upon the producers of manufactured 
 goods, the problem of the incidence of taxation would 
 be comparatively simple. We should obviously require 
 to know, first of all, what goods various individuals or 
 social classes consumed. We should next inquire which 
 of these goods were manufactured under competitive 
 conditions and which under monopoly conditions. 
 Finally, we should have to satisfy ourselves whether 
 there were in force any special circumstances which 
 would tend to modify the general rule as to the shifting 
 of taxes. If there were no such disturbing elements to 
 be allowed for, we could pronounce with some certainty 
 an opinion as to the location and the weight of the tax 
 burden as between producers and consumers. Even 
 here we ought to remember that each individual is or- 
 dinarily both a consumer and a producer; we ought to 
 regard him in each capacity, and if necessary strike a 
 
 ' For this reason Mr. George is right when he- maintains 
 that a tax on pure economic rent cannot be shifted. Mr. 
 Edward Atl<inson is in error upon this point. Prof. Charles H. 
 Hull in a valued criticism on this matter of shifting of taxation, 
 urges forcibly that it would be more exact to put the matter thus 
 — " The possibility of shifting depends upon the possibility of the 
 producer's raising the price, instead of restricting the supply." 
 But in the last resort the raising of price depends on restricting 
 supply except only where the demand for an article is absolutely 
 rigid.
 
 76 TAXATION : ITS REAL AND APPARENT BURDEN, 
 
 balance before making our final estimate of the pressure 
 of taxation he sustains. 
 
 Unfortunately the actual problem of incidence is not 
 as simple as this. While much of our public revenue 
 comes from the taxation of commodities in the hands 
 of the producer or the importer (indirect taxes), even 
 more is raised by taxing" individuals irrespective of 
 what they consume, on the basis of the property they 
 own or the income they receive. Even here the pre- 
 ceding case gives us a clue by which we may discover, 
 in a general way, how far such taxes (direct taxes) are 
 shifted. In general we saw that the possibility of the 
 producer's shifting a tax depends on his power to re- 
 strict the supply. What holds good of one commodity 
 produced for the market holds good of the contributions 
 made by various property-owners and income-recipients 
 to the social income or ' National Dividend.' Incomes ^ 
 are ordinarily derived from the production of commodities 
 or the rendition of services. Sometimes an individual's 
 income is from both sources. When, therefore, a class of 
 individuals is taxed, they will bear the burden of the tax 
 unless they can restrict the supply of goods furnished 
 or -services rendered by them. In a general way taxed 
 incomes derived from monopoly sources are likely to 
 bear the burden of taxation. Incomes derived from 
 competitive sources will escape the burden of taxaticni 
 
 * If income be taken in the widest sense, as the flow of 
 economic advantages per unit of time, the benefits derived from 
 the actual use of wealth by the owner is a part of his true 
 income. If a man lives in his own house, the comfort and 
 shelter it affords are parts of his real income. If A Jets his 
 house to B, A is making a contribution to the social income, 
 as much as though A manufactured iron goods. If wealth thus 
 used, or income-yielding property (in contradistinction to pro- 
 ductive capital in the narrower technical sense) be taxed, the 
 iucome it yields is curtailed, and there is no way in the im- 
 mediate present by which such a tax can be shifted.
 
 A P PLICATION TO I/^RIOUS CLASSES OF INCOME. 77 
 
 in so far as such sources of income are curtailed. In 
 static conditions such monopoly incomes as are derived 
 from pure economic rent or from superior personal abili- 
 ties will be saddled with the burden of taxation. Incomes 
 derived from invested capital must suffer from taxes im- 
 posed thereupon, unless the capital can be withdrawn* 
 and reinvested in more advantageous ways, or until re- 
 stricted investments raise the income from such capital. 
 Taxes imposed on wage incomes (unless skilled abilities 
 limited in supply give a quasi-monopoly wage) can only 
 be shifted when the supply of labor is decreased. This 
 implies a checked growth of the numbers of unskilled 
 workmen — a process which is generally slow and always 
 more or less uncertain, although freedom of movement 
 aids in cutting down the over-supply of labor in given 
 localities. 
 
 Besides the general conditions laid down, any 
 bar to the action of unrestricted competition between 
 parties to avoid the brunt of taxation must modify the 
 general principles of the incidence of taxation. In ac- 
 tual finance the question of the incidence of specific taxes 
 must be determined by considering how far the general 
 laws already enunciated are modified by concrete cir- 
 cumstances. 
 
 Supplementary Note. 
 
 There are certain problems which concern incidence 
 as regards individuals rather than as regards typical 
 social classes. Examples of such problems are the 
 method of shifting taxation by capitalization. A certain 
 piece of property is burdened with a tax. The tax re- 
 
 'An equal tax on all capital is a practical impossibility. If 
 theoretically possible, the tax on the income from such invest- 
 ments could be shunted only by a general decrease in the 
 growth of the future capital. Where debts secured by mort-
 
 7 8 TAXATION: ITS RBaL AND APPARENT BUkDhN. 
 
 duces the net yield of the property in question, and con- 
 sequently its oapitalized value. So that a purchaser will 
 ordinarily shift the whole burden of the tax upon the 
 erstwhile owner by according a reduced price for the 
 property. That is, the original owner cannot shift the 
 tax by selling the property. Another analogous problem 
 is presented by equal incomes similar in their economic 
 origin. Ceteris paribus the burden imposed on each in- 
 come will be the same. It may happen, however, that a 
 great portion of one income is expended upon articles 
 whose prices are largely taxes in disguise, whereas a 
 small part or perhaps no part at all of the other income 
 is expended upon such taxed products. In this case the 
 amount of taxation borne by the first income is greater 
 than that borne by the second. It is perhaps question- 
 able whether this is of great impt)rtance for practical 
 finance where classes must be dealt with as classes. 
 
 gages are practically the only kind of personal property taxed, 
 the lender shifts the tax to the borrower by exacting a rate of 
 interest high enough to cover the tax. See p. 126.
 
 CHAPTER Iir. 
 
 TAXATION : ITS EQUITABLE DISTRIBUTION. 
 
 Nature of the Problem. — In the preceding chapter 
 a matter of fact was discussed ; in this chapter a ques- 
 tion of right is involved. Where the stresses of the 
 tax load are actually distributed throughout the eco- 
 nomic structure is, in a general way, known. How this 
 burden ought to be distributed is largely a matter of dis- 
 pute. The question of public equity is nowhere freighted 
 with greater significance than in the domain of taxation. 
 The issue is an ethical one and <>( far-reaching impor- 
 tance. Thoroughly to exploit it would involve a search- 
 ing analysis of the very foundations of morals. The 
 question of equity in taxation is by no means wholly or 
 principally a problem of the mere adjustment of adminis- 
 trative detail. Even current discussion of the Singlie 
 Tax proposal or of the now defunct Income Tax could 
 not content itself with surface generalizations. The very 
 foundations of society, of private property, of liberty as 
 now known to law, are challenged. Here as elsewhere 
 the house economic is divided against itself, and the 
 question of the distribution of taxation is a crucial ques- 
 tion. It is " quick and powerful," and pierces " even to 
 the dividing asunder " of collectivists who would fain 
 retain the benefits of competition, and of individualists 
 who perhaps regretfully shut their eyes to what they 
 reg^ard ae the cjelusive dreams of a socialistic Utopia. 
 
 79
 
 8o TAXATION : ITS EQUITABLE DISTRIBUTION. 
 
 There are indeed those who deny that abstract equity 
 can be regarded either in the framing of tax laws or in 
 their enforcement. Cumbered with the muUifarious 
 worries of fiscal administration, they exalt the necessity 
 or perhaps the convenience of the fisc into a guiding 
 principle to which all else is subordinate and must con- 
 form. For them, as for Colbert, " the supreme art of 
 taxation " is " to pluck the greatest amount of feathers 
 with the least amount of squalling," Or, as McCulloch i 
 more decorously puts it : " The characteristic of the best 
 tax is not that it is most nearly proportioned to the 
 means of individuals, but that it is easily assessed 
 and collected, and is at the same time most conducive to 
 the public interests." 
 
 This, however, is no solution of the problem of equity 
 in taxation. It is rather the despair of finding any solu- 
 tion. A perfectly equitable tax system may be an un- 
 attainable ideal. But this does not absolve us from all 
 effort making for approximate justice. 
 
 Broadly speaking, we may say that three generic 
 schemes offer themselves as supplying norms of justice 
 in taxation. These three are, respectively, Confiscation, 
 Progression, Proportion. The confiscatory proposal is 
 based upon the alleged injustice of certain kinds of pri- 
 vate property and the incomes flowing therefrom. Re- 
 dress these evils, it is urged, by restoring to society that 
 which is rightfully its own, and taxation will take care 
 of itself. This is the claim of Mr. George and his ad- 
 herents. Tl'is is also the demand of those who would 
 impose upon certain monopolies the entire burden of 
 taxation. 
 
 The adherents of progressive taxation occupy a less 
 extreme position. They concede it to be the duty of 
 
 *Ta?^?ition and Funding, p. i8,
 
 THE CONFISCATORY THEORY. 8l 
 
 practically all subjects of the state to make sacrifices for 
 the state. But they would impose the heavier burdens 
 upon the wealthy, and would thus exempt wholly or in 
 part those who have but little. Lastly come those who 
 insist upon the universality of the duty of supporting 
 the government, but who would distribute the weight 
 of taxation always in strict proportion either to the re- 
 sources of the contributors or to the benefits they sev- 
 erally derive from the state. 
 
 The Confiscatory Theory. — The most famous of the 
 confiscatory theories is Mr. George's proposal that pure 
 economic rent ^ in its entirety be taken by way of taxa- 
 tion. This claim is based upon his contention that natu- 
 ral equity does not permit private property in land. It 
 is at once evident that the issue here raised involves the 
 basal principles of social organization. Mr. George's 
 argument may be briefly stated as follows: The sole 
 and ultimate justification of private property is rooted 
 in " the right of a man to himself,^ to the use of 
 his own powers, to the enjoyment of the fruits of 
 his own exertions. ... As a man belongs to him- 
 self, so his labor when put in concrete form belongs 
 to him." Only when these powers are embodied in 
 a product is the product rightfully his. Land is not 
 the product of human labor, and thus cannot right- 
 fully be held in private ownership. Such a material 
 product as a pen, for example, is rightly and ab- 
 solutely and exclusively the property of its producer 
 or of the one to whom the producer has transferred it. 
 
 ^ For those not conversant with ordinary economic terms 
 it may be worth while to state that Mr. George proposes that 
 such part of real estate incomes as are in excess of the interest 
 upon the capital invested in improving the land or in building 
 thereon shall be absorbed by taxes. He does not advocate 
 the confiscation of the entire income from real estate. 
 
 * Progress and Poverty, p. 299 s(i.
 
 82 TAXATION: ITS EQUITABLE DISTRIBUTION. 
 
 " No other human being can rightly lay claim to it." 
 But no similar claim can be made for private ownership 
 of land. 
 
 The obvious answer to Mr. George's allegation is co- 
 gently put by Prof. Sidgwick.^ " Human labor is ob- 
 viously not the cause of the matter of any material 
 product, but only of its form; therefore, if a man is to 
 have the right of property in the product, he must have 
 already been allowed to appropriate the material; and 
 this preliminary appropriation will require justification." 
 This logical demolition of Mr. George's argument seems 
 to me to be indefeasible. If private property in material 
 chattels is justifiable, there is no reason a priori why 
 private ownership of land may not also be justifiable. 
 As Mr. Rae says, " Land is as much the creation of man 
 as anything else, and everything is as much a gift of 
 God as land." Whatever be the fundamental justifica- 
 tion of private property, to maintain, as Mr. George 
 does, that chattels may rightly be the subject of private 
 property, but land may not, is to attempt at the same 
 time " to hold with the hare and run with the hound." 
 It is perfectly allowable, of course, to argue, as Mr. 
 George subsequently does,, that the well-being of society 
 will be the better secured by the state's virtual acquisi- 
 tion of the soil. But to adopt this line of argument is 
 in itself a change of venue. The proud claim of securing 
 an immediate intuitive verdict from the supreme 
 tribunal of natural equity against private landownership 
 has been abandoned; and the case has thus been re- 
 manded to the lower court of social utility. The con- 
 tention of the Single Tax advocates now takes this form. 
 
 ^ Political Economy, p. 503. Cf. also Grotius de Jure Belli 
 et Pads. III., ill., § 3; Huxley, Method and Results, Essays, p. 
 ^J2'> I^ae, Contemporary Socialism, p. 4^8.
 
 THE CONFISCATORY THEORY. 83 
 
 Taxation should absorb the totality of economic rent, 
 because under the system of private landownership the 
 entire increase of wealth must theoretically inure to the 
 exclusive benefit of the landowner. Such, they claim, 
 has historically been the case. That this is the contention 
 of Mr. George is proved by the following extract^ : " Land 
 being necessary to labor, and being reduced to private 
 ownership, every increase in the productive power of 
 labor but increases rent, the price that labor must pay 
 for the opportunity to utilize its powers; and thus all the 
 advantages gained by the mareh of progress go to the ozvn- 
 crs of land,^ and wages do not increase. Wages cannot 
 increase; for the greater the earnings of labor the greater 
 the price that labor must pay out of its earnings for the 
 opportunity to make any earnings at all. The mere la- 
 borer has thus no more interest in the general advance 
 of productive power than the Cuban slave has in an ad? 
 vance in the price of sugar." 
 
 If this presentation of the facts corresponded with the 
 facts themselves, even Mr. George's remedy would 
 hardly seem too high a price to pay for our economic 
 regeneration. But both theoretically and historically 
 Mr. George is in error. Every increase in productive 
 power normally increases the demand for the various 
 factors necessary to production. But in what propor- 
 tion the demand for land, capital, and labor (both manual 
 and directive) will increase is, in general, unpredictable. 
 It is a gratuitous assumption, however, to assert that 
 increased productive power will enhance the demand for 
 land only.3 Thoroughly to sift Mr. George's historical 
 contention, that as a matter of fact the entire increase 
 
 ^ Progress and Poverty, p. 255. 
 ' The italics are not in the original. 
 
 * Cf. F. A. Walker, Political Economy (Advanced Course), 
 p. 419 sq., for an examination of George's theoretical argument.
 
 84 TylX/tTlON: ITS EQUlT/iBLE DISTRIBUTION. 
 
 of productive power has exclusively benefited the land- 
 owning class, would take us too far afield. ^ The same 
 must be said about his assertion as to the increase of 
 poverty. This latter subject indeed hardly falls within the 
 scope of Public Finance. Similar reasons also must bar 
 out any discussion of the various compensatory or quasi- 
 compensatory schemes of land nationalization. Suffice 
 it to say that neither theoretically nor as a matter of 
 common observation is the private ownership of land 
 tantamount to the exploitation of the landless classes. 
 The labor theory which Mr. George has erected is ob- 
 viously untenable as a fundamental ethical basis for 
 private property. His utilitarian argvmient for the ne- 
 cessity of the state's acquisition of land proves upon 
 examination to be theoretically and historically incon- 
 clusive. Whatever then be the moral basis upon which 
 private property in land is to be theoretically justified,- 
 the confiscatory gospel of the Single Tax advocates can 
 hardly be accounted an enlightened solution of the 
 problem of the just distribution of taxes. 
 
 ' Cf. Rae, Contemporary Socialism, Ch. XII., second edition; 
 Seligman, Essays in Taxation, especially the examination of the 
 Single Tax theory, Ch. III. 
 
 ' The argument in the text in reference to the ethical basis 
 of private property is entirely critical and destructive. Person- 
 ally, I do not sympathize with the view very generally accepted 
 by American economists that Social Utility and Right are con- 
 vertible terms, and the same in essence. For the individual 
 I hold that alone to be Right vv'hich realizes or tends to realize 
 his personality as a rational being. Similarly for society that 
 alone is Right which realizes or tends to realize the rational 
 personalities of its constituent members. Now, Society like the 
 individual is environed in a milieu where the struggle for exist- 
 ence prevails. This preconditioning law is inevitable. Private 
 property I believe to be the most efficacious method yet de- 
 vised to minimize the suffering involved in the struggle for 
 existence. Private property thus secures the possibility for the 
 greatest self-realization of the rational persons who constitute 
 Society. This is, in my opinion, its moral justification. In 
 short, felicific tendency is frequently an index or exponent of the 
 Right, but is not Right in essence.
 
 THE CONFISCATORY THEORY. 85 
 
 There are those who do not confine their attention 
 to the taxation of economic rent, but who argue that rent 
 is only a species of a large genus of gains — all of them 
 unearned. Thus certain monopolized enterprises or 
 speculative gains are to be singled out for taxa- 
 tion. Apart from the probable inadequacy of revenue 
 so derived to meet the wants of the government, 
 the objections to such a policy are weighty.^ The 
 speculative investment of capital in new enterprises 
 is roughly based upon the average return thus obtain- 
 able. This average return is made up of hits and misses. 
 The point is well illustrated by a story told of a promi- 
 nent financier who, upon deciding to invest in a projected 
 railroad, remarked that he would either lose a hundred 
 and fifty thousand dollars or make a million and a half 
 in the venture.^ If every lucky investment is to be re- 
 garded as prima facie evidence of theft, or at least of 
 unearned wealth, the average inducement to make such 
 ventures will be materially weakened, and society will 
 sufifer no less than the individual who is thus fined for 
 his ingenuity .3 Moreover, when the source of monopoly 
 or unearned profits has been once transferred from the 
 original owner, special or exclusive taxation involves the 
 expropriation of property owners who acquired their title 
 by indefeasible right. Thus a lawyer may out of his 
 professional earnings buy stock in a successful industrial 
 company. The value of the stock may have been origi- 
 nally " unearned," but the present holder's moral title 
 is not thereby affected. If society through the tax- 
 
 ^ Cf. Bastable, Public Finance, p. 309. 
 
 ^ He is said to have added that if he did the former, the public 
 
 would say he was ' a d fool,' and if he did the latter, they 
 
 would say he was ' a d thief.' 
 
 ^ Of course where public franchises are a source of unusual 
 profits, special taxation may be only a just return for the privi- 
 leges accorded.
 
 S6 TAXATION: ITS EQUITABLE DISTRIBUTION. 
 
 collector is to mulct any one, it ought to be the original 
 beneficiary of the rise in the stock's market value. It 
 hardly requires to be said that fiscal administration can- 
 not undertake as preliminary to the imposition of taxes 
 the determination of the original equitable acquisition of 
 property. 
 
 The Theory of Progressive Taxation. — However the 
 taxpayer's ability be measured, whether by income or by 
 property or by consumption, the theory of progressive 
 taxation contemplates the exaction of a larger propor- 
 tional slice from the greater means than from the lesser. 
 This proposed canon of equity is supported on two dis- 
 tinguishable, though not always distinct, grounds. First, 
 it is based upon what is called the politico-social theory 
 of taxation ; second, it is founded on the contention that 
 progressive taxation is a more exact measure of ability 
 than rigidly proportional taxation which takes the same 
 fraction from all resources, be they great or small. The 
 politico-social theory of taxation ^ is essentially an at- 
 tempt to correct by means of progressive taxation the 
 inequalities of the competitive distribution of wealth. 
 The attitude of its supporters is Janus-like. They face 
 both Collectivism and Competition. They hold that a 
 little stealing is not a dangerous thing, provided the state 
 commits the theft. This rule is unsound, because it is 
 based on the idea that the state can beneficially interfere 
 with economic distribution by acts which weaken the 
 incentives to accumulation. The second claim which is 
 made for the progressive principle is much more weighty. 
 The rich, it is argued, are abler far to contribute to the 
 needs of the state than are the poor. They are able, 
 moreover, to contribute a larger proportional share of 
 their total resources than are their less fortunately cir- 
 
 * Wagner, Finanzwissenschaft, II., p. 207 sq. and p. 405 sq.
 
 THE THEORY OF PROGRESS Il/E TAXATION. 8? 
 
 cumstanced neighbors. Though the rich give more than 
 the rest, both absolutely and relatively, still more remains 
 at their disposal when the taxes have been paid in. As 
 Paley ^ put it, " the point to be regarded is, not what men 
 have, but what they can spare." 
 
 A careful preliminary definition of the taxpayer's 
 ability will clarify the discussion of the moot question 
 of progressive versus proportional taxation. It is evi- 
 dent that ability must in some degree be related to in- 
 come. This latter term designates the amount of com- 
 modities received and services enjoyed within a given 
 period. A man's income in its broadest sense includes 
 the economic satisfactions received within a given period. 
 Property itself is of value only as a source of income. 
 It is not the only source, but it is one of the two ulti- 
 mate sources, labor being the other. Income again must 
 be differentiated into gross income and net income. 
 The former is the total periodic influx of commodities 
 and services, while the latter is determined by de- 
 ducting from gross income all cost involved in its acquisi- 
 tion, excepting the exertion, if any, on the part of the 
 recipient. For example, A is a manufacturer. His 
 annual sales (gross income) amount to $100,000. His 
 expenses of production are $85,000. His net income is 
 $15,000. In many cases gross income and net income 
 coincide. Thus an ordinary laborer's wages usually suf- 
 fer no deduction for the tools he uses or the material on 
 which he works. 
 
 Does equity in taxation then prescribe a strictly 
 proportional levy upon net incomes or does it prescribe 
 a rising rate upon the higher net incomes ? Some allege 
 that the higher net incomes should be assessed at the 
 
 * Elements of Political Knowledge, Ch. XI. He is here 
 speaking of gross, not net, income.
 
 S8 TAXATION: ITS EQUITABLE DISTRIBUTION. 
 
 higher rate, inasmuch as " to take loo/. from looo/. is a 
 heavier impost than lOOo/. taken from 10,000/." i It is not 
 ahog-ether easy to see any rational basis for such a claim. 
 It is probably true that if a person A with an unchanged 
 scale of wants and a fixed standard of living should at one 
 time lose $100 out of $1000, he would feel the loss more 
 severely than if he lost at another time (when his posses- 
 sions were greater and his wants not enlarged) $1000 
 out of $10,000. In the first place, however, one's standard 
 of living is almost certain to keep pace with one's income. 
 And even if itdidnot, the argument is wholly inconclusive, 
 inasmuch as it assumes that what is true of the same man 
 at tii'o diifercnt times is true of two different men at the 
 same time, and that A would feel the loss of $100 out of 
 $1000 more severely than B would feel the loss of $1000 
 out of $10,000. Until some better proof of this assertion 
 is offered, one may well remain skeptical in regard 
 thereto.2 The higher net incomes are the usual con- 
 comitants of higher standards of living, and that a cur- 
 tailment of the greater expenses would be less felt than 
 a proportional retrenchment on the part of less preten- 
 tious establishments is open to the gravest doubt. The 
 case, then, for progressive taxation cannot be said to be 
 proved. Two qualifications, however, ought to be added: 
 first, that any system of strictly proportional taxation 
 based on net income w^ould be essentially a species of 
 progressive taxation. Very small incomes cannot prac- 
 
 ' Mill, Political Economy, Bk. V., Ch. TT.. § 3. IVlill is here 
 speakini? of gross income, however, and practically denies this 
 contention except as applicable to the miiiimuni of subsistence. 
 
 ' It ought also to be said that no regard is here paid to the 
 source of income as affecting the necessity of saving for the 
 future. Equal net incomes (as defined") from landed property 
 and from personal exertions are not perfectly fair indices of 
 e(|ual ability, for the latter stops with the death of the recipient, 
 while the former continues.
 
 THE THEORY OF PROPORTIONAL TAXATION. 89 
 
 tically be reached. Even if they could, the cost of tax- 
 collection would make the attempt to reach them unwise. 
 Practically this amounts to degressive taxation so 
 called, namely the exemption of the minimum of sub- 
 sistence. The second qualification is that a decision ad- 
 verse to progressive taxation as a general system does 
 not necessitate the rejection of specific progressive taxes 
 among the constituent parts of a tax system. Thus a 
 progressive income tax, such, for example, as one which 
 exempts incomes up to a certain amount, may be a neces- 
 sary correction of fiscal inequalities resulting from taxes 
 upon the consumption of necessities which absorb a 
 greater fraction of small incomes than of large.^ 
 
 The Theory of Proportional Taxation. — ^We have 
 found reason for rejecting confiscation and progression 
 as norms of fiscal justice in the distribution of taxation. 
 There remains the third scheme of proportional taxation. 
 The first question which arises in regard to propor- 
 tional taxation is, proportioned to what ? In very young 
 economic communities a rough approximation to justice 
 is attempted by laying taxes in proportion to numbers, 
 and by taxing every man alike. This is a primitive 
 poll-tax. But, as Bentham 2 says, " because a man has 
 a head, it does not follow that he has anything else," 
 and the unfairness of such a distribution of taxes is soon 
 apparent. According to what then ought taxes to be 
 proportioned ? In this matter one may readily subscribe 
 to what is essentially Prof, von Helferich's ^ view, which 
 
 * Another powerful objection to the progressive taxation is 
 that it renders impossible the administrative method of '* stop- 
 page at the source." See p. 186 and p. 189. 
 
 ' Principles of the Civil Code, Ch. XV. 
 
 ' Schonberg's Handbuch, Vol. III., p. 136,^5. Prof. v. Helfe- 
 rich distinguishes between the necessary and optional functions 
 of government
 
 90 T/iX/ITION: ITS EQUIT/IBLE DISTRIBUTION. 
 
 may be stated thus: Government benefits when general in 
 character and incapable of measurement or allotment should 
 be paid for from taxes levied on the basis of the subject's 
 net resources: government benefits zvhen concrete, specific, 
 ami measurable should be paid for by the individual re- 
 cipients of such benefits. There are certain offices which 
 the state performs which are advantageous to all its sub- 
 jects. Such are the protection of life and property. It 
 is futile to try to determine what individuals or classes 
 are most (or least) benefited by such state services. 
 " Government," as Mill ^ says, " must be regarded as so 
 pre-eminently a concern of all, that to determine who are 
 most interested in it is of no real importance." As it 
 is impossible to measure the relative advantages derived 
 by various classes of individuals from sucli public ser- 
 vices, it seems a fair presumption that the same propor- 
 tional deduction from each one's net resources is as fair 
 an approximation to what Mill calls " equality of sacri- 
 fice " as can reasonably be attained. Hence the first 
 ])art of the canon. 
 
 On the other hand, it would be folly to ignore the fact 
 that certain government services do specially and spe- 
 cifically benefit particular individuals mainly or perhaps 
 exclusively. Thus a municipality paves a street and 
 l.cnefits to a large extent the abutting property owners. 
 Or it grants a local transit company a franchise and thus 
 assures the corporation a paying business. Or a post- 
 ir.an is sent to deliver a special deliver)- letter, and the 
 sender is the particular beneficiary. In these and similar 
 cases the benefit afforded is largely specific and its cost 
 is measurable. In such cases, therefore, there is good 
 
 ' Political Economy, Book V., Ch. II. See here Mill's 
 refutation of the idea that relative benefits can be measured by 
 the respective incomes enjoyed under the protection of the state.
 
 THE THEORY OF PROPORTIONAL TAXATION. 91 
 
 reason for exacting the price of the service or the 
 afforded privilege from the one thus signally advantaged. 
 
 Supplementary Note. 
 
 The further question may be asked whether the price 
 charged by way of a tax or quasi-tax ought to be gradu- 
 ated so as merely to cover the cost of service (or the value 
 of the public rights surrendered), or whether the tax 
 should rise above this margin, if possible, so as to measure 
 the advantage conferred on the beneficiary in question. 
 For example, suppose the average cost of special postal 
 delivery to be ten cents per letter, and suppose that a 
 charge of fifteen cents per letter could be exacted with- 
 out any sensible diminution in the demand for such postal 
 service. Which rate ought to be asked ? This, I fancy, 
 is a question which must be determined by a large num- 
 ber of collateral considerations, such as the current need 
 of revenue, the indirect effects of such public services, 
 the general character of such letters — commercial, social, 
 or otherwise. In general, however, it ought to be re- 
 membered that the government has no interest analogous 
 to that of a private firm in making a net profit out of the 
 enterprises it conducts. Provided the cost is covered, 
 the sacrifice of net profits corresponds to an increase in 
 the " consumer's rent " obtained by the one who employs 
 the government agency.
 
 CHAPTER IV. 
 
 TAXATION : ITS PRACTICAL EFFICIENCY. 
 
 Adequacy of Tax Revenue. — Up to this point we have 
 studied taxation mainly on its outer side. That is to 
 say, we have viewed taxation primarily as an objective 
 economic phenomenon, and have not asked what rules 
 should guide the financier with whom rests the origina- 
 tion or the execution of tax laws. At this point we take 
 up the subject of taxation on its inner side, as it were, 
 and inquire what principles must guide the legislator 
 and finance minister in this business of raising revenue. 
 The general features of taxation he must, of course, un- 
 derstand. The essential nature of a tax, its processes of 
 shifting, the applicable norms of equity — all these con- 
 stitute an indispensable part of a financier's equipment. 
 But they are rather the postulates on which he acts than 
 the problems which immediately press upon him for 
 solution. The paramount demand zvhich a practical finan- 
 cier makes upon any tax system is that it furnish rercnue 
 sufficient for public needs. It is indeed desirable that a 
 tax system be popular; it is important that it be just; 
 but it is absolutely essential that it furnish adequate 
 revenue. Adequacy in finance is like charity among the 
 virtues. Its absence renders all collateral excellences 
 as nothing, and its presence covers a multitude of sins. 
 It therefore becomes a matter of prime importance to 
 determine, first, how a tax system is to be constituted
 
 SINGLE AND MULTIPLE TJX SYSTEMS. 93 
 
 which will afford the requisite amount of revenue; and 
 secondly, to determine how to administer such a system 
 most advantageously, having regard to the interest both 
 of the public treasury and of the individual taxpayer.^ 
 
 Single and Multiple Tax Systems. — If we approach 
 this subject from a purely a priori standpoint, nothing 
 would seem more natural than that the aggregate 
 amount taken by taxation should be raised by a single, 
 uniform process, rather than collected by multiple, im- 
 perceptible, and devious agencies.^ 
 
 We have seen that taxation is in essence a diminution 
 of the amount of income at the disposal of the individual. 
 It does not increase the amount that is deducted from 
 individual enjoyment and use to take it in a single lump 
 sum, or, at least, to take it by a single, uniform process 
 of collection. Indeed there is, it would seem, good 
 ground for believing that actually less would be taken 
 from the taxpayer if tax collection could thus be more 
 economically prosecuted. How then are we to explain the 
 seeming anomaly that everywhere there is a multiplicity 
 of taxes and a variety of methods of tax collection ? No 
 more vivid picture of a plague of taxes has ever been 
 given than by Sydney Smith,^ who described the EngHsh 
 
 * Wagner entitles his two politico-financial canons of taxa- 
 tion Adequacy and Elasticity. Cf. his Finanzwissenschaft, Vol. 
 II., p. 304. To a certain extent one implies the other, but inas- 
 much as exceptional needs of the fisc are met both by increased 
 taxes and by loans, I have judged the matter of Elasticity may 
 be properly treated under the discussion of equilibrium between 
 Income and Expenditure. 
 
 ' A single tax system, it must be understood, does not neces- 
 sarily involve an exclusive tax upon any one particular object 
 of wealth such as land. Mr. George proposed to tax only rental 
 values, it is true, but this is but one out of many possible single 
 tax schemes. If all taxes whatever were raised by a single 
 assessment upon general property alone, we should have an 
 example of a single tax system. 
 
 * Edinburgh Review, 1820, Vol. 32, p. 77,
 
 94 TyiX/tTION: ITS PRACTICAL EFFICIENCY. 
 
 tax system in force after the Napoleonic struggle as fol- 
 lows : " We can inform Jonathan what are the inevitable 
 consequences of being too fond of glory; — Taxes on 
 every article which enters into the mouth, or covers the 
 back, or is placed under foot — taxes on everything which 
 is pleasant to see. hear, feel, smell, or taste — taxes upon 
 warmth, light, and locomotion — taxes on everything on 
 earth, and the waters under the earth — on everything 
 which comes from abroad, or is grown at home — taxes 
 on the raw material — taxes on every fresh value that is 
 added to it by the industry of man — taxes on the sauce 
 that pampers man's appetite, and the drug which restores 
 him to health — on the ermine which decorates the judge, 
 and the rope which hangs the criminal — on the poor 
 man's salt and the rich man's spice — on the brass nails 
 of the cofifin, and the ribands of the bride — at bed or 
 board, couchant or levant, we must pay : — The schoolboy 
 whips his taxed top — the beardless youth manages his 
 taxed horse, with a taxed bridle on a taxed road : — and 
 the dying Englishman, pouring his medicine which has 
 paid 7 per cent., into a spoon that has paid 15 per cent. — 
 fiings himself back upon his chintz-bed which has paid 22 
 per cent. — makes his will on an eight pound stamp, and 
 expires in the arms of an apothecary who has paid a 
 license of a hundred pounds for the privilege of putting 
 him to death. His whole property is then immediately 
 taxed from 2 to 10 per cent. Besides the probate, large 
 fees are demanded for burying him in the chancel ; his 
 virtues are handed down to posterity on taxed marble; 
 and he is then gathered to his fathers, — to be taxed no 
 more." ^ 
 
 The seeming absurdity of such a multiplicity of exac- 
 
 ' For a somewhat similar characterization of the tax system 
 of the United States, see D. A. Wells, Cobden Club Essays, 
 second series, p. 479.
 
 SINGLE AND MULTIPLE TAX SYSTEMS. 95 
 
 tions, no less than a true perception of the increased 
 burden such a number of taxes imposes, has led to 
 various proposals for a simplification and a unification 
 of taxes. Vauban (1633-1707) proposed in the reign of 
 Louis XIV. to establish a tax known as the royal tithe 
 or dime royale which, while it was not to supersede all 
 other taxes whatever, was intended to replace an harass- 
 ing- multitude of fiscal levies. Again at a later period 
 the Physiocrats projected the impot unique as a substitute 
 for the vexatious swarm of taxes which weighed down 
 the French taxpayer. Both Turgot and Mirabeau, 
 however, admitted the impossibility of abolishing at that 
 time all other taxes. Recognize, as we must, the theo- 
 retical shortcomings of the Physiocrats, especially in 
 their identification of the material surplus of extractive 
 industry with the only source of taxation, it is still im- 
 possible not to have a generous sympathy with the ra- 
 tional principle which lay at the basis of their faith. 
 Compared with the administrative pettifogging and the 
 shortsighted pedantry which marked the cumbrous mass 
 of fiscal anomalies then prevalent in France, their clear- 
 cut plans and sweeping designs for financial reorgani- 
 zation have the broad and permanent traces of political 
 genius. ) If experience allowed us to harbor the hope of 
 peoples more enlightened and of governments less ex- 
 travagant, a single tax system might be perhaps realized. 
 Such a project to-day is an Utopian ideal, but a capti- 
 vating ideal none the less. 
 
 The practical difBculties which prevent the realization 
 of a single tax system are, the danger of gross inequality 
 in the distribution of taxes under such a regime, the 
 necessity of suiting taxes to the convenience of the tax- 
 payer, and the difficulties, in the United States at least, 
 which would attend upon the disbursement of revenue
 
 96 TAXATION: ITS PRACTICAL EFFICIENCY. 
 
 among different governmental units. The inequalities 
 which would arise if all taxes were levied upon articles 
 of consumption, for instance, are readily imagined. Peo- 
 ple of smaller means would bear more than their pro- 
 portionate share of the general burden. Similarly, if 
 money incomes alone were taken as the sole basis of 
 taxation, much ability to contribute to public needs 
 would escape. No matter how broad the basis chosen, 
 it seems certain that great inequality would result from 
 any single tax system. While viewed abstractly, there- 
 fore, a number of different taxes may seem an unneces- 
 sarily cumbrous piece of financial machinery, yet such a 
 number of taxes, if kept within due bounds, guarantees 
 a sort of compensatory action which, if it does not secure 
 perfect equity, at least prevents the grossest inequality. 
 The second cause given for the non-establishment of a 
 single tax system is the necessity of suiting taxes to the 
 convenience of the taxpayer. This is a desideratum pre- 
 scribed by considerations of securing smooth adminis- 
 tration no less than by considerations of adequate reve- 
 nue. Roughly speaking, there is no criterion of the 
 convenience which a tax system affords the taxpayers 
 comparable with their general acquiescence in such a 
 system. Such acquiescence may be dictated by motives 
 of inertia, interest, or ignorance. But so long as these 
 continue to be traits of human character, and so long 
 as we confine ourselves to viewing things as they are, 
 rather than as they ought to be, there is no material 
 error in saying that of two tax systems which exact sub- 
 stantially the same amount of objective wealth from a 
 community, that which is the more popular is felt to im- 
 pose the lesser burden. Indeed the greater satisfaction 
 on the part of the general public may even offset what, 
 objectively viewed, is a greater real burden of taxation-
 
 CONSTRUCTION OF A TAX SYSTEM. 97 
 
 This it is that compels modern states to have so large 
 a recourse to what are termed indirect taxes — that is to 
 say, taxes levied in general upon consumable commodi- 
 ties. These taxes normally fall, as we have seen, upon 
 the consumer. They stand in no necessary relation 
 whatever to his taxpaying ability. But for a number of 
 reasons shortly to be given they are in the eyes of the 
 taxpayer more convenient than direct taxes. They come 
 in the disguise of the prices of commodities, which the 
 taxpayer seems to regard with comparatively little aver- 
 sion. In taxation, as elsewhere, " people like to be hum- 
 bugged." Even aside from considerations of equitable 
 distribution, a single tax system would impose too severe 
 a strain upon the moral nature of ordinary humanity. 
 The amount taken from the individual's income by taxa- 
 tion is so considerable in the aggregate that, however 
 economical and reasonable a plan might seem, which 
 would take this amount once for all in a lump sum, there 
 is absolutely no chance of securing for such a project any- 
 thing like popular approval. The taxpaying multitude is 
 like Issachar — " a strong ass crouching down between 
 two burdens," one of which is the necessary load of taxa- 
 tion, and the other the unnecessary encumbrance im- 
 posed by their ignorance of the nature of taxation. 
 
 The third reason for the non-establishment of a single 
 tax system is the difficulty which under pur form of 
 government would arise in the allotment of revenue be- 
 tween the federal and the state governments. If either 
 were exclusively charged with the collection of the tax, 
 the other would soon become politically dependent. If 
 each continued in partial independence of the other to 
 raise taxes, it is difficult to see how a single tax system 
 could be steadily maintained. 
 
 Cpnstructipn of a Tax System. — The foregoing con-
 
 98 TAXATION: ITS PRACTICAL EFFICIENCY. 
 
 siderations force us to acknowledge the practical neces- 
 sity of a complex or multiple tax system instead of a 
 single tax system. Resort must be had to both direct 
 and indirect taxes. It, therefore, becomes necessary to 
 consider the respective merits and defects of these two 
 kinds of taxes. The very terms have been used at vari- 
 ous times in various senses. Nor is it our intention 
 to grope longer than necessary in the dialectical bog in 
 which their meanings have been obscured or buried.^ 
 Originally a direct tax was one whose real burden was 
 borne by the payer in the first instance. J |An indirect 
 tax was a tax which the payer shifted uporb com-:; one 
 else. I This was essentially the sense in which thj Physio- 
 crats employed the terms. Unfort-niately some of the 
 Physiocratic ideas as to what taxes were shifted and what 
 taxes were not shifted proved untenable. Thus it hap- 
 pened that, while the old terms were retained, some taxes 
 which was originally supposed to be unshiftable and 
 therefore direct turned out to be shiftable and there- 
 fore indirect. Thereupon a more cautious distinction was 
 made. John Stuart Mill 2 put it as follows: "A direct 
 
 ' No better example of a long-winded contention about the 
 proper meaning of the terms " direct " and " indirect " can be 
 cited than the recent arguments before the Supreme Court in the 
 i-icome tax cases. The term " direct taxes " in the federal Con- 
 stitution was supposed to have a specialized and technical 
 r caning, to wit, land-taxes and capitation taxes co uoniinr. 
 History was ransacked and philology tortured to make the term 
 mean something else. Whatever other effect the court's 
 decision may have had, it seems to have brought the legal defini- 
 tion of the term into consonance with current economic 
 definitions, athough this was done by traversing former de- 
 cisions which had intimated strongly that only taxes imposed on 
 individuals as such, and land as such (not as a possible or prob- 
 able source of income), were " direct taxes " within the meaning 
 of the Constitution. For a discussion of the various uses of the 
 terms see article by Dr. Charles J. Bullock in Political Science 
 Quarterly, Vol. XIII., No. 3- 
 
 " Principles of Political Economy, Book V., Ch. 3.
 
 CONSTRUCTION OF A TAX SYSTEM. 99 
 
 tax is one which is demanded from the very persons who 
 it is intended or desired should pay it. Indirect taxes 
 are those which are demanded from one person in the 
 expectation and intention that he shall indemnify him- 
 self at the expense of another." Here the intention or 
 desire of the legislator is made the determinant factor in 
 deciding whether a tax is direct or not. Both the earlier 
 and the later criteria used to distinguish direct from 
 indirect taxes are inadequate. The incidence of taxes can- 
 not always be nicely and certainly predicted. Besides, 
 their immediate incidence and their eventual incidence 
 may be different. Hence the impossibility of making 
 incidence the test of the distinction. The intention 
 of the legislator as regards incidence, even if the inten- 
 tion could always be ascertained or presumed, affords a 
 poor basis of distinction. The motives of the legislator 
 in enacting tax laws are complex. The probable inci- 
 dence of the tax is but one of many considerations which 
 influence his action in the matter. It may influence him 
 to a very small degree or to no degree at all. It there- 
 fore seems best to adopt the empirical classification 
 made by administrative officers and the general public 
 as well, and to classify taxes accordingly. It must be 
 admitted that administrative and popular usage in dif- 
 ferent countries differs in certain details. It seems best, 
 however, to note such differences, and to treat them ac- 
 cordingly when dealing with taxation in the concrete, 
 rather than to refine upon existing definitions or add 
 new definitions to the already cumbrous list. Direct 
 taxes may then be described as regularly recurring ex- 
 actions made upon the basis of existing possessions or 
 occupations, whose collection is ordinarily initiated by 
 the treasury officials who are furnished with lists of 
 the tax objects or taxpayers. Indirect taxes are
 
 100 TAXATION: ITS PRACTICAL EFFICIENCY. 
 
 irregularly recurrent exactions made upon the basis of 
 new acquisition, purchase, consumption, or use, whose 
 collection is primarily occasioned by the individuals who 
 thus newly produce, acquire, purchase, consume, or en- 
 joy certain kinds of goods. ^ Hence a tax on existing 
 property, either as an undiffer^itiated whole or on speci- 
 fied parts thereof, or a tax on the income derived there- 
 from, or from pursuits or trades of some time standing, 
 are examples of direct taxes. Taxes on the importation 
 of goods, or on the manufacture of goods, or on the 
 occurrence of certain specified transactions, such as the 
 recording of deeds or the inheritance of property, are 
 indirect taxes. Curtly put, direct taxes are taxes on 
 outstanding possessions; indirect taxes are taxes on new 
 acquisitions. 
 
 Properly to apprehend their respective merits and de- 
 fects it is necessary to consider them from a number of 
 standpoints. These standpoints in the order of their im- 
 portance are: (i) the financial productiveness of the two, 
 (2) their industrial consequences, (3) their influence on 
 the distribution of the tax burden, and (4) their political 
 tendencies. 
 
 Their Financial Productiveness. — The relative amount 
 of revenue derived from these two classes of taxes 
 respectively, varies from one nation to another. In 
 the United States the amount derived from indirect 
 taxes is less than the aggregate derived from direct 
 taxes, although the federal government's receipts come 
 almost exclusively from the first source. Of all na- 
 tions Switzerland derives perhaps the greatest propor- 
 tion of its revenue from direct taxes. The first fact, 
 however, to deserve careful attention is not the vari- 
 able proportions yielded in different states by these 
 two kinds of taxes, but rather the universal recourse
 
 THEIR FINANCIAL PRODUCTIl^ENESS. lOl 
 
 which all states have to both of them. Gladstone once 
 described direct and indirect taxes as two sisters, — the 
 offspring of Necessity and Invention, — " differing only as 
 sisters may differ, — the one being more free and open, the 
 other somewhat more shy, retiring, and insinuating " ; 
 and frankly confessed that, whether from " a lax sense 
 of moral obligation or not," he, as Chancellor of the 
 Exchequer, " thought it not only allowable but even an 
 act of duty to pay his addresses to them both." This 
 universal utilization of direct and indirect taxes goes 
 to show the necessity, or at least the preponderating con- 
 venience, of employing them both. This is due to a 
 number of causes, one of them being the very consider- 
 able amounts annually spent by governments. We are 
 here concerned, however, to trace only the reasons why 
 both kinds of taxes must be used to afford adequate 
 public revenue. Were direct taxes alone employed, a 
 large part, often the larger part, of the population of the 
 state would escape taxation altogether, except in so far 
 as the taxes advanced by the minority were shifted upon 
 the rest of the people. To some extent this would hap- 
 pen, but even then the resources of the many would not 
 be subjected to anything like their normal tax bearing 
 capacity. It is, of course, theoretically possible to im- 
 pose direct taxes upon even the poorest, but the expense 
 of tax-collection would thereby be so enormously in- 
 creased as to make the attempt unjustifiable from a 
 purely fiscal standpoint. '' It is one of the open secrets 
 of finance " that indirect taxes " have a knack for levying 
 on the small resources of insignificant persons which 
 direct taxes have never learned. They know how to 
 coax pennies out of poor people whose names have never 
 been on the tax-collector's books. But they are very 
 sly and have at command a thousand successful dis-
 
 102 TAXATION: ITS PRACTICAL EFFICIENCY. 
 
 guises. High or coniplicatcd tariffs afford them their 
 most frequent and abundant opportunities. Most peo- 
 ple have very short thoughts, which do not extend be- 
 yond the immediate phenomena of direct vision, and so 
 do not recognize the liand oi the government in the hi,L;h 
 prices charged them in the shops. I'cw of us taste the 
 tariff in our sugar, and I suppose that even very thought- 
 ful topers do not perceive the Hcense tax in their whis- 
 key." ^ This, then, is the first reason that both kinds 
 of taxes are employed, namely, to reach taxable ability 
 wherever found. 
 
 As the national wealth grows, the yield from taxes 
 will normally increase, and thus in a w'ay keep 
 pace with the expanding needs of the government. 
 In this tendency to increase there are some important 
 differences between direct and indirect taxes. The au- 
 tomatic growth of indirect taxes is the morie rapid in 
 ordinary times, and their shrinkage is likewise more vio- 
 lent in periods of disaster and crisis. The reason for 
 this is that the occasions of importation, manufacture, or 
 purchase which give rise to revenue from indirect taxa- 
 tion nuiltiply rapidly in times of prosperity, and decrease 
 in hard times even more markedly. This results in a 
 rapid and an automatic growth in the yield from indirect 
 taxes in the first period, and in a marked diminution of 
 such receipts when, on the contrary, production, impor- 
 tation, and sales fall off in number and amount. Direct 
 taxes, on the other hand, imply some estimate of the 
 property or income of the taxpayer. Such estimates 
 cannot be rapidly adjusted to changes in the taxpayer's 
 economic status. Estimates of income may be made 
 each year, it is true, but re-valuations of property take 
 place much less often. The result is that unless the 
 rate of taxation be raised, the increase in the yield from 
 
 ^Woodrow Wilson, Congressional Government, p. 132.
 
 THEIR FINANCIAL PRODUCTIVENESS. 103 
 
 direct taxes is much more tardy than when changed in- 
 dustrial conditions spontaneously enlarge the volume 
 of indirect taxes and reflect themselves in augmented 
 revenues. On the other hand, if the growth of direct 
 taxes is less rapid, it is steadier and less subject to 
 shrinkage in times of need.^ 
 
 There is one further consideration worthy of note in 
 this comparison. That is the relative cost of collecting 
 the two kinds of taxes. This refers, of course, only to 
 the expense which the government is at in the process of 
 collection. It does not take account of the attendant 
 losses inflicted upon the taxpayer. Here the advantage 
 lies generally upon the side of direct taxes. The average 
 cost of collecting taxes runs between two and five per 
 cent, of their total yield. Taking a broad survey of the 
 question, the average cost of collecting indirect taxes 
 approaches the upper limit; the cost of collecting direct 
 taxes lies in the vicinity of the lower limit.^ From the 
 standpoint of financial productiveness we may then con- 
 
 ^ Good examples of these tendencies are cited by Leroy- 
 Beaulieu, Science des Finances, I., p. 229 sq. Thus in England, 
 under substantially similar conditions at the two different 
 periods. 
 
 The income tax (direct) yielded between 1865 and 1879 an 
 increase of 14%. 
 
 The spirit tax (indirect) yielded between 1865 and 1879 an 
 increase of 24%. 
 
 The tendency of indirect taxes to shrivel in times of depres- 
 sion is much more serious than Leroy-Beaulieu represents it. 
 Thus in the United States customs duties in the fiscal year '92-3 
 yielded $203,355,016; in '93-4, $132,818,530. Internal revenue 
 in the fiscal year '92-3, yielded $161,027,623; in '93-4, $147,111,232. 
 
 ^ For details see Leroy-Beaulieu, Science des Finances, I., 
 270 sq.; Ely, Taxation in American States and Cities, p. 90 
 sq.; Bastable, Public Finance, p. 104. An exact statistical 
 comparison of the respective costs of collection is very diffi- 
 cult. The mutually dependent relations of the various adminis- 
 trative bureaus, and the apparent variations in the rate of cost 
 when the total receipts rise or fall below normal complicate the 
 problem enormously.
 
 I04 TAXATION: ITS PRACTICAL EFFICIENCY. ] 
 
 elude that both direct and indirect taxes are necessary 
 to reach taxable capacity in full measure: both are in- 
 strumental in providing for the growing wants of the 
 state, their action in this respect being compensatory 
 to a certain degree in that indirect taxes have the greater 
 rapidity, and direct taxes the greater stability of growth. I 
 And, lastly, it is worth our notice that direct taxes are or- 
 dinarily somewhat cheaper to collect. 
 
 Industrial Effects. — Taxation provides the public ; 
 treasury with the needed funds. This is its primary ; 
 function. But no tax system can be judged solely by 
 its capability to furnish the requisite revenue. A second 
 question must always be asked, namely, how the tax sys- 
 tem affects the national income, the ultimate source of | 
 all taxes. It is possible in finance, as the history of 
 the later Roman Empire shows, to kill the goose that 
 lays the golden egg. In one sense all taxes have the 
 same immediate effect, to wit, the appropriation of a part ; 
 of the national income for public purposes. Exorbitantly 
 high taxes may even lessen the sources whence the na- 
 tional income flows.^ But while both direct taxes and i 
 indirect taxes produce this effect of reducing the amount 
 of wealth individually disposable, indirect taxes not in- \ 
 frequently produce ulterior effects upon the industry of , 
 a nation. These ulterior effects result largely from the ^ 
 manner in which indirect taxes are levied. In general 
 the effective administration of a system of indirect taxes i 
 necessitates certain restrictions upon the ordinary free- j 
 dom of industrial enterprise. For example, a customs J 
 system compels a government to limit the number of | 
 ports of entry. Thus importations are frequently made, 
 not at the place most convenient for buyer and seller, 
 but at the nearest available customs office. This is per- 
 
 See page 14.
 
 EFFECTS UPON DISTRIBUTION OF THE TAX BURDEN. 105 
 
 haps not a very serious restriction upon commercial 
 freedom, as the custom-houses are located at all the 
 great natural ports. It is an impediment, nevertheless, 
 to economic transportation. Again, the indirect taxes 
 which the federal government levies on tobacco and 
 spirits necessitate in those industries a large amount of 
 inspection, espionage, registration, enforced book-keep- 
 ing, and the like, which, if universalized, would be found 
 to be intolerably oppressive. And while it would be 
 absurd exclusively to attribute the tendency toward con- 
 centration in certain industries, to indirect taxation levied 
 on their products, still the facilities offered to large deal- 
 ers, perhaps mainly in the interest of economical fiscal 
 administration, by this system of indirect taxation, go to 
 create monopolies or to intrench them more strongly 
 when once they have come into existence.^ The in- 
 direct cost of indirect taxes is many times greater than 
 their immediate cost of collection. To what extent this 
 is true of various kinds of indirect taxes we shall attempt 
 to show later on. In general it is true that indirect taxes 
 have an ulterior evil effect, restricting industrial enter- 
 prise, hampering trade, and thus obstructing in part the 
 natural growth of the national income. 
 
 Effects upon the Distribution of the Tax Burden. — 
 It is not sufficient that taxes be adequate to the needs 
 of the govenrment ; they ought also in the widest sense 
 of the term to be as little onerous as may be to the tax- 
 payers. Hence they ought generally to be apportioned 
 according to the abilities of the taxpayers. How do 
 direct and indirect taxes respectively stand this test of 
 fairness or equity ? For indirect taxes no substantial 
 claim can be made on this score. Experience has 
 
 ^ See Ely, Taxation in American States and Cities, p. 83 sq.; 
 Cliffe Leslie, Cobden Club Essays, second series, p. 189 sq.
 
 io6 TAXATION : ITS PRACTICAL EFFICIENCY. 
 
 demonstrated pretty conclusively tliat the great revenue- 
 yielding objects are not articles of luxury or conven- 
 ience, but are mainly the so-called necessities, staples of 
 practically universal use or consumption, like wool, 
 sugar, tea, woven goods, and tobacco. There are great 
 difficulties in making any very considerable discrimina- 
 tion between the different grades of these staples so as to 
 impose heavier taxes on the choicer and more expensive 
 kinds. Thus it comes about that when the taxes on 
 such articles have become a normal part of their ex- 
 penses of production, the consumer bears the tax.^ No 
 one pretends that a tax on sugar, for example, stands in 
 any proportion to the respective ability of the various 
 consumers of sugar. A family with an income of $5000 
 does not consume ten times as much sugar as a family 
 with an income of $500. Hence the smaller the ability 
 to pay taxes, the greater is the weight of taxation im- 
 posed by such an indirect tax. 
 
 Direct taxes, when tried by this test of equity, are not 
 found wanting to an equal degree, though they by no 
 means deserve the indiscriminate commendation so often 
 accorded them. By themselves direct taxes cannot be 
 said to " realize justice." In the first place the}- are not 
 universal; they are levied ordinarily upon only a small 
 part of any community. In the second place, they are 
 frequently shifted, in whole or in part, from the nominal 
 payer to the actual user of the property taxed. On the 
 other hand, it must be admitted that direct taxes do 
 more nearly approximate the ideal of fiscal justice than 
 do indirect taxes. They are proportioned to what is 
 supposed to be the taxpayer's ability. And such appor- 
 tionments are, roughly speaking, fairly accurate. More- 
 over, direct taxes are not shifted to any such degree as 
 
 * See page 72.
 
 POLITICAL EFFECTS. 107 
 
 are indirect taxes. Some direct taxes are practically un- 
 shiftable.^ To this extent they are, when viewed alone, 
 more equitable than indirect taxes. The gross injustice 
 of a system based wholly or mainly on indirect taxes is 
 considerably tempered by the addition of direct taxes, 
 especially if these be unshiftable. But the realization of 
 anything beyond a rough kind of equity is generally be- 
 yond the power of the practical financier. 
 
 Political Effects. — The last test to which these two 
 kinds of taxes must be subjected is the political 
 test. Which is the more efficient in educating the citi- 
 zen to understand and to perform his duties as a citizen ? 
 Which is the better calculated to maintain the stability 
 and unity of the body politic ? Here as elsewhere the 
 political doctors disagree. " If all taxes were direct," 
 says John Stuart Mill,^ " taxation would be much more 
 perceived than at present; and there would be a se- 
 curity, which now there is not, for economy in the pub- 
 lic expenditure." This seems very probable^^ although 
 where direct taxes are in vogue there is often wasteful and 
 extravagant expenditure, as, for example, in our muni- 
 cipal governments at present. Even here the most cor- 
 rupt of city governments, as the Tammany regime in 
 New York City shows, have appreciated the necessity of 
 a low tax rate to keep themselves in power. So that 
 Mill's contention still carries weight. On the other 
 hand, it is alleged with some show of reason that a- 
 
 * See page 77. 
 
 'Principles of Political Economy, Bk. V., Ch. VI., § i. 
 
 ' Leroy-Beaulieu's attempt to minimize the importance of 
 this fact (Science des Finances, I., p. 252) by. citing the case of 
 the heavy income tax in England during the Crimean war seems 
 to me very weak. The direct taxes were increased to keep pace 
 with increased expenditure already necessitated by the war. 
 To argue that they did not pacify the war spirit is not at all in 
 point.
 
 io8 TAX/1TION: ITS PRACTICAL EFFICIENCY. 
 
 system composed entirdy of direct taxes would lead to 
 the repudiation of public debts. Our commonwealths 
 have done this in more than one instance.^ It is cer- 
 tainly a grave comment upon existing methods of taxa- 
 tion that there is danger in letting the people understand 
 how great taxes really are, for fear the people may 
 smash a part of our ordinary financial machinery. A 
 resort to an exclusively direct system of taxation might 
 lead to greater future economy in expenditure, and at 
 the same time occasion the repudiation of engagements 
 already contracted. To the administrator the unques- 
 tionable advantage attaching to indirect taxes is their 
 popularity. The maintenance of the status quo may be 
 at times of far vaster importance than rigid govern- 
 mental economy or the promotion of a more widespread 
 interest in politics. While it is difficult to forecast 
 social tendencies, the opinion might perhaps be reason- 
 ably hazarded that, while anything like the remission of 
 most existing indirect taxes is very improbable, ' demo- 
 cratic finance ' seems to be moving in the direction of 
 increased direct taxation. Income taxes are the product 
 of the nineteenth century, and the large taxation of in- 
 heritances points in the same direction. 
 
 General Conclusions as to the Construction of a 
 Tax System. — The complex nature of the problem of 
 constructing or reconstructing a tax system even in 
 part will be evident when one bears in mind the many 
 conflicting advantages and disadvantages of direct and 
 indirect taxes. Besides the vague general principle that 
 both are necessary in present conditions, no general rule 
 can be laid down. At various times different considera- 
 tions are uppermost. When revenue is urgently needed 
 
 * Cf. W. A. Scott, Repudiation of State Debts in the United 
 States.
 
 DIRECT AND INDIRECT TAXES IN THE UNITED STATES. 109 
 
 the collateral evil effects of indirect taxes must often be 
 endured. When revenues are abundant and pubHc 
 needs less pressing, scope is afforded for securing 
 greater equity in taxation, enlarged freedom in indus- 
 trial undertakings, and increased interest in good gov- 
 ernment. The application of the general principles to 
 concrete situations must be determined by the practical 
 financier. 
 
 Direct and Indirect Taxes in the United States. — The 
 federal government derives by far the greater part of its 
 income from indirect taxes. The main sources of this 
 revenue are (i) customs duties levied upon imports, 
 (2) excises or internal revenue taxes levied mainly upon 
 the production of spirits and tobacco, and (3) postal 
 receipts. The last we shall treat under the head of 
 income derived from the performance of services by the 
 state. The tax upon the national banks is almost the 
 only direct tax imposed by the federal government. 
 This is of minor importance.^ 
 
 The commonwealths and the local governments, on 
 the other hand, derive almost all of their revenue from 
 direct taxes. Of these the (i) general property tax and 
 (2) corporation taxes are the most important. Inherit- 
 ance taxes are collected by some of the commonwealths. 
 The causes for this assignment of direct taxes to the 
 one and indirect taxes to the other are partly legal 
 and partly economic. The Constitution of the United 
 States (Art. I, Sec. 10) excludes the states from rais- 
 ing revenue by means of customs duties. The fed- 
 eral government itself is prohibited from taxing ex- 
 
 ' The recent taxes imposed by the Act of June 13, 1898, to 
 raise money for the Spanish war are not covered in this descrip- 
 tion. So long as their permanence is doubtful, it seems best to 
 omit them from consideration here. See Appendix A.
 
 no TAXATION: ITS PRACTICAL EFFICIbNCY. 
 
 ports. There is, however, no direct legal restriction 
 to forbid the states from resorting- to internal revenne 
 taxes upon articles manufactured within the- rrisdiction. 
 To do this, however, would result in driving these indus- 
 tries to other states where no such taxes were imposed, 
 or where, if imposed, they were less severe. Nor c^n a 
 state effectually resort to taxation upon such articles 
 manufactured elsewhere, but brought for consumption 
 within their own jurisdiction. Such attempts would 
 probably be adjudged interference with mterstate com- 
 merce, whose control is jealously guarded by the 
 federal government (LI. S. Cons., Art. I, Sec. 8). 
 Thus the states and the local governments are practi- 
 cally restricted to direct taxes. On the other hand, 
 while the federal government has the power of collect- 
 ing direct taxes, such taxation must be territorially uni- 
 form throughout the land (U. S. Cons., Art. I, Sec. 8) ; 
 and must also be apportioned among the states " ac- 
 cording to their respective numbers " (U. S. Cons,, 
 Art. I, Sec. 2). As this second provision would so 
 grossly violate all considerations of an equitable distri- 
 bution of taxation, inasmuch as the aggregate wealth 
 of the older sections is largely in excess of their numeri- 
 cal proportion of the total population, the federal gov- 
 ernment is practically restricted to indirect taxes. 
 
 The next part of this work will be devoted to the con- 
 sideration of taxation in the concrete, beginning with 
 Direct Taxes, mainly collected by the states and local 
 governments, especially the general property tax and 
 corporation taxes. Thereafter indirect taxes, mainly col- 
 lected by the federal government, particularly customs 
 and the internal revenue, will be reviewed. Lastly, we 
 shall glance at the subject of income taxation (direct), 
 practically unused at present by either federal or state 
 governments.
 
 CHAPTER V. 
 
 STATE TAXATION (MAINLY DIRECT). 
 
 History of the General Property Tax. — The federal 
 g-overnment, as explained in the last chapter, has pre- 
 empted the domain of indirect taxation. This result is 
 due partly to the constitutional inhibition laid upon the 
 commonwealths forbidding them to impose duties on 
 imports, partly to the economic necessity under which 
 the commonwealths labor of abstaining from taxing any 
 productive enterprise ' 'that could or would run away" ' 
 to another jurisdiction which might deal with it more 
 considerately. The consequence is that our state and 
 local governments are forced to raise nearly all of their 
 revenue by direct taxes. 
 
 By far the greater part of this revenue is derived from 
 the general property tax. This tax. or, more properly, 
 this tax system, consists in raising revenue upon a valua- 
 tion of substantially all property within reach of the tax- 
 ing power. The rate of taxation is ordinarily" uniform, 
 irrespective of the different kinds of property taxed and 
 without regard to the ownership ^ thereof. Notwith- 
 
 ' "Never tax anything that would be of value to the state, 
 that could or would run away, or that could or would come to 
 you." This canon of taxation is contained in a pamphlet en- 
 titled "The Tax Question" (1873) by Mr. Enoch Ensley. 
 
 * In some states personal property is taxed at a lower rate 
 than real e-^tate. 
 
 ^ Frequently the property of ecclesiastical, charitable, and 
 educational institutions is exempt from taxation ; the property 
 of the state and of the United States always. 
 
 Ill
 
 112 STATE T.IXATION. 
 
 Standing the endless variety in the details of the tax 
 systems of the various states, the underlying theory of 
 taxation embodied in the general property tax ^ is every- 
 where unmistakably the same. The system assumes that 
 the payment of taxes is the duty of every property owner, 
 that the value of the owner's total property is the index 
 of his ability to contribute to the public treasury, and 
 that this measure of ability can with measurable ac- 
 curacy be ascertained — three propositions of which the 
 last two contain far less than the whole truth. 
 
 The universal prevalence of this system warrants a 
 word of explanation with regard to its history. In early 
 colonial days taxes were light and frequently irregular 
 in occurrence. The general treasurer of Rhode Island 
 in 1649 reported that " he had received nothing and had 
 nothing in his hands." ^ The town clerk of Providence 
 wrote to Sir Henry \^ane : " Sir, we have not known 
 what an excise means. We have almost forgotten what 
 tythes are ; yea, or taxes, either to church or common- 
 wealth." The expenses of the colonial governments 
 were frequently met by the sale of public lands, or 
 by their rentals, by the fines and fees exacted in 
 the courts, and not infrequently by having recourse 
 to such questionable shifts as public lotteries or to 
 
 ' The name of a tax, it must always be borne in mind, refers 
 to the basis of its exaction, and does not connote a discrete 
 source of income or fund of property. All taxes take the prop- 
 erty of individuals. This is, in the last resort, the only source 
 of taxation. But the general property tax levies on the tax- 
 payer upon the basis of the capital value of his total property; 
 the income tax, upon the basis of his current income: indirect 
 taxes, upon his purchases of particular commodities. The different 
 taxes may be compared to different faucets to the same tank. 
 They may all draw upon the reservoir at the same time. For 
 a pood explanation of the relation of capital and income see 
 Hadley, Economics, p. 464. 
 
 * Ely, Taxation in American States and Cities, p. io8»
 
 HISTORY OF THE GENERAL PROPERTY TAX. 1 13 
 
 such unquestionable frauds as issues of fiat money. 
 Oliver Wolcott, Secretary of the Treasury, made 
 a report to Congress in 1796 of the tax methods 
 then in vogue in the various states. In this document 
 it appears that some of the states had already adopted 
 the general property tax.^ The majority, however, 
 enumerated certain specific objects ^ of taxation, such 
 as land, slaves, and polls ; and assessed these objects 
 not at their value in money, but at an arbitrary 
 valuation which listed all land of the same grade at so 
 much an acre, slaves at so much a head, and so forth. 
 The transition to a tax based upon the total value of 
 property as an undifferentiated whole was inevitable. 
 For wealth grew apace. New forms of property multi- 
 plied. Town lots became more valuable than equal 
 areas of grazing land. The ingenuity of the legislator 
 was tortured to keep the swollen legal list of taxable 
 objects abreast of the constantly growing complex 
 which comprised the community's wealth. Every new 
 kind of chattel slipped through the meshes of the legal 
 net until, in one state after another, the unequal contest 
 ended in the adoption of an omnibus clause. Instead 
 of naming specific taxable objects and by implication 
 exempting all other objects, the new system specified 
 the exemptions, if any, and taxed everything else. This 
 change, necessary as it proved, was not the outcome of 
 diversified kinds of property solely, but was due as well 
 
 ^ '■ Taxes are imposed on the mass of property, real and per- 
 sonal, with certain exceptions, in the states of Rhode Island, 
 New York, Delaware, and Maryland." Wolcott's Report. 
 Annals of Congress, 1796-1797, p. 2700. 
 
 ^ It is perhaps questionable whether there was at first any 
 very radical difference in the basis of tax apportionment in the 
 various states. The kinds of property were so few in number 
 and so comparatively uniform in value that a few categories 
 of taxable objects practically coincided with the sum total of 
 property.
 
 114 STATE TAXATION. 
 
 to the growing complexity of ownership in mucli of the 
 property of these expanding- communities. The eco- 
 nomic complexion of our early colonial settlements was 
 extremely simple. They were largely agricultural com- 
 munities in which land was plentiful and to be had for 
 the tilling. We should be inclined to smile at the 
 scanty inventory of chattels possessed by the ordinary 
 colonial households, but what they had was their own. 
 They had to work hard for a bare subsistence, but they 
 were not, at least at the beginning, paying interest on 
 mortgages. Soon certain handicrafts arose, and later 
 still manufactures under the factory system sprang up, 
 especially in thriving towns and cities. Not only did 
 wealth increase in amount and in kinds, but much of it 
 was employed by those who had borrowed it. The 
 ' loan fund ' of available capital which the owners were 
 willing to lend out at interest began to assume con- 
 siderable dimensions. Where a borrower, therefore, de- 
 ducted from the value of his property the amount which 
 he owed, it was thought that the lender, whose equity 
 was in the form of a note, mortgage, book-account, or 
 bill of exchange, would escape taxation unless all prop- 
 erty evidenced by credit paper were included among 
 taxable objects. So it came about that all property, 
 personal or real, was made subject to taxation, and or- 
 dinarily at the same uniform rate. 
 
 This process of transforming the elementary tax sys- 
 tem into the general property tax may be best traced in 
 some of our central states where the transition was rapid 
 and comparatively recent. • In the state of Ohio ^ land 
 was originally classed in three grades, and every hundred 
 acres of the same grade was taxed at the same rate. 
 
 'Ely, Taxation in Anierican States and Cities, p. 135; also 
 p. 146 sg,.
 
 ADMINISTRATION OF THE GENERAL PROPERTY TAX. 115 
 
 Taxes for local purposes came from this tax on land 
 combined with a poll-tax and taxes on specified farm 
 chattels, each at an arbitrary valuation. ^ The tax laws 
 of 1825 and 183 1 mark the futile attempt to enumerate 
 the new kinds of wealth which had begun to appear. 
 Farm land was differentiated from town lots. The capi- 
 tal of merchants and brokers, " money at interest, all grist 
 and saw mills, all manufactures of iron, glass, paper, 
 clocks, and nails, all distilleries, breweries, tanneries, all 
 iron, brass, and copper foundries," were expressly in- 
 cluded. When the state constitution was revised in 
 1851 this procedure of encyclopedic enumeration was 
 given up, and what was practically an omnibus clause 2 
 was inserted — a clause so uncompromisingly rigid as to 
 specifically include the bonds of the state ^ and of its 
 local governments among taxable objects. Ex uno disce 
 omnes. By the end of the civil war the general property 
 tax had become practically universal in our common- 
 wealths. 
 
 Administration of the General Property Tax. — The 
 first step in the administration of this tax consists in 
 listing the community's property. Here the legal dis- 
 tinction between real estate and personal estate furnishes 
 a rough basis for the primary subdivision of the aggre- 
 gate of the community's taxable wealth. Real estate 
 ordinarily includes land with its fixed improvements, 
 such as buildings. In computing the value of real 
 
 * All horses, for example, at $40 a head. 
 
 ^ General property tax laws at present frequently enumerate 
 specific kinds of property which are to be listed for taxation, 
 but they make no attempt to enumerate the various industries 
 whose property is to be taxed. 
 
 ° Governments frequently exempt their own bonds from tax- 
 ation, and thus secure a higher purchase-price for them than 
 otherwise could be obtained. The higher price makes good the 
 loss of future taxes on the bonds.
 
 ii6 STATE TAXATION. 
 
 estate, however, deductions are not generally made for 
 mortgage indebtedness resting thereon. Thus a house 
 worth $20,000, but mortgaged for $5000, might stand as- 
 sessed jointly with the mortgage at $25,000.' Personal 
 estate includes all property not classed as realty. Thus 
 chattels such as live stock, raw materials, jnachinery, and 
 furniture are examples of personal estate. Property the 
 legal title to which is evidenced by credit paper is also 
 classed as personalty. It is worthy of notice that the eco- 
 nomic corpus of real and personal property is frequently 
 identical. It is therefore a mistake to confound the legal 
 title of property with its economic corpus or material 
 embodiment. Strictly speaking, a mortgage is not 
 property, but the legal title to a part of the property on 
 the basis of which the mortgage was issued. The same 
 is true of notes, bonds, stocks, and bills of exchange.^ 
 
 The primary listing and valuation of real estate is or- 
 dinarily intrusted to assessors, whose operations are con- 
 fined to the smaller political subdivisions, such as town- 
 ships or city districts. These assessors are generally 
 under the control or supervision of a board of officials 
 whose jurisdiction embraces the city or county. The 
 valuations of real estate in the smaller areas are thus 
 subject to review and correction, so that the basis of 
 estimate is made approximately the same for the larger 
 area. Within that area (ordinarily the county) the 
 valuations of realty are relatively fair. Opportunity is 
 normally afforded to any one who may feel aggrieved at 
 
 ' In Massachusetts, Connecticut, New Jersey and Colorado 
 mortgage debts are not taxed when the real estate has been as- 
 sessed without deductions for such debts. 
 
 * Even government bonds are substantially nothing more or 
 less than a title to a part of the productive property of the state 
 that issues them, and also a lien upon a part of the future product 
 of the state's citizens.
 
 ADMINISTRATION OF THE GENERAL PROPERTY TAX. n? 
 
 the valuation attached to his property to appear and 
 state his case. ReHef may be afforded where a clear 
 case of unjust valuation is made out by the com- 
 plainant. When the various counties of the state have 
 completed their respective tax lists, these lists are fre- 
 quently subject to review by a State Board of Equaliza- 
 tion. The object of this tribunal is to make such an 
 equitable adjustment between the county valuations as 
 the supervisory county or city board has made between 
 their respective townships or city districts. The per- 
 sonal knowledge of local conditions which makes pos- 
 sible an equitable readjustment of valuations within a 
 city or a county renders similar work on the part of the 
 state board practically impossible. Thus, while within 
 cities or counties the valuations of real estate are rela- 
 tively fair, as between the various counties of the state 
 (or as between the various townships or towns when 
 there is no county board of equalization), these valua- 
 tions are flagrantly unjust. In one section real estate 
 is returned at its market value, in another at twenty- 
 five per cent, thereof. It thus happens that one section 
 may pay towards state purposes twice or three times as 
 much as its equitable share. These valuations of real 
 estate are ordinarily revised and corrected only after in- 
 tervals of some considerable duration, sometimes but 
 once every decade. Thus, although a relatively fair es- 
 timate of realty is originally embodied in the assessor's 
 list, its fairness is likely to undergo material alteration 
 before the next revision, some property rising and some 
 falling in value in the interim.^ 
 
 The attempt is generally made to secure a complete 
 
 ^ In New Jersey the primary assessment of real estate is 
 made frequently by the owner, and its value is annually stated 
 upon the tax return. Thus a yearly valuation of real estate is 
 effected, though at the risk of under-estimate in the first instance.
 
 <■•' 
 
 ; 
 
 Il8 ST}4TB TAXATION. 
 
 list of personal prop.Qrty by requiring the owners thereof 
 to make out an inventory of their personal estate and 
 to affix thereto its true value. This " disclosure,'" as it 
 is humorously called, is generally supported upon oath 
 or affirmation. The law which determines the place at 
 which property of various kinds shall be taxed varies 
 from state to state, the general rule being that realty is 
 taxable where it is situate, and personalty at the resi- 
 dence of the owner.i In this self-assessment of per- 
 sonalty opportunity is afforded for deduction on account 
 of debts owing by the taxpayer. It is perhaps needless 
 to say that this deduction is- made with unfailing scru- 
 pulousness, even for fictitious de,bts that have been 
 specially — often fraudulently — contracted to serve this 
 very purpose. In general, most personal property is not 
 listed at all, and the value attached to that listed is often 
 absurdly small. The same equalizing process already 
 described with reference to real estate is frequently ap- 
 plied to the valuation of personalty. The aggregate 
 valuation of real and personal property serves as the 
 basis upon which taxes for both the commonwealth and 
 the local governments are ordinarily based. The actual 
 collection of these taxes is commonly intrusted to the 
 officers of the smaller governmental units. The tax col- 
 lected is sufficiently large to cover the expenses of the 
 local unit as well as the local unit's share of the county 
 and state taxes. Remittance is duly made to the county 
 and state treasuries of the quotas apportioned to the 
 township or city where the taxes have been actually col- 
 lected.2 
 
 ^ See Cooley, The Law of Taxation, p. 369. Some states tax 
 chattels, where they are found, and other personaUy (credits) 
 at the residence of the owner. 
 
 "Tliis description of tlie .Ljcncral ])ropcrty tax must be under- 
 stood to be a general description of the typical features of the
 
 DEFECTS OF THE GENERAL PROPERTY TAX. 119 
 
 Defects of the General Property Tax. — The principles 
 
 on which the general property tax is based are that prop- 
 erty owners only should pay taxes; that the aggregate 
 wealth of each owner is the fairest index of his taxpaying 
 ability; and that this index can be approximately ascer- 
 tained. The first two propositions are questionable; the 
 third is almost always untrue. Accepting as we do the 
 dictum that each should pay taxes according to his 
 ability, we may justly question the assertion that the 
 absence of property indicates total inability to contribute 
 to the needs of the government. Is the salaried indi- 
 vidual who has amassed no property, having saved 
 nothing out of his entire income, unable to bear any 
 share of the public burdens ? It may be inadvisable on 
 grounds of fiscal expense to attempt the collection of 
 direct taxes from those who possess but a minimum of 
 goods, but this procedure is dictated, not by considera- 
 tions of equity, but on grounds of economical financial 
 administration. That property is the fairest gauge of 
 taxpaying ability is a canon whose truth depends upon 
 the assumption that the individual's income will in the 
 long run be proportioned to his realized wealth. This 
 may be approximately true in the long run, but that 
 there are numerous exceptions in individual cases is no- 
 torious. That a relatively fair disclosure of the total 
 wealth of individuals is attainable is an assertion which 
 the facts of financial history abundantly disprove. It is 
 chiefly on this last ground that the tax on general prop- 
 
 system, but not equally applicable to every commonwealth. 
 In some states the commonwealth collects the tax on person- 
 alty in whole or part and remits to the local governments 
 their respective shares. In New Jersey the taxes for state 
 purposes are raised mainly by the tax on corporations, and 
 without recourse to a state tax on the aggregate of realty and 
 personalty, except for education.
 
 lao STATE TAXATION. 
 
 erty so frequently fails to secure the just distribution of 
 the tax burden. 
 
 First, as between different communities. The unfair- 
 ness in the basis of taxation for state purposes has al- 
 ready been explained.^ As a partial mitigation of this 
 inequality it may be urged that the tax levied for state 
 purposes is commonly light. This is happily true, but it 
 does not affect the principle involved. It might be sup- 
 posed that the overtaxed sections would get some relief 
 from the partial transfer of their property to the more 
 lightly taxed sections, or that they would shift their taxes 
 ultimately by a diminished rate of improvement upon 
 their real estate. Individuals might thus get some re- 
 lief. It is well known that the rate of taxation is or- 
 dinarily taken into account by those who are deciding 
 upon the location of an industrial enterprise. But the 
 actual fact is that the state tax is a variable quantity, nov^ 
 higher, now lower ; 2 that it is imposed mainly upon real 
 estate from which the tax burden is with difficulty 
 shifted, and that the permanence of a low rate in an\ sec- 
 tion is not assured. So that the probability is that the 
 extra burden is borne at least for a considerable time 
 by the overtaxed section, and that the readjustment 
 through shifting processes is slow and generally incom- 
 plete. 
 
 More serious far than the unfairness between sections 
 is that between individuals whose possessions are differ- 
 ently constituted of real and personal estate. As already 
 indicated, the great mass of personal property is never 
 taxed at all. It escapes through many devices. Omit- 
 ting entirely the question of collusion ^ between the tax- 
 
 * See page 117. 
 
 * See Hadley, Economics, p. 459. 
 
 ' I know personally of an estate which cost over a million
 
 DEFECTS OF THE GENERAL PROPERTY TAX. 12 1 
 
 payers and the assessors, who ' for ways that are dark ' 
 are certainly ' pecuHar,' personal estate dodges taxa- 
 tion by some of the following methods: 
 
 (a) The owner makes no return at all. Very gen- 
 erally the assessors first proceed to list real estate, and 
 then require the return of personal property to be made 
 by the owner of the realty. If the owner of personalty 
 owns no real estate, his name is frequently omitted al- 
 together from the tax list. 
 
 (h) Some personalty is purposely stricken from the 
 tax list by the assessors. Stock in trade is often un- 
 touched by local assessors who fear to drive business to 
 another place. 
 
 (c) Much personalty is never listed by the owners. 
 Debts due from persons living at a distance are very 
 infrequently disclosed. Stocks of non-resident corpora- 
 tions are seldom returned by the owner. Mortgages are 
 not often uncovered by the mortgagee. 
 
 (d) Personal property is enormously undervalued. 
 All doubts of the solvency or financial status of debtors 
 are resolved by the taxpayer in his own favor. 
 
 (e) Vast deductions are made for fictitious debts. 
 Frequently when taxes fall due there is an enormous 
 nominal conversion of property into forms of wealth 
 that are by law exempted from taxation. 
 
 The extent to which personal property escapes taxa- 
 tion may be estimated by comparing the amounts of 
 realty and personalty returned for taxation with the true 
 valuation thereof. 
 
 The last Census ^ shows that in 1890 the real estate in 
 the United States returned for taxation was valued at 
 
 of dollars assessed at a valuation of less than one hundred 
 thousand, while other property in the same section is generally 
 assessed at over half of its market value. 
 
 ' See Abstract of the Eleventh Census, p. 188 sq.
 
 122 STATE TAXATION. 
 
 18,956 millions of dollars and the personal property at 
 6516 millions. The true valuation of real estate in 1890 
 the Census estimates at 39,54^)- millions, and ^t personal 
 property ai. 25,492 millions. The older and wealthier a 
 community is, the greater is the relative amount of its 
 personal property. We should expect, therefore, to find 
 in the larger cities personal property aggregating more 
 than real estate. Just the reverse is the case. In New 
 York City 1 in 1893 real estate was valued at 3626 uii.- 
 lions of dollars, personal property at 411 millions. In 
 Brooklyn in 1895 the personal property returned v.a- 
 only a triHc over one per cent, of the total valuat on. 
 In New Jersev in 1893 the total taxable valuation was 
 768 millions, of wdiich realty comprised 651 millions.- 
 Where the relative amount of personal property is 
 greatest the amount disclosed for taxation is generally 
 least. This is due in part to the fact that personal prop- 
 ertv in the form of farm chattels is readily discoverable, 
 while personal property evidenced by credit paper is 
 generally inaccessible to the collector. Nor is this ten- 
 dency for personalty to escape taxation on the decrease. 
 The tendency is strongly in the opposite direction. The 
 most stringent laws have been repeatedly passed to 
 effect the disclosure of personal estate, but in vain. The 
 board of assessors of Boston is described by Mr. Thomas 
 G. Shearman as being an honest and able body, '" fa- 
 natical believers in the taxation of personal property.'" 
 and ■' armed by law with almost despoLc powers of valu- 
 ation." In 1889 the whole- amount of taxable personalty, 
 exclusive of bank stock, which they cculd di;^cover was 
 $39,000,000. " Being dissatisfied with this estimate, 
 which was all that was justified by any facts which they 
 
 ' See Seligman, Essay in Taxation, p. 27 sq. 
 'Legislative Documents of N. J., 1893.
 
 DEFECTS OF THE GENERAL PROPERTY TAX. 123 
 
 could state, they proceeded to multiply it four and a half 
 times by a mere guess." ^ Some years ago there was 
 passed in Ohio a law known as the tax inquisitor law, 
 or more commonly as " the blackmail law." This em- 
 powered individuals who would disclose their neighbors' 
 personal property on which taxes had been due but not 
 paid, to collect the back taxes. A large part of the tax 
 thus collected went to the informer. The result has 
 been that some wealthy citizens changed their legal 
 residences to other states.^ Some states have sought 
 to uncover personal property through the machinery 
 of oaths, affidavits, and the like. The effective- 
 ness of such laws is inconsiderable. If Jove laughs at 
 lovers' vows, he probably guffaws at taxpayers' oaths. 
 Even the Psalmist's hasty allegation of universal men- 
 dacity needs little qualification in this province of 
 finance. Where the taxpayer's conscience is tender he 
 finds (as one has put it) that virtue is perforce its own 
 reward. This phase of the system is described in one 
 tax report as " a tax upon ignorance and honesty " ; 
 and in another report we are told that " the payment of 
 the tax on personalty is almost as voluntary and is con- 
 sidered in pretty much the same light as donations to 
 the neighborhood church or Sunday-school." ^ 
 
 The most glaring unfairness occasioned by the general 
 property tax is between the farmers as a class and city 
 residents. The farmers pay taxes on a greater part of 
 their personal property than do the urban taxpayers. 
 Whether this is in part shifted is perhaps an open ques- 
 tion, but the onus of shifting the burden is upon the 
 agricultural sections, and it is highly probable that much 
 
 * Natural Taxation, p. 81. 
 
 ' See Ohio Tax Inquisitor Law, by T. N. Carver: 
 Economic Studies, Vol. III., No. 3. 
 
 ' See Seligman, Essays on Taxation, p. 31 sq.
 
 124 STATE TAXATION. 
 
 of the unfair burden is never shifted at all. A piece of 
 unfairness sometimes involved in the general property tax 
 is that those who hold their property unencumbered 
 by mortgages pay taxes upon their entire property. 
 Those whose property, on the contrary, is mortgaged 
 sometimes pay taxes only on the unencumbered part of 
 their estate; and if the mortgagee pays any tax at all 
 upon the mortgage, he is probably more honest than 
 most of his class. The result of the system is a premium 
 on indebtedness and an incentive to dishonesty. 
 
 Transformation of the General Property Tax. — In the 
 troubled waters of commonwealth finance there are two 
 rocks of offence. Both are found in the operation of 
 the general property tax. The first is the unfairness 
 wrought by the taxation of realty for state purposes, the 
 second is the injustice resulting from the futile attempt 
 of local governments to tax personal estate. The former 
 produces inequality in the tax burdens of different locali- 
 ties; the latter, inequality in the tax burdens of different 
 classes of property holders. 
 
 The remedy for the first evil is not difficult to find. 
 It is the abolition of the state tax on real estate. The 
 basis of assessment upon which this tax is now imposed 
 is unfair as between different sections. This basis of 
 assessment is also incapable of any very material im- 
 provement through the machinery of state 'boards of 
 equalization. If the temporary retention of real estate as 
 a source of state taxation is necessary, as it may well be 
 in the newer commonwealths where agriculture is almost 
 synonymous with industry, an apportioned tax might 
 be substituted for a rated tax. That is, instead of im- 
 posing a uniform rate of taxation upon the valuations 
 now made of different sections, a state board or com- 
 mission might approximately determine the respective
 
 TRyiNSFORMATlON OF GENERAL PROPERTY TAX. 1 25 
 
 taxable ability of different sections of the state. Upon 
 these sections in accordance with their taxable ability 
 as thus ascertained a certain sum of money would be 
 raised by the local collectors. In most of our states, 
 however, the entire abolition of commonwealth taxation 
 upon real estate seems feasible. The comparatively 
 modest budgets of the commonwealths, as well as the 
 torpid growth of these budgets, will permit the states to 
 forego their revenues from this source. And conversely, 
 the enormous aggregate expenditure of local govern- 
 ments, as well as its rapid expansion, seems to warrant the 
 segregation of real estate for purposes of local taxation. 
 The growing wants of local governments will thus have 
 an adequate source of supply in the growing productive- 
 ness of real estate, especially within our larger cities and 
 towns. Real estate is visible and tangible, and thus in- 
 capable of escaping the tax collector. Its fair valuation 
 within local limits is perfectly practicable and is now ap- 
 proximately realized. Under the present system of the 
 taxation of general property real estate pays an ever- 
 increasing percentage of city taxes. The loss occasioned 
 to local governments, therefore, by the relinquishment of 
 local taxes on personal property would be readily re- 
 couped by a slight addition to the burden now imposed 
 on real estate. Moreover, the collateral advantages of 
 such an arrangement would largely recompense real 
 estate owners for the small additional load on realty. 
 
 For purposes of fiscal adequacy it seems best in the 
 taxation of real property to make no deduction for mort- 
 gage indebtedness, or indeed for indebtedness of any 
 kind. A provision of this kind ought perhaps not to 
 be imposed at once and without warning, for fear of 
 prejudicing vested rights and of disappointing the an- 
 ticipations of owners whose property has been mort-
 
 126 ST/tTE TAXATION. 
 
 gag-ed under the expectation of tax abatement for debts. 
 It might safely be appHcd, however, to all future in- 
 debtedness, and to all debts whatever at the expiry of 
 a stated term. No abatement for indebtedness will in the 
 long run be no very substantial hardship to the debtor. 
 The increase in the amount taxable will be offset by a 
 lower rate of interest on his loans, while the greater 
 amount of property thus brought under contribution 
 (much of which would otherwise escape altogether) will 
 tend to lessen his tax quota. ^ Such a refusal to deduct 
 for debts in assessing property will also lessen the in- 
 justice of taxing those who are free from debt at a higher 
 rate than those whose encumbrances are large. 
 
 Assuming that the commonwealth governments im- 
 pose no taxes on real estate, it is inevitable that personal 
 property should furnish the greater part of state rev- 
 enues. The reasons for such a policy are weighty. Be- 
 sides the gain in equity derived from relinquishing real 
 estate to the local governments, the needs of the states 
 can be adequately met by taxing personalty. The ad- 
 ministrative apparatus, moreover, for reaching much 
 personal property is possessed by the state governments 
 alone. This latter fact accounts for the widespread 
 adoption by our states of special machinery for taxing 
 many corporations, such as railroads and banks. The 
 extent and power of some of these corporations have 
 grown to such a degree that they are but imperfectly 
 amenable to the tax power of local governments. Tl:e 
 
 ' Plehn, Taxation of Mortgages in California (Yale Review, 
 May 1899,) denionstralcs that the rate of interest on morlgages 
 in that state has equalled the market rate of interest plus the tax 
 plus the cost of shifting the tax. This has been the result 
 under a law which taxed the owner on the value of property less 
 the value of mortgage indebtedness thereon, and which taxed the 
 mortgagee on the value of the debt. " The borrower is worse ofif 
 than he would be if the mortgage were exempt, and the mortgagor
 
 TRyiNSFORMATION OF GENERAL PROPERTY TAX. 127 
 
 franchises under which they operate are ordinarily con- 
 ferred by the state legislature. Hence it seems obvious 
 that much personal property can be taxed adequately 
 only by state officials. Prof. Seligman ^ affirms that 
 " at present, especially in industrial communities, the 
 greater part of the personalty in the hands of individuals 
 consists of intangible personalty, mainly of corporate 
 securities." The proposed plan, therefore, provides 
 for the taxation not merely of a part but of the 
 greater part of personal property. The complex ques- 
 tions involved in such special taxation are too many to 
 be touched upon here.^ In general it may be said that 
 allowance is or ought to 'be made for the local taxes on 
 real estate paid by the corporations or joint-stock com- 
 panies whose personalty is taxed by the state. Moreover, 
 the principle of ' stoppage at the source ' ought every- 
 where to be adopted, if possible. This process is the 
 deduction of taxes from dividends or profits at the time 
 and place they are declared or paid, before they reach 
 the owner's hands. Both on grounds of adequacy and of 
 economy this procedure is highly advisable. The bases 
 on which taxes are imposed on personal property are 
 various. The stock and bonds of corporations ought 
 both to be considered as the joint source of the earnings 
 of the personal property taxed. Net earnings, including 
 both dividends and interest on bonded indebtedness, 
 constitute the fairest theoretical basis for imposing these 
 taxes. But gross earnings on account of their certainty 
 give perhaps a better practical basis. Should the tax 
 raised by the state exceed its own needs, the remainder 
 
 were taxed upon the assessed vahie of the property without any 
 deduction." 
 
 ^ Essays in Taxation, p. 136. 
 
 " For a full discussion of the matter see Seligman, Essays in 
 Taxation, Chaps. VI, VII, VIII.
 
 128 STATE TAXATION. 
 
 may be apportioned among the local governmental 
 units.^ 
 
 State taxation of personal property invested in cor- 
 porations or in analogous stock companies, like express 
 companies, leaves untouched the further question of the 
 taxation of the remainder of personal property like farm 
 stock or stock in trade. How is personalty in the shape 
 of chattels to be brought under contribution as well as 
 chattels evidenced by credits ? Perhaps the best solu- 
 tion, as it is certainly the easiest, is to exempt such 
 chattels from taxation altogether, on the assumption 
 that processes of shifting will equalize the advantages 
 attaching to different species of personal property. 
 
 Besides the taxation of personal property many of our 
 commonwealths are deriving a substantial part of their 
 revenue from taxing inheritances. Fifteen states tax 
 collateral 2 inheritances; four states have passed laws 
 taxing direct inheritances. The latter are ordinarily 
 taxed at a lower rate than the former. Barring the ir- 
 regularity in the yield of such taxes, for millionaire mor- 
 tality is unpredictable, the tax is to be commended as 
 furnishing ample returns, as being felt but slightly by 
 
 * The importance of state taxes on personalty may be in- 
 stanced in the case of New Jersey. Here for the year ending 
 Oct. 31, 1896, of the total net receipts amounting to $2,138,532, 
 railroad and canal corporations paid $1,079,687 and miscel- 
 laneous corporations $707,951 additional. Seligman, Essays 
 in Taxation, pp. 176, 177, gives statistics of the yield of state 
 taxes on personal property, corporations, etc. 
 
 ' Collateral inheritances arc such as descend to distant relatives. 
 The laws in the various states draw an arbitrary limit between 
 direct and collateral inheritances. The latter are generally 
 taxed at five per cent, of the total value. Sometimes the rate 
 of taxation increases with the amount of the estate. The fed- 
 eral government imposed a war tax on inheritances by the law 
 of June 13, iSgS. Tlie rate of taxation rises with the amount of 
 the personal estate. See Max West, The Inheritance Tax, 
 Columbia College Studies, Vol. IV., p. 175 sq. See also Ap- 
 pendix A,
 
 TRANSFORMATION OF GENERAL PROPERTY TAX. 129 
 
 the payer, and as justifiable on the ground of special 
 state protection involved in the devolution of property. 
 So long as the smaller direct inheritances are exempted, 
 the law cannot be said appreciably to weaken the motives 
 prompting to the acquisition of property. The yield ^ 
 of the tax in 1894 was as follows: 
 
 New York $1,688,954 
 
 Pennsylvania 869,179 
 
 Massachusetts 239,368 
 
 New Jersey 204,695 
 
 The probable form of state and local taxation in this 
 country is already apparent. " State revenues will be 
 derived almost exclusively from corporation taxes and 
 inheritance taxes, while real estate will be relegated to 
 the local divisions." ^ 
 
 ^ Seligman, Essays in Taxation, p. 134. I am inclined to 
 dissent from Prof. Seligman's justification of inheritance taxes. 
 He justifies them on the ground that they are fortuitous income 
 which otherwise would not contribute to public needs. If the 
 former owner has already paid taxes on his property, the tax- 
 ation of his heirs is taxing the same property twice in the same 
 year. Moreover, the fact that inheritances are fortuitous in- 
 come to the inheritor does not increase the social income in the 
 least. 
 
 " Seligman, Progressive Taxation in Theory and Practice, 
 p. 215.
 
 CHAPTER VI. 
 
 FEDERAL TAXATION (MAINLY INDIRECT). 
 
 THE INTERNAL REVENUE SYSTEM. 
 
 The Establishment of the Internal Revenue System, — 
 The political acumen of the framers of our constitution 
 is nowhere more cogently instanced than in the choice 
 made of the sources of federal revenue by those we fondly 
 canonize as " the Fathers." Their task consisted not 
 only in wresting the grant of a strong central power for 
 the new federal government from the reluctant forces of 
 separatism, but in disguising the burden such a sov- 
 ereignty, however beneficent, carried in its train. Ham- 
 ilton's solution of the difficulty was a reliance chiefly 
 upon indirect taxes — customs and excises — for the sup- 
 port of the new government. The system thus in- 
 augurated is in its main outlines the system of to-day. 
 " It may, therefore, be accounted one of the customary 
 advantages which our federal government possesses over 
 the governments of the states that it has almost always, 
 in ordinary times, derived its entire revenue from prompt 
 and facile indirect taxes, whilst the states have had to 
 live upon the tardy and begrudged income derivable 
 from a direct levy. Since we have had to support two 
 governments it has been wisely resolved to let us, as 
 long as possible, feel the weight of only one of them, — 
 and that the one which can get at us most readily, and, at 
 
 130
 
 ESTABLISHMENT OF IhlTERhlAL REyENUE SYSTEM. 13X 
 
 the same time, be most easily and promptly controlled by 
 our votes. It is a plain, convenient, and, on the whole, 
 satisfactory division of domain, thoug-h the responsi- 
 bility which it throws on state legislatures is more apt 
 to pinch and prove vexatious than is that which it lays 
 upon Congress." ^ 
 
 The origin of our federal system of finance is in some 
 ways unique. It did not evolve as in England and on 
 the continent out of a pre-existing jumble of ' ill-defined 
 prerogative rights,' of market-fees, tolls, trade-licenses, 
 and royal monopolies.^ This system of taxing the 
 manufacturer of certain products always implies a thor- 
 oughly developed system of exchange by means of 
 which the producer may recoup his tax loss by increas- 
 ing the price charged the purchaser. Such a system of 
 transfers had not been developed throughout the length 
 and breadth of the land in 1789. Produce was largely 
 consumed by the family on whose farms it had been 
 raised, and in many of the early agricultural communi- 
 ties barter was the dominant mode of exchange. Some 
 five ^ of the states, it is true, had made the attempt to 
 raise revenue by the taxation of domestic spirits. But 
 it was evidently a half-hearted manoeuvre, unpopular, 
 costly, and soon abandoned. 
 
 As the revenue derived from customs duties proved 
 inadequate to meet the expenses of the nascent govern- 
 ment, Hamilton insisted with greater emphasis upon 
 excise taxation. Congress with considerable reluctance 
 acquiesced in his proposal, and early in 1791 ^ imposed 
 
 ^Woodrow Wilson, Congressional Government, pp. 133. 134. 
 
 ' Cf. Bastable, Public Finance, p. 470 sq. 
 
 ' New Hampshire, Connecticut, New York, New Jersey, and 
 Pennsylvania. Cf. F. C. Howe, Taxation in the U. S. under 
 the Internal Revenue System, p. 16. 
 
 * Act of March 3, i-Qi.
 
 132 FEDERAL TAXATION. 
 
 a graduated tax ranging- from nine to twenty-five cents 
 per gallon upon spirits manufactured from home-grown 
 materials. Perhaps no financial measure of the great 
 Secretary was in its nature more of an experiment than 
 this one. He was acquainted with the financial expe- 
 dients of other governments. He knew that the * drink 
 duties ' were relied upon in Great Britain for a large 
 part of the national revenue, and he argued that such a 
 scheme was practicable at home. Great was the op- 
 position, however, which the law called forth. The rudi- 
 mentary economic development of the newer agricultural 
 communities, the sectional spirit which the law evoked, 
 and the inefficient and often corrupt administration of 
 the measure itself raised against it a storm of disappro- 
 bation. What was then the West was particularly 
 bitter against the tax. Corn was their great staple 
 product, and its cheap transportation was then possible 
 only when the corn was condensed in bulk in the shape 
 of spirits. In these regions " money was so scarce that 
 barter was the prevailing means of exchange, and whis- 
 key the recognized measure of value." ^ Notwithstand- 
 ing abatements in the rates, and modifications of the law 
 intended to placate these sections, the tide of opposition 
 grew in strength until finally in 1794 the federal tax- 
 collector was openly defied by the western counties of 
 Pennsylvania, which rose in rebellion. The ' Whiskey 
 Insurrection' was speedily quelled, and that, too, with- 
 out great difificulty. But when to the disappointing re- 
 turns of the tax we add the heavy cost of its collection — 
 between fifteen and twenty per cent, of the total yield — 
 and when we remember also the cost of suppressing the 
 disorder,^ we can hardly regard the excise on spirits 
 
 ' F. C. Ho\ye, op. cit., p. 22. 
 
 *The cost of suppressinti the rebellion was about $1,500,000
 
 ESTABLISHMENT OF INTERNAL REVENUE SYSTEM. 
 
 133 
 
 as a financial success. On the other hand, it must in 
 fairness be said that it laid the foundation for what has 
 ultimately proved an eminently practical financial sys- 
 tem. It early asserted the power of the federal govern- 
 ment, and thus proved a valuable object lesson to the 
 unruly. Though supplemented by taxes on other ar- 
 ticles such as tobacco and sugar, as well as by a direct 
 tax, the system of internal taxation did not survive the 
 downfall of the Federal party; and after Jefiferson's 
 election in 1800 the whole system was swept away, and 
 for over a decade customs duties supplied the federal 
 treasury with the revenue it required. 
 
 The financial difficulties of the United States during 
 the second war with Great Britain illustrated two fa- 
 miliar truths. The first is that lenders of capital will no 
 more readily lend to a government than to an individual 
 unless they see the government making a manly effort 
 at taxation to pay the interest accruing. The war of 
 1812 was undertaken under the mistaken idea that prac- 
 tically all the extraordinary expenses of the struggle 
 could be met by borrowing rather than by extra taxation. 
 By 1813 this was seen to be a delusion. The other fact 
 which was exemplified was the familiar one that a party 
 in power frequently adopts or is frequently driven to 
 adopt means and measures which it may have execrated 
 when in opposition. ' Necessity ' is frequently the 
 justification of the practical administrator, as well as 
 ' the tyrant's plea.' Thus it happened that the domi- 
 nant party, the Democrats, who had destroyed Hamil- 
 ton's scheme of internal taxation, were led to create a 
 similar system of their own. Under the guidance of 
 Gallatin, Congress reimposed taxes upon the manufac- 
 
 at ^Ptlftie when the total income of the federal government was 
 about $4,000,000.
 
 134 FEDERAL TAXATION. 
 
 iure of spirits as early as 1813.' Besides this impost, 
 there were imposed at the same session of Congress 
 stamp duties, an excise on sugar refining, and a direct 
 tax upon the states. The stress of war seems to have 
 prechided any insurrectionary expression of popular 
 dissatisfaction which may have been fell at the rehabili- 
 tation of the former system of internal taxation. Re- 
 peated disasters in the field compelled Congress at the 
 instigation of Secretary Dallas, the successor of Gallatin, 
 to increase the rates of taxation, and to impose taxes 
 upon additional manufactures. Products made from 
 iron, paper, leather, and tobacco were heavily freighted 
 with revenue charges, while the direct tax was doubled 
 in amount. The cessation of the war early in 181 5 re- 
 duced the government's expenditure, and while for two 
 years longer the excise system continued in vogue, it was 
 swept completely away in the closing days of 18 17.2 
 Thereafter for almost forty-five years the land had rest 
 from the federal exciseman. Economy in public ex- 
 penditures was the rule, and customs dues again became 
 the main reliance of the federal treasury. Prudence 
 probably would have dictated another policy. The re- 
 tention of moderate duties upon certain eligible objects 
 of taxation, such as spirits, would have proved but a 
 slight burden upon the country, and would have pre- 
 served intact the necessary fiscal machinery which could 
 quickly be run at higher speed whenever war became 
 imminent. The best contrived tax systems, as experi- 
 ence demonstrates, require time to attain their normal 
 efficiency. The creation of a capable administrative 
 
 ' Acts of July 24 and Aug. 2, 1813. 
 
 'Taxes received after 1817 by virtue of the previou^jiternal 
 revenue legislation were those in arrears when the sy| 
 demolished by the Act of Dec. 17, 1817.
 
 ESTABLlSHMEhIT OF IhlTEkNAL REyEhlUE SYSTEM. 
 
 135 
 
 staff is not the work of a day, though when a nucleus 
 of experienced officials exists, the extension of such a 
 fiscal arm is speedily possible. The penalty of our 
 hasty policy seemed, however, to put off the day of its 
 coming; and not until we found ourselves in the throes 
 of civil war, and the loan policy of Secretary Chase had 
 miserably failed, were earnest efforts made to re-establish 
 a federal system of internal taxation. 
 
 The Act of July i, 1862, which re-created the internal 
 revenue system was a sweeping measure.^ " The one 
 necessity of the situation," as Mr. Wells ^ puts it, " was 
 revenue, and to obtain it speedily and in large amounts 
 through taxation, the only principle recognized — if it 
 can be called a principle — was akin to that recommended 
 to the traditionary Irishman on his visit to Donnybrook 
 Fair: 'Whenever you see a head, hit it.' Whenever 
 you find an article, a product, a trade, a profession, or a 
 source of income, tax it ! " Successive acts enlarged 
 the already swollen list of taxable objects, or raised the 
 rates of taxation previously in force. Customs duties 
 were increased at the same time, partly to secure addi- 
 tional revenue, and partly to shield from unequal foreign 
 competition the domestic producer staggering under 
 heavy excises. It was not, however, until 1866 that the 
 efficiency of the internal revenue system reached its 
 maximum. By that time the war had ended, and the more 
 
 ' " To show the general scope of the law., it may be stated 
 that it provided taxation upon trades and occupations; upon 
 sales, gross receipts and dividends; upon incomes of indi- 
 viduals, firms and corporations; taxes upon specific articles not 
 consumed in the use; stamp duties; taxes upon various classes 
 of manufactures as well as taxation upon legacies, distributive 
 
 find successions." W. Ford in Lalor's Encyclopedia, 
 rnal Revenue.
 
 1^6 FEDERAL TAXATION. 
 
 oppressive war taxes were being removed. Within three 
 years after the cessation of hostilities the only remaining 
 excises of any importance were those imposed on distilled 
 spirits, fermented liquors, cigars, and tobacco. These 
 articles have constituted the basis of the internal revenue 
 system from that day to this. The retention of a federal 
 system of excise taxation after the war was due to vari- 
 ous causes. The vast debt contracted during the struggle 
 demanded at first enormous sums to defray the annual 
 interest charges. The Republican party, which was then 
 in the ascendency, was the legatee of the excise policy 
 of the Federalists. Lastly, certain manufacturing in- 
 terests which had grown up under the stimulus of pro- 
 tective duties protested effectually against being exposed 
 to foreign competition. So it happened that the internal 
 revenue system, instead of being abolished as it had been 
 in 1817, was simplified, and made a seemingly perma- 
 nent part of our federal system of finance. 
 
 The Tax on Spirits. — The fewness of the articles 
 upon which excise taxes until 1898 were imposed en- 
 ables us succinctly to describe the internal revenue sys- 
 tcm by reviewing the respective imposts upon these 
 products. For the fiscal year ending June 30, 1897, the 
 aggregate receipts amounted to $146,619,508. Of this 
 amount over eighty-two millions of dollars came from 
 the tax on distilled spirits, while fermented liquors 
 (mainly beer and ale) yielded thirty-two millions more. 
 The tax on tobacco contributed almost thirty-one mil- 
 lions additional. Hence almost ninety-nine per cent.^ 
 of the internal revenue was until lately derived from 
 the excises on drink and tobacco. We shall discuss 
 these three taxes seriatim. 
 
 'The greater part of the remaining one per cent, canie from 
 the tax on oleomargarine.
 
 THE TAX ON SPIRITS. 137 
 
 Fully to appreciate the effect of the tax laid on distilled 
 spirits it is necessary first of all to grasp the circum- 
 stances of the manufacture and use of such spirits prior 
 to the Act of July i, 1862. Maize or Indian corn was 
 grown in such abimdance that there was in almost every 
 farming section a disposable surplus which readily found 
 its way to the local still. The business of distillation 
 was entirely free from anything like excise taxation, 
 and instead of being localized at a few centres, was 
 prosecuted everywhere. The product of the stills was 
 used not only as a stimulant, but served in large meas- 
 ure as the raw material of many manufactures. The 
 fabrication of burning fluid (a widely used illuminant, 
 the predecessor of kerosene) absorbed annually some 
 twenty-five million gallons of proof spirits. The prepa- 
 ration of dyes, varnishes, patent medicines, imitation 
 wines and vinegar made additional inroads into the 
 annual supply of alcohol ,1 so that of the estimated annual 
 product of ninety million gallons, there was left only a 
 part, though a good part, for individual consumption in 
 the shape of ' ardent spirits.' Nevertheless the price 
 of whiskey was uncommonly low, falling in August, 
 1861, in the Cincinnati market to thirteen cents a gallon, 
 so that, as has been remarked, " previous to i860 a man 
 could undoubtedly get drunk in the United States with a 
 less expenditure of money than in any part of the civil- 
 ized world." 2 
 
 Upon this Bacchic Arcadia the tax-gatherer * came 
 down like the wolf on the fold.' The Act of July i, 
 r862, imposed upon distilled spirits a tax of 20 cents 
 per proof gallon.^ This was raised to 60 cents by the 
 
 *Cf. D. A. Wells, Practical Economics, p. 156 j^. 
 
 ' Op. cit. supra, p. 1 63. 
 
 * A proof gallon consists of a mixture of equal parts of pure
 
 138 FEDERAL TAXATION. 
 
 Act of March 7, 1864, and to $1.50, and finally to $2 
 per gallon by the successive Acts of June 30, 1864, and 
 Dec. 22, 1864.^ Besides these taxes on the output, 
 there were laid imposts on the processes of mixing and 
 compounding spirits, and licenses were required as well 
 for selling them at wholesale as at retail. 
 
 Under the combined influence of speculation resulting 
 first from the varying fortunes of the federal arms, and 
 second from radical and unstable tax legislation, all 
 prices jumped up and down as though excited by a gal- 
 vanic current. The price of distilled spirits and of al- 
 cohol, their chief ingredient, rose so high that its 
 disuse in many of the arts was widespread and speedy. 
 Petroleum luckily furnished a substitute for burning 
 fluid, but in pharmacy the use of alcohol was curtailed 
 about fifty per cent. 
 
 When no substitute for alcohol was to be had the 
 price of the finished product reflected the increased cost 
 of the raw material; and the effect of the higher price 
 was to diminish the ordinary consumption. A decrease 
 in the use of whiskey as a stimulant mig'ht have been 
 viewed from one standpoint with complacency. But it 
 was this very use of distilled spirits which most tena- 
 ciously held its own. Until the 60-cent rate was reached 
 there was no perceptible decrease in the use of whiskey 
 for drinking purposes.^ Under the higher rates there 
 was noticed a decreased use in the rural regions, where 
 beer (the price of which had not been correspondingly en- 
 hanced) began to be consumed in greater amount. On 
 
 alcohol and water. The American standard gallon is the wine 
 gallon, which contains 231 cubic inches. 
 
 'The two latter Acis taxed spirits distilled from grapes at 
 a lower rate. Since 1868 spirits from whatever materials dis- 
 tilled have been taxed at the same rate. 
 
 ' D. A. Wells, Practical Economics, p. 180.
 
 ' ' THE TAX ON SPIRITS. 139 
 
 the other hand, there was no noticeable diminution in 
 the aggregate consumption in the larger cities where 
 resort was had to the debasement of the quality of the 
 liquor in order to keep the retail price from advancing. 
 From a sumptuary aspect the net effect of the law had 
 been to compel the people to drink practically the same 
 amount of adulterated liquor rather than liquor of a bet- 
 ter quality. 
 
 The effect of the tax upon the national revenues makes 
 a somewhat more complicated story. In i860 it was 
 estimated that the annual output of distilled spirits in 
 the United States was 90,000,000 gallons. This was 
 before any tax was imposed. After the introduction of 
 the internal revenue system the annual yield of the tax, 
 the rate of taxation per gallon, and the number of gal- 
 lons annually assessed for the first four years respect- 
 ively are as follows: 
 
 Fiscal year ending June 30, 1863. 1864. 1865. 1866, 
 
 Total tax yield $5,176,530 $30,329,149 $18,731,422 $33,268,171 
 Rate per gallon 20 cts.* 20 018." $1.50° $2.00 
 
 No. gallons re- 
 turned (indi- 
 cating total 
 product) 16,149,950 85,295,391 16,936,778 14,599,209 
 
 • In force for lo months. •> To March, 1864; thereafter 60 cts. 
 
 <= To Jan. I, 1865; thereafter I2.00. 
 
 This table requires some elucidation. It will be 
 noticed, first, that the total amount returned for taxa- 
 tion, ostensibly indicating the total product, was always 
 greatly below the estimated output of 90,000,000 gallons 
 in i860; secondly, that the annual product varied greatly 
 from year to year, that for 1864 being apparently over 
 five times as great as that for the year preceding ; thirdly, 
 that the relation between the rate of taxation and the 
 total yield of taxation seems altogether indeterminate.
 
 140 FEDERAL TAXATION. 
 
 The explanation of these seeming discrepancies will 
 shed light upon some of the most striking features of 
 the tax on distilled spirits. The small product disclosed 
 m 1862-3 is explained by the rawness of an inexperi- 
 enced body of administrative officials. The immense in- 
 crease in the amount returned the following year was due 
 to the fact that the Act of March 7, 1864 (which raised 
 the tax rate per gallon from 20 to 60 cents) did not apply 
 to stocks on hand at that date.^ The increase in the 
 rate of taxation and the necessary rise in the selling 
 price of all spirits produced after the higher tax rate was 
 to be in force were both foreseen. The distillers con- 
 sequently strained every nerve to augment their stocks 
 before the advance in the tax rate became operative. 
 Hence the enormous amount returned for taxation in 
 the fiscal year 1863-40 The failure to make the higher 
 tax rate retroactive put millions into the pockets of the 
 distillers. At this point another element begins to enter 
 into the problem. The subsequent advances in the tax 
 rate to $^1.50, and finally to $2 a gallon, were equiva- 
 lent to a tax of almost 1000 per cent, upon the prime 
 cost of manufacture. If the producer could evade the 
 payment of the tax in whole or part, his profits were in- 
 creased many fold. The abnormally high tax rate was 
 equivalent to a premium on dishonesty. It was no 
 longer ' prosperous to be just,' and most of the whiskey 
 interest chose to be prosperous. By far the greater part 
 of the whiskey produced for a time was never returned 
 for taxation. Thus the annual output which paid tax 
 in 1865-6 was less than fifteen million gallons, and in 
 1867-8 fell to less than seven million gallons. In this 
 way it came about that the excessively high rates of 
 
 * Provided the 20-ct. tax per gallon had been paid or bond 
 given for its payment.
 
 THE T/iX ON SPIRITS. 141 
 
 taxation and the failure to make these rates apply to 
 existing stocks promoted dishonesty and evasion on the 
 part of the producers, fraud or connivance on the part 
 of many revenue officials, venality and speculation in 
 Congress, and leanness instead of plenty in the federal 
 treasury. The reduction of the tax to 50 cents a gallon 
 in 1868 greatly increased the revenue, removed much 
 of the temptation to fraud, and aided to eradicate tlie 
 taint of corruption which had almost completely per- 
 meated this entire branch of the revenue service. 
 
 The most convincing proof of the success, both moral 
 and fiscal, of the abatement of the tax is seen in the fact 
 that during the first four years during which the 50-cent 
 rate prevailed the average revenue realized was 
 $33,563,161, against an average annual revenue for the 
 four years preceding (under the $1.50 and $2 rates) 
 of $21,727,000. The average annual output indicated 
 by these collections was over sixty-seven million gal- 
 lons under the lower tax, and less than nine million 
 gallons under the higher impost. The apparent differ- 
 ence in output indicates the enormous extent of the 
 fraud perpetrated upon the government ;i — a fraud at 
 some times so palpable that the wholesale price of spirits 
 would not cover the tax and the cost of manufacture 
 combined. 
 
 The Act of July 20, 1868, which reduced the tax to 
 50 cents per gallon, imposed certain minor taxes gradu- 
 ated according to the capacity of stills and their annual 
 output, so that the aggregate tax per gallon was 
 about 65 cents. Besides the reduction of the tax rate the 
 technique of collection was improved by the use of 
 adhesive stamps to indicate the payment of spirit taxes. 
 
 ^ The history of the tax given by Mr. Wells has become 
 an economic classic. Cf. Practical Economics, p. 216.
 
 142 FEDERAL TAXATION. 
 
 This at once made the g-eneral public an auxiliary rev- 
 enue inspector, and served to identify spirits and to evi- 
 dence their satisfaction of the tax requirements. But 
 before long an agitation began seeking an increase in 
 the tax rate to 70 cents per galhjn. The animus of this 
 proposal was veiled under the ostensible purpose of con- 
 solidating the existing major and minor taxes into a 
 single equivalent tax on the product. Accordingly in 
 1872 a 70-cent tax per gallon was substituted for both 
 taxes previously obtaining. Again in 1875 ^ the rate 
 was raised from 70 to 90 cents a gallon. This change 
 exempted existing stocks as usual, thus giving the dis- 
 tilling interest and interested congressmen another sop. 
 The revenue, however, kept fair pace with the tax, and 
 the higher rates were perhaps as honestly collected as 
 the 50-cent tax had been. There was still nmch cor- 
 ruption in the department of internal revenue, but tl e 
 lower rate and the improved methods of inspection and 
 collection prevented such wholesale fraud as reigned 
 prior to 1868. 
 
 For almost twenty years the tax remained at 90 cents 
 a gallon. The revenue from distilled spirits grew rap- 
 idly. The increased efficiency and honesty of the 
 revenue service, and the change in the condition of whis- 
 key manufacture, which was now centralized and local- 
 ized, made the tax easy to collect. In 1894 Congress, 
 following the advice of the Secretary of the Treasury, 
 increased the rate to $1.10 per gallon.- This tax, more- 
 over, was made applicable to stocks in bond.^ Since 
 
 'These two Acts raising the tax per gallon are dated June 6, 
 1872, and March 3, 1875, respectively. 
 
 ' Section 48 of the so-called Wilson Bill of 1894. 
 
 * It is gratifying to note that for tlic first time the change in 
 the rate was made retroactive, and this, too, in spite of the 
 alleged attempt of the Whiskey Trust to bribe Congress to ex- 
 ■snipt slocks on liand. Cf. Shearman, Natural Taxation, p. 17.
 
 THE TAX ON TOBACCO. 143 
 
 the passage of the Act there has been a noticeable fall in 
 the revenue yielded by the tax on distilled spirits. The 
 greater part of the loss has undoubtedly been caused by 
 the widespread industrial depression and the consequent 
 shrinkage in the use of spirits. But the increase in the 
 tax, as well as the hard times themselves, renders the in- 
 centive to dishonest distillation greater than before, and 
 discoveries of the illicit production of spirits have of late 
 markedly multiplied. ^ 
 
 The excise imposed on fermented liquors, such as 
 beer, ale, and porter, has contributed less material to the 
 criminal literature of finance. The Act of July i, 1862, 
 imposed a uniform tax of a dollar a barrel.^ The rate 
 per barrel was lowered subsequently to 60 cents, but 
 since April i, 1864, the first rate was maintained until 
 1898, although a deduction of 7^ per cent, in the 
 purchase of the revenue stamps used for this purpose 
 made the tax really amount to but 92^ cents a barrel. 
 This corresponds to an ad valorem tax of about twenty 
 per cent., and was not high enough to incite to fraud. 
 Owing to the surprising growth of the per capita con- 
 sumption of malt liquors the yield from the tax upon 
 fermented spirits steadily grew until it amounted to over 
 thirty million dollars annually. The steadiness of the tax 
 receipts from this source even in years of industrial de- 
 pression, and the comparatively low ad valorem rate of 
 taxation, indicated that in times of emergency this was 
 one of our most promising financial resources.^ 
 
 The Tax on Tobacco. — ^The third and last great con- 
 
 * " The average number of stills destroyed since the Act went 
 into effect has approximated one hundred and fifty a month." 
 E. C. Howe, Taxation in the United States under the Internal 
 Revenue System, p. 202. 
 
 ' Thirty-one gallons is the maximum capacity of a barrel 
 according to the law. 
 
 'See Appendix At
 
 144 FEDERAL TAXATION. 
 
 tributor to the internal revenue is tobacco. Upon the 
 use of ' the weed,' whether by smoking or chewing, or 
 in the form of ' the good old gentlemanly vice ' of 
 taking snufT, the federal government levies toll. The 
 history of the excise on tobacco presents few features 
 that have not already been commented upon in the case 
 of spirits.^ The tax on tobacco was originally impose 1 
 in 1862 under the pressing need of revenue. With the 
 intention of increasing this revenue the rates of taxation 
 were subsequently raised. As such advances in the rate 
 did not apply to existing stocks, the rise in the selling 
 price of the article was anticipated by the accumulation of 
 enormous supplies far in excess of the normal demand. 
 The enrichment of producers of tobacco would have 
 been greater had not the deterioration of tobacco with 
 the lapse of time set limits to the stock that could pru- 
 dently be carried. The revenue from tobacco responded 
 more quickly to the higher tax rates than had been the 
 case with revenue from distilled spirits. Still fraud and 
 evasion were rife, and the returns, though increasing in 
 absolute amount, disappointed the expectations of the 
 Treasury, until in 1868 the use of adhesive stamps and 
 the substitution of specific for ad valorem duties brought 
 substantially the whole tobacco product under contribu- 
 tion. Curiously enough the trend of subsequent legisla- 
 tion has been towards lowering the rates of taxation on 
 tobacco instead of increasing them as in the case of dis- 
 tilled spirits. From 1883 to 1898 cigars were uniformly 
 taxed at $3 a thousand ;2 and in 1890 the tax on smok- 
 ing and manufactured tobacco was reduced to six cents 
 a pound. The reason for this action was the existence 
 
 ' Cf. Quarterly Journal of Economics, Vol. V.; art. on The 
 Tobacco Tax by F. L. Omsted. 
 
 ' Ordinary cigarettes were taxed fifty cents per M. See Ap- 
 pendix A,
 
 THE TAX ON TOBACCO. 145 
 
 of surplus revenue, and the unwillingness of protected 
 interests to permit a reduction of protective duties. The 
 unique features of the tobacco tax in the United States 
 are its reliability and its capacity to yield additional 
 revenue. Whether tobacco be classed as a luxury or 
 as a necessity, it is an article whose consumption is ex- 
 ceedingly steady. " A tramp," says Mr. Smart,^ " with 
 6c?. in his pockets will spend 3^. on a bed in a lodging- 
 house, a penny on bread, and 2d, on tobacco." This 
 action is typical of the users of tobacco in the aggregate. 
 While customs duties shrivel in times of depression,^ the 
 steady yield of the tobacco tax indicates how little the 
 consumption of tobacco decreases in like circumstances. 
 And when, as in 1883, the tax on tobacco was decreased 
 almost one half, the notion that the use of tobacco would 
 largely increase proved empty. The total consumption 
 was but slightly affected. 
 
 Compared with other countries the tax levied by the 
 United States on tobacco is extremely low, the per capita 
 tax being but a third or a fourth of the pe7- capita tax in 
 Great Britain and France respectively ; and the ad 
 valorem rates on manufactured tobacco in this country 
 being less than a tenth of the corresponding rates in 
 Europe. Tobacco, like beer, seems to be capable of 
 yielding millions of additional revenue at short notice.^ 
 
 ' Introduction to the Theory of Value, p. 23. 
 ' As illustrative of this tendency we may cite the following: 
 Customs in 1872, $216,000,000; tobacco revenue, $33,000,000 
 " " 1873, 188,000,000; " " 34,000.000 
 
 " " 1874, 163,000,000; " " 33,000,000 
 
 'The remaining articles taxed under the internal revenue 
 laws prior to the Spanish war were oleomargarine, opium, and 
 playing-cards. The tax on the first mentioned article yields 
 over a million dollars annually. Its taxation is due to the out- 
 cry of the agricultural interest and is essentially a protective 
 measure, contrived in the interest of butter producers ^nd 3,% thf 
 expense of the qonsumer.
 
 146 FEDER/tL T^X^TION. 
 
 The Canons of Excise Taxation — An ideal tax sys- 
 tem must so far as possible reconcile and harmonize a 
 number of independent interests. The public treasury 
 must be supplied with adequate revenue. This revenue 
 ought to be exacted with the minimum interference with 
 all that makes for a large national income. The appor- 
 tionment of taxes ought to be equitable as between the 
 contributors ; and the political and moral sense of so- 
 ciety ought in every practicable way to be guarded, or 
 at least not outraged, by the state's financial system. In 
 a previous chapter it has been indicated that a complete 
 reconciliation of these different interests can be secured 
 only approximately. Much less then can a single 
 branch of a tax system be supposed to completely co- 
 ordinate these divergent demands. Still in case of 
 conflict, adequacy of revenue outranks the others, and 
 the proper order of subordination has already been 
 treated.^ 
 
 Adequacy. — The study of the internal revenue sys- 
 tem of the United States affords conclusive proof of 
 Swift's dictum that "in the arithmetic of the customs 
 two and two, instead of making four, make sometimes 
 only one." ^ The highest rates on distilled spirits pro- 
 duced far less revenue than the moderate rates. There 
 is no more certain fact than that ceteris paribus the con- 
 sumption of an article will decrease if its selling price be 
 advanced. There is a great difference in the degree ac- 
 cording to which the use of various articles will be relin- 
 quished under the influence of a higher price which 
 reflects the tax as an item in the increased expenses of its 
 production. Only observation and experiment can de- 
 termine what rates of taxation any traffic will bear. But 
 
 See p. 92. 
 'Quoted jn the Wealth of Nations, Bk. V., Ch. II,
 
 ADEQUACY. 147 
 
 too high or too low a rate is equally fatal if the fiscal 
 quest is the maximum of revenue. 
 
 Experience has also demonstrated that in the selection 
 of articles for excise taxation the great staple articles of 
 popular consumption, comparatively few in number, 
 must be chosen. Luxuries even when taxed at the 
 heaviest rates yield, comparatively speaking, little rev- 
 enue. But spirits, tobacco, tea, coffee, and sugar when 
 taxed yield their millions and tens of millions. The 
 difficulty of taxing articles of luxury is that such articles 
 must be taxed on the basis of their value. If different 
 rates are assessed on articles according to their value, 
 the door is at once opened throughout entire schedules 
 to wholesale undervaluation and fraud. These dangers 
 make specific rates of duty preferable, even though- the 
 effect of such rates is to tax alike the high-grade and the 
 low-grade article. It is better for the consumer of 
 moderate means to pay a slightly higher percentage tax 
 on the articles he uses than to be mulcted twice to make 
 good evasions which too nice a regard for ideal justice 
 have occasioned. 
 
 Almost equally important with the proper choice of 
 the rates and objects of excise taxation is the selection 
 and training of a capable administrative staff of revenue 
 officials. Mr. Howe does not overestimate the funda- 
 mental necessity of this requisite when he says: 
 " Probably no branch of our national administration 
 has suffered so much from the spoils system as has the 
 internal revenue service ; for in no department of the 
 government are efficiency and honesty so essential in the 
 employee." ^ No governmental department can at once 
 attain its greatest efficiency under the spur of new de- 
 
 ' Taxation in the United States under the Internal Revenue 
 System, p. 195.
 
 148 FEDERAL TAXATION. 
 
 mands. Time is essential. But given a nucleus of 
 trained financial specialists with certain tenure of office 
 during good behavior, and a speedy adjustment to new 
 conditions is assured. The cost of collection ^ of taxes 
 depends largely upon the character of the Treasury's 
 civil service. Even improved methods in the technique 
 of collection are largely due to this source. 
 
 Viewed as a whole, the internal revenue system is the 
 most satisfactory part of our entire financial structure, 
 state or federal. Its returns are fairly steady and reliable 
 in times of depression. Its growth is automatic. It is 
 imposed on articles the demand for which is tolerably 
 inelastic. Its burden is not perceptibly felt. It is 
 honestly and economically collected ; and, finally, it is 
 abundantly capable of yielding additional revenue should 
 an unforeseen emergency arise. 
 
 Effects on Industry. — The seamy side of excise taxa- 
 tion reveals itself in its interference with the development 
 of industries which are subject to such taxation. Under 
 our system this official oversight of private business is 
 practically confined to such industries as distilling, 
 brewing, and tobacco manufacturing. Fortunately no 
 attempt is made to tax the raw material of these products 
 while it is in the hands of the original producer, — the 
 farmer. Such taxation would involve an intolerable ex- 
 tension of the revenue administration and an equally in- 
 tolerable interference with agricultural operations at 
 their inception. This is really the main objection to 
 any excise tax on raw material — that it necessitates a 
 widespread and vexatious cramping of industry at its 
 birth. When once the raw material is in the hands of 
 
 'The cost of collection of the internal revenue is less than 
 three per cent of the total yield. It was about 2.70 in the fiscal 
 year 1895-6.
 
 EFFECTS ON INDUSTRY. 149 
 
 distiller, brewer, or tobacco manufacturer, the watch- 
 ful supervision of the revenue department begins. The 
 producers are required to give bond for the faithful obser- 
 vance of the law. They are required to register all ma- 
 terial bought and sold, together with whatever stock 
 they keep on hand. A particular method of book-keep- 
 ing and often monthly reports are exacted by the rev- 
 enue ofificials, who also assume liberty to examine the 
 books of the producer at any time. Such interference, 
 if universal, would strangle industry in the tightening 
 coils of red tape and officialism. Still, long continued 
 usage has probably made this species of state interfer- 
 ence tolerable. 
 
 In so far as the prices of these products are competi- 
 tive prices, fixed by the marginal expenses of production, 
 the cost involved in this governmental supervision is ulti- 
 mately borne by the consumer. Nor must we neglect the 
 possibility that these expenses of production are higher 
 than they might otherwise be if the routine processes de- 
 manded for purposes of fiscal convenience had not para- 
 lyzed much inventiveness which else had trained its 
 genius upon devising new and cheaper processes. It is 
 often alleged that excises tend to favor the large pro- 
 ducer at the expense of the small producer. The bond 
 required previous to starting in business and the econo- 
 mies secured by production on a large scale are both 
 seemingly favored by excise taxation. Some such in- 
 fluence may have been exerted by our internal revenue 
 system. But the trend of production in manufacture 
 has been towards production on a large scale, and distil- 
 ling and tobacco manufacture have proved no exceptions 
 to the general rule. Moreover, the prices of these prod- 
 ucts are by no means wholly competitive prices, so that 
 it is not easy to determine how greatly, if at all, their
 
 ISO FEDERAL TAX /IT ION. 
 
 selling price has been indirectly affected by the inter- 
 ference caused by the revenue officials' supervision and 
 inspection. Lastly, when we note that the raison d'etre 
 of production on a large scale is the decreased cost of 
 production thereby effected, it is very doubtful whether 
 old-fashioned and expensive processes have been kept in 
 vogue even indirectly by our internal revenue system. 
 The practical effect of this system has been to make the 
 federal government the biggest partner, though a silent 
 partner, in these industries, and to raise abundant rev- 
 enue without inquisitorially encroaching upon the sphere 
 of general industry. 
 
 Effects on Public Morality. — Excise taxation has 
 been advocated frequently as likely to reform public 
 morals or to abate public vices. The would-be reformer 
 is apt to imagine that he has discovered ' a nice, easy, 
 original plan of social salvation ' in an impossibly exor- 
 bitant tax on intoxicating liquors. Unfortunately this 
 is not the fact. Such a tax is unlikely to produce any 
 permanent diminution in the quantity of liquor drunk. ^ 
 It is almost certain to debase the quality of the liquor, 
 and to engender enormous frauds by reason of dishonest 
 attempts to evade the tax. Indeed about the only favor- 
 able moral influence that an excise can exert is the nega- 
 tive influence of not tempting taxpayers or tax-collectors 
 above that they are able. It is a false and cynical axiom 
 that every man has his price, but most persons' integrity 
 is more or less elastic, and like the Yankee of the story, 
 
 * " . . . .the whole evidence from tlic experience of the United 
 States is, that if the great and rapid increase in the price of dis- 
 tilled spirits of the year 1863, through federal taxation, did for 
 a time and to some extent operate to diminish their popular 
 consumption, the effect was but temporary." D. A. Wells, Prac- 
 tical Economics, p. 183.
 
 THE BURDEN OF INTERNAL REI^EnUE TAXES. 151 
 
 while they would refuse to " lie for a ninepence " (the 
 New England eighth of a dollar), they " woula tell eight 
 of 'em for a dollar." Fiscal adequacy and the conserva- 
 tion of morals are both subserved by moderate rates of 
 taxation. 
 
 The Burden of Internal Revenue Taxes. — The 
 burden of the internal revenue tax would ultimately fall 
 entirely upon the consumer if the pi-ices charged for 
 liquor and tobacco were purely competitive. In case 
 these products were closely monopolized, a tax like our 
 internal revenue would be borne in part by the producer 
 and in part by the consumer.^ But the fact is that 
 liquor and tobacco, while in part monopoly products, are 
 not so altogether. Even our most sweeping monopolies 
 feel the force of residual competition. Hence the diffi- 
 culty of locating with assurance the incidence of our in- 
 ternal revenue. It seems probable that the incidence is 
 divided between producer and consumer, though the 
 problem is a complex one.2 The truth seems to be that 
 retail prices of such articles as liquor and tobacco are 
 fairly stable. When, therefore, the producer finds his 
 profits shrink he throws the tax irr part upon the con- 
 sumer by debasing the quality of the product rather than 
 by increasing its retail price. But this very resort to de- 
 basement implies a pressure upon these producers which 
 they can thus shift in part without suffering materially 
 from the competition of other producers who are in 
 substantially the same position. The chances therefore 
 are that the burden of our excises is distributed between 
 
 *Cf the general treatment of the incidence in taxation in 
 
 Ch. II. , , T 
 
 = Cf. Howe, Taxation in the United States under the Internal 
 Revenue System, pp. 165, 166, and 254 sq., where the view is 
 taken that the producer bears at least a part of the tax.
 
 152 FEDERAL TAXATION. 
 
 producer and consumer; and that the advantages and 
 disadvantages which the consumer in the hrst instance 
 experiences are largely those of a difference in the quality 
 of the goods consumed rather than in variations in the 
 retail price he pays.
 
 CHAPTER VII. 
 
 CUSTOMS DUTIES. 
 
 The Two-fold Uses of Customs Duties. — The federal 
 income, as was incidentally remarked in the preceding 
 chapter, springs mainly from the taxes levied on certain 
 domestic manufactures, and from duties imposed upon 
 goods and merchandise brought within our customs 
 frontier. It is the revenue which accrues from these 
 latter that will next demand our attention. These 
 customs receipts unfortunately do not readily lend 
 themselves to a perfectly colorless and dispassionate 
 scrutiny. Interlacing this part of the financial fabric 
 are to be found strands of an industrial policy which 
 has excited and which still excites endless contro- 
 versy. In other words, the taxes which are imposed 
 upon imported commodities are in the main designed 
 either to raise money for the Treasury or to protect cer- 
 tain domestic industries, and between these two ends 
 there is no ' pre-established harmony.' It would in- 
 deed be an unfair presentation of the case to assert that 
 a tariff of duties whose primary aim is protection is in- 
 capable of raising, together with the internal revenue, 
 sufificient money for the economical administration of 
 the federal government. Such a statemenl: of the case 
 would be as misleading as the opposite contention that 
 a revenue tariff is necessarily synonymous with a deficit 
 But the position can hardly be assailed that a tariff which 
 
 153
 
 154 CUSTOMS niJTlES. 
 
 was exclusively designed for purposes of raising revenue 
 would be built on very different lines from a tariff whose 
 primary aim was to afford to domestic industries a shel- 
 ter from foreign competition. It is just here that the 
 difficulty arises in treating customs duties from a finan- 
 cial standpoint exclusively. The financial interest and 
 the industrial interest (assuming that the latter is to be 
 subserved by a protective policy) are, if not hopelessly 
 divergent, at least in the first instance, by no means in 
 complete accord; and whether the public is benefited 
 the more by making one interest subservient to the other, 
 or by striking a rough compromise between tl:e two, is 
 a question of practical policy which cannot be decided 
 on financial grounds alone. Upon the issue of protec- 
 tion itself it is hardly safe to assume that there will be 
 any general agreement for many years to come. But 
 there is little ground for debate upon the lesser issue 
 that there is no necessary connection between the 
 revenue yielded by a tariff which accords the desired 
 degree of protection, and the revenue which a tariff 
 is capable of yielding if constructed exclusively with 
 reference to revenue. The protectionist may logic- 
 ally concede the fact and yet contend either that the 
 hampering of the fiscal machine is of relatively little 
 moment, or, even if great in itself, is more than 
 offset by * the far more exceeding and eternal weight ' 
 of gain which tlie jDolicy of protection brings in its wake. 
 On the (jther hand, it is true that to one who is not con- 
 vinced of the util/'.y of the ])rotective policy this crip- 
 pling of the arm of the fisc is an additional grievance 
 which he lays up against the protective system. But 
 that is a matter which we need not pursue here. What 
 IS much more to our present purpose is to point out 
 that, waiving the question of protection, whose discus-
 
 THE TARIFF POLICY OF THE UNITED STATES. 155 
 
 sion here would take us too far afield, it will be necessary 
 to consider first those general aspects of customs duties 
 which are common alike to protective and to revenue 
 tariffs, and then to give separate consideration to a tariff 
 system built consistently upon revenue principles only. 
 But before essaying this task of establishing the princi- 
 ples on which tarilY duties ought to be based, it will be 
 convenient to sketch in brief outline the checkered 
 course of our national tariff policy. 
 
 Tho Tariff Policy of the TJnited States. — It is a matter 
 of some curious interest to compare the antiquity of 
 customs duties with the modernness of excises. The 
 latter require naturally enough a developed system of 
 production and exchange, and would obviously be im- 
 practicable under a regime of household industry or a 
 ' natural economy.' Customs duties, on the other 
 hand, are almost as old as the common law. Their 
 exact origin in England is unknown, but " the reason 
 for their existence is clear.^ The merchant in those pred- 
 atory times, when every one was so ready and eager 
 to fleece him that ' pille comnie un marchand ' became sub- 
 sequently a proverb, willingly paid on entering the king- 
 dom and on taking merchandise out of it toll to the king 
 for the necessary safeguard for himself and his merchan- 
 dise, inenndo, morando, ct rcdcundo,^ in port, on land, and 
 on the seas. The toll was, in short, in the nature of a 
 premium paid to the king for insurance. But in what- 
 ever manner these tolls may have commenced in Eng- 
 land, they became subsequently definite in amount, ac- 
 quired by continuance the validity allowed to that which 
 has long existed, and so came to be termed ' consuetu- 
 
 ' S. Dowell, A History of Taxation and Taxes in England, 
 Vol. I., p. 75- 
 
 'Quoted from paragraph 41 of Magna Charta.
 
 156 CUSTOMS DUTIES. 
 
 dines,' or customs." In the course of their development 
 the rates of customs duties became flexible, and their 
 figures were fixed from time to time by parliamentary- 
 statutes. During the period of the settlement of the 
 English colonies in America the customs machinery of 
 England was employed with a protective purpose to 
 build up various industries in England. Still this policy 
 of monopoly which was dictated by the dominant mer- 
 cantile system did not greatly vex the colonists at first. 
 Cromwell's Navigation Act of 1651 left them to trade 
 with whom they would, but restricted such commerce to 
 the vessels of English subjects. Still this law was hon- 
 ored perhaps as much in the breach as in the obser- 
 vance, inasmuch as the Dutch continued thereafter a 
 contraband trade with the colonies. Even when to the 
 monopoly of navigation there was added later the mo- 
 nopoly of trade, and when trammels were put on inter- 
 colonial commerce and upon colonial manufactures, the 
 yoke did not for a long time appreciably gall the colo- 
 nies. Restrictions on foreign trade did not weigh heav- 
 ily on the light-hearted smuggler ; restraints on inter- 
 colonial commerce were frequently practised by the 
 colonies against each other ; and the strict prohibi- 
 tion against prosecuting certain manufactures in the 
 colonies was not likely to create nuich discontent 
 when their labor was so much more richly rewarded 
 when applied to agriculture or commerce, that the 
 colonies were themselves driven to various expe- 
 dients (such as bounties and in some cases even to 
 protective duties) to promote the hoped-for manufactur- 
 ing industries.* The war of the Revolution was brought 
 about not so much by the passage of new acts as by the 
 rigid enforcement of existing statutes. The Stamp Act 
 
 * Cf. Rabbeno, American Commercial PcHcy, pp. lOi, 102.
 
 THE TARIFF POLICY OF THE UNITED STATES. i57 
 
 was. however, an additional grievance, and the growing 
 discontent of the colonists naturally centered around the 
 issue of taxation. During the struggle for independence 
 each state practically adjusted its imposts and customs 
 duties to suit itself. There were certain shadowy re- 
 strictions in the Articles of Confederation upon the exer- 
 cise of such power by the individual states. But here as 
 eisew ..ere the Confederation proved but a ' rope of 
 ?and,' and after the cessation of hostilities with the 
 mother country some of the states engaged in a mutual 
 war of retaliatory tarififs. Indeed the difficulties attend- 
 ant upon this tariff struggle contributed effectively to the 
 calling of the constitutional convention and to the fram- 
 ing of the present federal Constitution. That document 
 lodged in the hands of Congress exclusive power i over 
 the levying of import duties, and at the same time utterly 
 forbade the imposition of duties on exports.^ Through- 
 out the Revolution, Congress and its Financier, Robert 
 Morris, sought in vain to obtain from the states the 
 necessary assent to a modest federal impost; but the 
 plan failed both then and afterwards until the necessity 
 of placing such power in the hands of the national gov- 
 ernment was formally recognized in the new charter. 
 
 Tariff legislation under the Constitution began with 
 the Act of 1789, and the first distinct era in our tariff 
 history may be said to extend from that date to 1808. 
 The character of this patristic legislation has been por- 
 trayed by contending disputants in very different colors. 
 Protectionists cite the protective aim avowed by the ad- 
 vocates of such legislation. They also cite the distinct 
 
 ' U. S. Cons., Art. I, Sec. VIII, i. 
 
 ^ U. S. Cons., Art. I, Sec. IX, 5. The probable reason for 
 such action was to guard against possible injustice to any sec- 
 tion. Thus a general tax on the export of cotton would have 
 been collected only in the southern states.
 
 1^8 CUSTOMS DUTIES. 
 
 statement of the protective purpose to be found in the 
 preamble of the first act. On the other side it is pointed 
 out that the general level of duties was but five per cent. 
 ad valorem, and that the highest rates of duty on luxuries 
 did not rise above fifteen per cent. The truth seems to 
 be that the willingness of Congress to accord a modest 
 degree of assistance to nascent American manufactures 
 was rather the outcome of the spirit of nationality intent 
 upon both political and economic independence than any 
 very clearly reasoned scheme of industrial development. 
 Hamilton, indeed, in his Report on Manufactures 
 (December, 1791) put in classical form the protective 
 creed, but it can hardly be doubted that Hamilton was 
 largely influenced in his advocacy of protection by po- 
 litical considerations, especially by his desire to attach 
 to the support of the new federal government the com- 
 mercial and business classes. There was a gradual increase 
 of tariff duties until the ad valorem rates in 1808 were 
 from 15 to 22| per cent. This increase has been variously 
 interpreted. One side alleges that it shows steady and 
 conscious growth of the principle of protection ; their 
 opponents maintain that almost every augmentation of 
 rates was due to the growing needs of the Treasury. 
 This much seems to be certain, that the amount of pro- 
 tection afforded by such moderate duties as were ac- 
 corded up to 1808 could not have been very consider- 
 able, and that such duties did not have the effect of 
 creating new manufacturing industries of any extent by 
 diverting labor and capital from the fields of agricul- 
 ture and commerce, where for the time being the ex- 
 penditure of industrial energy was most liberally repaid. 
 The change in our industrial conditions began about 
 1808, and, instead of being the result of our conscious 
 choice, was forced upon us from without. The struggle
 
 THE TARIFF POLICY OF THE UNITED STATES. 159 
 
 which was pending between Napoleon and Great Britain 
 involved us in difficulty on account of the restrictions 
 placed by the contestants upon our commerce. The disre- 
 gard of the rights of neutrals practised by France under 
 the Berlin and Milan decrees, and by Great Britain un- 
 der warrant of Orders in Council, induced Congress 
 in December, 1807, to lay an embargo upon our foreign 
 commerce. This absolute prohibition was mitigated 
 later by the substitution of the Non-Intercourse Act. 
 This milder act forbade foreign commerce only with 
 France and England, but it did not prevent the con- 
 tinuance of foreign complications which culminated in 
 1812 in our declaration of war against Great Britain. 
 The industrial outcome of these commercial restrictions 
 and of the war which followed was almost to annihilate 
 the importation of goods — and especially of manufac- 
 tured goods — into the United States. The rates of 
 duty on imports were doubled during the war in order 
 to secure more revenue. This increase was of altogether 
 minor importance, however, as the volume of foreign 
 trade had dwindled to exceedingly narrow dimensions. 
 This cessation of imports naturally gave an enormous 
 stimulus to the introduction and extension of domestic 
 manufactures. " The interruption of trade was equiva- 
 lent to a rude but vigorous application of protection." ^ 
 Our scanty supply of manufactured goods, especially of 
 textiles, and the imperious necessity for the munitions 
 of war made lucrative these avenues of production, and 
 lured labor and enterprise from the bark and the plow 
 to the spindle and the forge. Instead of being a nation 
 almost exclusively devoted to agriculture and commerce, 
 \ve were made perforce to introduce manufactures, and 
 
 * Taussig, Tariff History of the United States, p. 34.
 
 i6o CUSTOMS DUTIES. 
 
 upon the simple structure of our industrial constitution 
 was superimposed the factory system. 
 
 In l8i6 the high level of duties which had prevailed 
 during the war was replaced by a lower tariff averaging 
 about twenty per cent. This rate of duly, however, was 
 the highest that had ever prevailed in times of peace. 
 Some industries, moreover, were avowedly protected by 
 this act. The textile industries were given special as- 
 sistance by the imposition of a temporary duty of 25 per 
 cent, upon the importation of cotton or woolen goods. 
 After the return of peace the accumulated surplus 
 of English manufactures poured upon our mar- 
 kets. To cap this came a period of general industrial 
 depression in 1819, when at the same time the foreign 
 market for our agricultural staples proved disappoint- 
 ing. There was much sufYering both in manufacturing 
 and in agriculture. A cure was sought in legislation, 
 and the advocates of protection represented that policy 
 as the remedy for the existing distress. The strongest 
 support ^ of this policy was found in the middle western 
 section, which wanted a reliable home market for its 
 agricultural products. New England was at first op- 
 posed to the protective movement, fearing injury to her 
 shipping interests. But as the factory system grew in 
 that section, the opposition to protection became weaker 
 and the protective sentiment stronger. The South early 
 arrayed itself against the protective system. Slavery 
 was incompatible with manufactures, and thus very natu- 
 rally the South looked with little favor on a system de- 
 signed in the first instance to benefit the manufacturing 
 sections. In 1820 an attempt was made to alvance du- 
 ties, but the project was foiled, and not until 1824 were 
 the advocates of what Clay called the "American sys- 
 
 » Cf. Taussig, Turiff history of tli? United States, p. 7Q sq.
 
 THE TARIFF POLICY OF THE UNITED STATES. i6i 
 
 tern " successful in raising the tariff rates. This move- 
 ment reached its height with the passage of the so-called 
 " tariff of abominations " in 1828. From this point the 
 tide began to recede. Duties were lowered in 1832, and 
 in the following year the so-called " compromise tariff " 
 was passed, which provided for a gradual reduction of 
 duties until a uniform level at 20 per cent, should be 
 reached in 1842. The second era in our tariff history 
 may be said to extend from 1808 to 1832. This period 
 witnessed the inception of the factory system springing 
 up under the exigencies of war, then upheld out of mo- 
 tives of national benevolence, and finally becoming the 
 object of conscious solicitude and legislative favor until 
 in 1832 the fickle tide of fortune turned. 
 
 From 1833 to i860 the tariff was, or tended to be- 
 come, a revenue tariff. Exception must be made only 
 of the period 1842-46, when a slight protectionist re- 
 action asserted itself. Nor must it be thought that even 
 the Walker tariff of 1846 was in perfect consonance with 
 the postulates of an ideal revenue system. That meas- 
 ure imposed taxes on certain raw materials such as wool; 
 it also exempted from duty such distinctively revenue 
 articles as coffee and tea. Still if we bar the early period 
 prior to the second war with England, this era from 
 1846 to i860 marked our nearest approach to the policy 
 of a tariff for revenue only. This ended the third dis- 
 tinct phase of the history of our tariff policy — a phase 
 which witnessed the subsidence of the early protectionist 
 propaganda, and an empirical approach to a revenue 
 system. 
 
 The customs policy of the nation for the next genera- 
 tion was determined mainly by the civil war and its 
 legacies, political and financial. It is true that in 
 1859-60, before war was seriously anticipated, tentative
 
 1 62 CUSTOMS DUTIES. 
 
 efforts were making- towards a restoration of the protec- 
 tive rates of 1846. Such a measure passed the House 
 of Representatives in the session of 1859-60, and was 
 dangled as a bait ^ before the electorate of Pennsylvania, 
 whose vote was subsequently cast in favor of Lincoln, 
 the Republican candidate for President. This act had 
 hardly become law by its passage in the Senate when 
 the civil war broke out. Thereafter for a time the urgent 
 need of revenue dominated all legislation. The internal 
 revenue system 2 levied heavy taxes on the domestic 
 manufacturer. This afforded another reason for ad- 
 vancing the rates of customs duties. Without such an 
 advance the manufacture of certain articles in this coun- 
 try would be discriminated against. As Senator Mor- 
 rill said, " If we bleed manufacturers we must see to it 
 that the proper tonic is administered at the same time." 
 In 1862 and again in 1864 there were general advances 
 in the rates of customs duties, partly to offset the height- 
 ened excises, partly to afford more revenue, partly to 
 afford additional protection. Measures the most ex- 
 treme and far-reaching in their effects were rushed 
 through Congress with inconsiderate speed and after in- 
 considerable debate. 
 
 The close of the war found us with a portentous tax- 
 machine upon our hands. Those parts of the machine 
 which were connected with the internal revenue were 
 first overhauled and generally discarded. Practically 
 all such excises as originally warranted the imposi- 
 tion of higher additional rates of customs duties were 
 
 * Such at least is the testimony of Taussig, Tariff History of 
 the United States, p. 158; Sumner, History of Protection, p. 56. 
 I do not know that this position is denied on the protectionist 
 side. 
 
 ' S?e p. 135.
 
 THE TARIFF POLICY OF THE UNITED STATES. 163 
 
 repealed by 1872.^ The income tax was lowered and 
 then swept away. The duties on such typical revenue 
 articles as tea and coffee were first reduced and then 
 abolished. This allowed a reduction in the govern- 
 ment's income, then vastly in excess of its expenditures, 
 and at the same time prevented any material change 
 in the protective duties. A horizontal ten per cent, re- 
 duction in the rates of duty was made in 1872 as a sort 
 of offset to the repeal of the duties on tea and coffee. 
 In 1873 and thereafter the industrial depression checked 
 imports as well as the revenue they yielded; but in 1875 
 this ten per cent, reduction was repealed and the earlier 
 and higher protective duties were reinstated. Thus " it 
 is clear that the extreme protectionist character of our 
 tariff is an indirect and unexpected result of the Civil 
 War," 2 no general revision, apart from the temporary 
 ten per cent, horizontal reduction of 1872, occurring un- 
 til 1883. In this latter year the various schedules were 
 overhauled, and new tariff rates were established. There 
 were some apparently considerable reductions in the 
 case of particular articles. But such changes were fre- 
 quently nominal, and in some instances really enhanced 
 duties by different systems of classifying imports. The 
 average ad valorem duty in 1883 was 42.4 per cent., 
 and in the two subsequent years ^ 41.6 and 45.8 per cent., 
 respectively. Hence the protective level was not seri- 
 ously depressed by the Act of 1883. 
 
 In December, 1887, President Cleveland in his Mes- 
 
 ^ To make plain the relation of customs and an excise, let us 
 suppose a tax of $10 a ton is levied on the home manufacturer 
 of steel rails; in case no customs duty is imposed on imported 
 rails, there would be a clear discrimination against the domestic 
 producer. Nor until the duty exceeds $10 a ton is the duty 
 protective. 
 
 ' Taussig, Tariff History of the United States, p. 193. 
 
 ' Cf. Statistical Abstract of the United States for 1893.
 
 164 CUSTOMS DUTIES. 
 
 sage to Congress made an attack upon the system of 
 protection, which he stigmatized as "vicious, inequitable, 
 and illogical." In the previous presidential campaign 
 the tariff had played a part, although the Democrats had 
 not accepted it as the sole issue at stake. The Presi- 
 dent's Message in 1887 was practically an acceptance of 
 the gage of battle, and determined the character of the 
 presidential campaign in the following year. In tliat 
 contest the Repulilicans were successful, and construed 
 their victory as a popular mandate to preserve the pro- 
 tective system. The assault on that system had been 
 made partly from the standpoint of finance. The gov- 
 ernment's income was in excess of its expenditure, and 
 it was argued that a decrease in duties was the proper 
 way to afford relief to the taxpayer. The solution of the 
 question was attempted by the Republicans by generally 
 retaining or advancing protective duties, by extending 
 such duties to other industries, by abolishing the import 
 duty on raw sugar,^ and by making more liberal expen- 
 ditures. The first three projects were embodied in the 
 original McKinley bill, to which in the Senate there 
 was tacked a Reciprocity amendment. This latter feat- 
 ure empowered the President to impose retaliatory du- 
 ties upon countries sending to the United States su^ar. 
 molasses, hides, tea, or coffee, in case he judged the du- 
 ties imposed by these countries on our products " unjust 
 or unreasonable." 
 
 The significance of the McKinley bill, however, lay 
 not so much in its heightened rate of duty on dutiable 
 articles as in its embodiment of tlie new attitude of the 
 adherents of protection. There had hitherto been a cer- 
 
 *This abolition of the sugar duty cut down the annual federal 
 income by fifty millions or more. The sugar planters in this 
 country were accorded bounties by way of compensation.
 
 THE T/IRIFF DUTIES OF THE UNITED STATES. 165 
 
 tain degree of relativity generally attaching to the doc- 
 trine. Hamilton, the great Coryphaeus of protection, in 
 his famous Report on Manufactures had said that " the 
 continuance of bounties ^ on manufactures long estab- 
 lished must almost always be of questionable policy, be- 
 cause a presumption would arise in every such case that 
 there were natural and inherent impediments to success. 
 But in new undertakings they are as justifiable as they 
 are oftentimes necessary." Clay in his speech of 1824 
 had said: " Let our arts breathe under the shade of pro- 
 tection; let them be perfected as they are in England, 
 and we shall be ready, as England now is said to be, to 
 put aside protection and to enter upon the freest ex- 
 changes." Parallel expressions might be culled from 
 the speeches of Garfield and Sherman, the successors of 
 Hamilton and Clay. Protection had been regarded as a 
 schoolmaster to bring us to free trade, or as a temporary 
 concession to vested interests, or as a momentary fiscal 
 expedient. But the new school of protectionists appar- 
 ently regarded the system as a finality to be permanently 
 maintained or even extended. Commercial isolation, 
 rather than industrial maturity, was the essence of the 
 new doctrine. The political reverses of 1890 and 1892 
 which befell the Republicans seemed to indicate that 
 public opinion had begun to turn against extreme pro- 
 tection. In 1894 the AIcKinley bill was repealed and 
 the so-called Wilson bill was enacted. The history of 
 that measure is so recent that it is barely worth while 
 here to recount how the original House bill, which 
 moved decidedly away from the protective extreme, was 
 amended in the Senate, and finally passed in a shape 
 
 ^Hamilton speaks here, it is true, of bounties; but in a pre- 
 vious passage in his report when speaking of protective duties 
 he remarks: " Duties of this nature evidently amount to a virtual 
 bounty," etc.
 
 1 66 CUSTOMS DUTIES. 
 
 which, while somewhat abating the higher duties, was 
 essentially a protective measure except in the case of 
 raw wool, which was placed on the free list. Owing to 
 a number of causes whose nature is still a matter of dis- 
 pute industrial depression began in 1893. The result of 
 the election of 1896 was to put the protectionists again 
 in power. The Dingley bill replaced the Wilson tariff 
 antl restored the high protective character of our cus- 
 toms duties.^ 
 
 General Canons of Customs Taxation. — ^The fore- 
 going recital of the alternating changes in our tariff 
 policy ought to convince us of the whimsicalness of our 
 electorate upon this subject. It must at the same time 
 demonstrate the necessity of establishing, so far as pos- 
 sible, principles applicable to all tariffs, whether these 
 tariffs be of the protectionist or of the revenue variety. 
 Agreement upon such very general principles is of no 
 little importance. Very frequently the lack of dispas- 
 sionate discussion of the question of the tariff may be 
 traced to the fact that instead of analyzing the operations 
 of the tariff in the concrete, from the standpoint of ad- 
 ministration, there has been a disposition to insist first 
 upon a confession of faith on the main issue. Thereafter 
 it is but a short remove to " the thunder of the cap- 
 tains, and the shouting," and that means an end of 
 profitable discussion. Nevertheless there are certain 
 general principles pertinent alike to revenue and protec- 
 tive measures; and in case these were generally ac- 
 knowledged, the final solution of the greater issues 
 might reasonably be anticipated. These general aspects 
 of customs duties may be treated under the captions of 
 incidence, — or the location of the burden of such taxes ; 
 
 ' For a brief summary of the revenue yielded by different 
 schedules, see page 178.
 
 GENERAL CANONS OP CUSTOMS TAXATION. 167 
 
 variation, — their shrinkage and expansion ; certainty, 
 that is, their being calculable or dependable. Let us con- 
 sider these phases of customs duties, beginning first with 
 the one last mentioned. Whether we are to have a protec- 
 tive or a revenue tariff is a matter of comparatively little 
 importance compared with the question whether the tariff 
 system which we adopt is or is not likely to be subject 
 to speedy and extensive changes. The existence of well- 
 defined and stable law is frequently of more importance 
 than the particular character of the law itself. Absence 
 of law means anarchy, defects of law mean only injustice 
 at the worst. Mr. Bryce in his American Common- 
 wealth, in speaking of the smooth working of our com- 
 plex governmental system, says that such men as the 
 settlers of New England could work any constitution. 
 Something of the same character may be said about our 
 business men. They can thrive — ultimately at least — 
 under any tariff, and their primary interest in the tariff 
 to-day is not that it be high or that it be low, but that it 
 be steady enough and dependable enough to remove the 
 unknown and unknowable elements which its present 
 instability creates in their business calculations. It is 
 not possible even to summarize the different ways in 
 which uncertainty in prospective tariff rates disturbs, de- 
 presses, and complicates various industrial enterprises. 
 In case, for example, the tax on the manufacturer's raw 
 material is likely to be advanced by the tariff, he will be 
 strongly tempted to purchase large stocks thereof in 
 order to anticipate the higher duty on such material in 
 future. On the other hand, the enhanced price of the 
 raw material must ultimately be reflected in a higher 
 selling price of the product, and ceteris paribus in a de- 
 creased demand for the finished goods. So that the 
 danger of accumulating dead stock must also be con-
 
 l68 CUSTOMS DUTIES. 
 
 sidered. The case is very similar to one of those card- 
 board puzzles where every section dovetails perfectly 
 into the others, and where a change in the size or shape 
 of a single piece renders reconstruction impossible, un- 
 less every other piece be reset. So a change in one 
 item of expense will very probably necessitate a com- 
 plete readjustment of the other items of merrantilf 
 cost. This readjustment will probably involve a certain 
 amount of experimentation with its attendant risks. If 
 hitherto there has been an upward swing in the trade, 
 the customs revision may blight with uncertainty the 
 prospect of further growth. If the trade has hitherto 
 been flagging, a change in customs duties will often 
 deaden the market and postpone the normal recovery. 
 
 The real dif^culty here lies in finding concrete means 
 to lessen the difficulties arising from tariff changes. 
 Changes in tariffs from time to time must be made. 
 Successions of surpluses or deficits in times of peace 
 make tariff alterations politically inevitable. The ne- 
 cessity for more revenue in times of war often has the 
 same effect. Four times in the last fifteen years our 
 tariff has been overhauled. So long as the federal gov- 
 ernment is debarred from the taxation of incomes, it is 
 hard to say how there can be introduced into federal 
 finance any elastic element which might be used to make 
 up a deficit.^ Still, the financier may guide his feet in 
 part by the lamp of experience. A moderate and tem- 
 porary surplus or deficit may be less of an evil than a 
 sweeping tariff revision, just as a stubborn case of in- 
 digestion may be preferable to an operation for appen- 
 dicitis. There is also some considerable latitude in the 
 choice of the time for tariff revision. In prosperous 
 times changes may be made with ease and met with 
 
 ' See p. 371, note.
 
 GENERAL CANONS OF CUSTOMS TAXATION. 169 
 
 complacency when the same change if made under other 
 conditions would chill ardor and deaden enterprise. 
 Considerable uncertainty might also be eliminated by 
 the general substitution of specific duties for ad valorem 
 duties.^ It is generally conceded that specific duties are 
 less likely to produce undervaluation and fraud than is 
 an ad valorem system, where a virtual premium is offered 
 to connivance and evasion. The main objection to spe- 
 cific duties is that with a fall in the prices of the duti- 
 able imports the rate of taxation rises. While this must 
 be admitted, the shoe is on the other foot when the 
 prices of imports rise ; and although it is probable that 
 general prices at present are more likely to fall than to 
 rise, it is undeniable that the greater certainty and 
 uniformity ^ of specific duties make them on the whole 
 preferable to the ad valorem system.^ Finally it may be 
 argued that there may be exercised some considerable 
 choice in the selection of articles upon which the rates of 
 duty are to be changed. Something may be said for the 
 policy of confining the most extensive changes (whether 
 up or down) to articles exclusively of foreign production. 
 So long as these articles are not raw materials, such 
 changes in duties will throw the immediate problem of 
 recalculating the problem of cost upon the foreign pro- 
 ducer, and to a certain extent upon the importer. 
 Changes in the prices of these articles will of course 
 alter the conditions of consumption, and finally affect 
 indirectly the demand for all products. But the burden 
 
 ^ A specific duty is levied upon articles ordinarily by weight 
 or bulk, e.g. a duty on coal of so many cents per ton. Ad 
 valorem duties are assessed upon the estimated price of an arti- 
 cle, e.g. a duty on wool of 20% of its value. 
 
 ^ I have heard importers claim that precisely the same kind 
 of import was differently taxed at different ports of entry under 
 the ad valorem system. 
 
 * Cf. Hadley, Economics, p. 457.
 
 17© CUSTOMS DUTIES. 
 
 of readjustment is in the first instance at any rate im- 
 posed upon other industries than our own. We may 
 then summarize these considerations thus: 
 
 Canon I. A schedule of customs duties should be as 
 stable and calculable as general conditions will permit; if 
 changes are made, they should be made at such times and by 
 preference in such schedules as will introduce the least un- 
 certainty into domestic industry. 
 
 The second aspect of customs to be here considered 
 is the variation in their yield. The revenue netted by 
 any tariff must depend on the amount of dutiable goods 
 entered. How greatly such imports will fall off in bad 
 times depends largely on what sort of goods a country 
 imports. If they are food staples, the decrease will be 
 less than if luxuries or conveniences were the chief im- 
 ports. In the case of the United States, however, the 
 variations in customs revenue are likely to be very great, 
 and such variations are likely to create unusual difficulty 
 in our finances. This great variation is likely to occur on 
 account of the number and variety of our dutiable 
 imports. Though the demand for some of them may not 
 be very greatly curtailed by industrial depression, there 
 are others whose consumption is violently checked, and 
 perhaps as speedily recommenced when better times set 
 in. The resultant of such changes is reflected in the 
 astonishing variations in the yearly aggregate of cus- 
 toms duties. The following table ^ will illustrate this 
 point: 
 
 ' Taken from the Report of the Secretary of the Treasury 
 for 1893, p. cxxiv. It should be said that the only important 
 change in this period was a 10% horizontal reduction in 1872. 
 Tlie former rates were restored, however, in 1875, and then 
 remained substantially unchanged until 1883.
 
 GENERAL CANONS OF CUSTOMS TAXATION, 171 
 
 RECEIPTS OF THE UNITED STATES FROM CUSTOMS FOR 
 FISCAL YEARS ENDING 
 
 June 30, 1872 $216,370,286 
 
 1873 188,089,522 
 
 1874 163,103.833 
 
 1875 "• 157.167,722 
 
 " 1876 148,071,984 
 
 1877 130,956,493 
 
 " 1878 130,170,680 
 
 1879 137,250,047 
 
 " 1880 186,522,064 
 
 " I88I 198,159.676 
 
 " 1882 220,410,730 
 
 It is worth while to insist on the fact that these varia- 
 tions are largely independent of the character of the 
 tariff, whether protective or otherwise. The period cov- 
 ered by the foregoing table was a protective period, but 
 incidentally coincided with a general ebb in business 
 operations. Apart from the difficulties entailed by such 
 a shrinkage of federal revenue, the peculiar danger to 
 our federal finances comes from the fact that we rely 
 to a far greater extent than any other nation of im- 
 portance upon customs duties as a source of income. 
 Whereas Great Britain and Germany derive from a 
 quarter to a third of their imperial revenues from cus- 
 toms, we look to customs for a half or even two thirds 
 of ours. The dangers resulting from an unexpected 
 surplus if not so obvious as those caused by a deficit are 
 perhaps even more insidious. They tend to produce ex- 
 travagant appropriations whijh become only too fre-
 
 17* CUSTOMS DUTIES. 
 
 qiiently fixed charges on the annual budget, and thus 
 make a deficit when it again occurs the more difficult 
 to get rid of. Alany of these proljlems must be more 
 fully considered under the discussion upon Public Credit 
 and Treasury Management, but enough has been said in 
 this place to warrant us in framing provisionally our 
 second rule. 
 
 Canon II. A customs system under which large varia- 
 tions in the annual revenue are certain should be supple- 
 mented by sonu' provision for meeting deficits by borrowing 
 or otherwise.^ 
 
 Equally applicable to protective and revenue tariffs is 
 a consideration of the incidence or ultimate burden of 
 customs duties. Nor must such an inquiry be con- 
 founded with that at issue between the protectionist and 
 the free-trader. We may resolve every point in dispute 
 in the matter of incidence in favor of the latter, and yet 
 leave unresolved the question of the ulterior benefit 
 of a protective system. If two boys between them 
 are carrying a log, it is possible from certain data 
 to judge whether the one who is doing the most 
 grunting is also carrying the greater weight. But 
 when this fact is known, we may still be in the 
 dark as to whether such a task is simply developing 
 his muscles or seriously overtaxing his strength. It 
 is much the same with the question of the incidence 
 of customs duties. When we have separated the ques- 
 tion of " who pays the piper " from the further question 
 whether after all he was worth paying for, we have fa- 
 cilitated the solution of the first inquiry by eliminating 
 or, at least, by postponing the final conflict. If the gen- 
 
 * Strictly speaking this is a problem in Public Credit. It will 
 be seen by reference to p. 371, note, that this plan has been partly 
 adopted by virtue of the Act of June 13, 1898.
 
 GENERAL C/tNON$ OE CUSTOMS TAXATION. i)3 
 
 eral discussion of the problem of incidence ^ has been 
 understood, it will be readily perceived that the imposi- 
 tion of duty upon an imported article will normally 
 raise its price and curtail its consumption. In case it 
 is produced abroad exclusively, and imder competitive 
 conditions, this contemporaneous rise in its cost and 
 narrowing of its market must force certain producers 
 ultimately to discontinue or decrease their former out- 
 put. The new marginal producer will thereafter recover 
 his expenses of production out of the price he receives, 
 and this increased price must be borne by the consumer. 
 Others will feel the effect of the tax in being forced to 
 lessen or stop their consumption of the article. If the 
 foreign producer had a monopoly ^ of an article, such 
 as tea, it is possible that the duty imposed would first 
 come out of his profits, and that the selling price in the 
 importing country would remain unchanged, especially 
 if an advance in the price of the tea seriously lessened its 
 use. When the duty reached such a point that the profit 
 realized by the foreign growers was no longer above the 
 ordinary profits in the East, the first rule would come 
 into operation, and the increments in the duty there- 
 after would ultimately fall on the consumer. Finally 
 comes the case where part of the supply of an article 
 is produced abroad and where another part is produced 
 at home. It is obvious that on such articles as are im- 
 ported the duty paid will be borne by the producer or 
 consumer in accordance with the two rules just enun- 
 ciated. The duty serves, in case the domestic expenses 
 of production are greater than the foreign expenses of 
 
 • Cf. Chapter II (Part II). 
 
 ^ It must be remembered that it by no means follows that 
 because an article is exclusively produced in one country its 
 sale will be monopolized. It is more usual to find competition 
 between the various foreign producers or exporters.
 
 174 CUSTOMS DUTIES. 
 
 production, to offset tlie greater cost of the domestic 
 product, and thus to render the home production of the 
 article possible. Hence it is evident that the price paid 
 per unit for the domestic product is greater than if the 
 whole supply were imported. This greater price paid 
 for the domestic product is virtually a tax upon the con- 
 sumer, though it yields no money to the fisc, and no 
 subsidy necessarily to the home producer. The prin- 
 ciple is illustrated by the cases of sugar and whiskey 
 cited by Mr. Thomas G. Shearman in his work on 
 Natural Taxation ^ (p. ii). He says: "The tax upon 
 foreign sugar is admittedly paid by our own people. For 
 many years it amounted to 70 per cent, of the cost, and 
 amounted to nearly $60,000,000 per annum. In addi- 
 tion to this, about 180,000 tons were annually produced 
 at home, the price of which to the consumer was in- 
 creased by at least two cents a pound by the tariff, or 
 about $8,000,000 in all. Either the whole of this 
 $8,000,000 went into the pockets of a few sugar-planters, 
 or, which is more probable, they only gained half of it, 
 while the other half was wasted in misapplied human 
 effort." Whether this sum was " misapplied " depends, 
 of course, upon the view one takes of diversifying do- 
 mestic industry and similar arguments urged in support 
 of the protective system. Into that wider question we 
 do not here enter, but shall content ourselves with sum- 
 marizing our conclusions in the third rule. 
 
 Canon III. The levying of customs duties shonld proceed 
 upon the assumption that the incidence of such taxes will 
 be normally upon the consumer unless the taxed import 
 be produced exclusively abroad under monopoly condi- 
 tions. 
 
 ^ I will not vouch for the accuracy of Mr. Shearman's esti- 
 mate.
 
 THE REVENUE TARIFF SYSTEM. i75 
 
 The Revenue Tariflf System. — It has already been 
 pointed out that the two distinct objects — protection 
 and revenue — which most tariffs are designed to pro- 
 mote are largely incompatible. Such measures aim, 
 therefore, not only to realize a double purpose, which is 
 difficult, but to reconcile cross-purposes, which is im- 
 possible. They must in consequence become mere me- 
 chanical compromises on the one hand, or concealed 
 surrenders on the other. It is therefore with a sense 
 of relief due to the simplification of the problem that the 
 student of finance turns to the discussion of a tariff sys- 
 tem founded exclusively on financial considerations. Such 
 a tariff we call a revenue tariff. By this we mean a tariff 
 system which makes revenue the one paramount con- 
 sideration, and which is not designed to afford to do- 
 mestic industry any shelter from outside competition. 
 Such a system does not imply that the revenue raised in 
 virtue thereof is the greatest that could possibly be ex- 
 torted without contravening the general principles of a 
 revenue system ; but simply that the sole aim in levying 
 duties is to raise revenue. Whether the aggregate of 
 such revenue be great or small ought to depend on the 
 current expenses of the government. 
 
 Viewing the matter from a financial standpoint exclu- 
 sively we may pronounce a revenue system definitely 
 superior to a protective system, first, because it will nor- 
 mally produce more revenue in the aggregate from each 
 particular import taxed ; secondly, because it simplifies 
 the whole problem of the construction of a tariff by 
 eliminating the disturbing factor of protection i ; third, 
 
 * It is of course open to the protectionist to argue that the 
 financial disadvantages of a protective tariff are more than ofTset 
 by the ulterior eflfects of protection in diversifying industry, in 
 effecting a more advantageous distribution of the national in- 
 come, and in thus rendering the ultimate sources of private 
 income, and therefore of public income, more copious than they 
 could otherwise be,
 
 176 CUSTOMS DUTIES. 
 
 because a revenue tariff does not take more from the 
 
 pocket of the taxpayer than it turns into the Treasury.^ 
 " Whatever be the details of the working of a protective 
 duty," says Professor Taussig,^ " it is prima facie less 
 desirable than a revenue duty, on the simple ground that 
 tlie tax serves not to yield revenue, but to offset the 
 greater cost of making the commodity at home." Even 
 though importations because of the high duty cease al- 
 together, and though the domestic price may be less than 
 the price of the duty-paid import, there is levied upon 
 the purchaser a concealed tax in the higher price, for it 
 could not be exacted did a lower duty allow the article to 
 be brought in from abroad. In the case above cited 
 the tax ordinarily serves to cover the greater cost of 
 producing the article at home, and no part of the tax 
 thus surreptitiously levied finds its way into the Treasury 
 vaults. 
 
 The framing of a revenue tariff involves, first, the 
 choice of articles on which to levy import duties, and, 
 secondly, the ascertaining of those rates which will afford 
 the revenue sought. To secure adequate revenue such 
 articles must be chosen as are imported in great 
 quantity and for which the demand is relatively stable. 
 It is also highly desirable that these articles should be 
 mainly of foreign production and, where possible, fin- 
 ished products rather than raw materials. The reasons 
 for the last two qualifications are plain. Goods pro- 
 duced exclusively abroad will not, when taxed, raise the 
 
 ' At least it does not have this effect if supplemented by 
 corresponding excises on such domestic products as might 
 otherwise be protected by a purely revenue duty. Whether 
 such a corresponding excise be imposed or not, the indirect 
 cost of a revenue tariff is considerably less than that of a pro- 
 tective tariff, because a revenue tariff by preference selects foi 
 taxation articles exclusively of foreign production. 
 
 'Tariff History of the United States, p. 187,
 
 THE REVENUE TARIFF SYSTEM. 177 
 
 prices of domestic products. Thus they will not levy 
 what is substantially a tax (never received by the gov- 
 ernment) in the guise of higher prices paid for the do- 
 mestic product. In case, however, considerations of 
 revenue require us to levy duties on imports which com- 
 pete with domestic products, the protection thus inci- 
 dentally afiforded the home producer may be offset by 
 levying on every unit of the domestic product an excise 
 exactly equivalent to the import duty.^ 
 
 The considerations which dictate the exemption of 
 raw material are that its taxation hampers at the outset 
 all industries which depend on the supply of the raw 
 material.2 Where industrial development, however, has 
 concentrated the elaboration of the raw material in a 
 very few plants, such a tax on the raw material may 
 impose but little burden on the manufacturers, and but 
 little difficulty on the tariff administration. Sugar re- 
 fining in the United States would perhaps be an instance 
 of this rather exceptional state of affairs. 
 
 From this standpoint such articles as tea ^ and coffee 
 would be ideal objects for subjecting to customs duties 
 upon their importation into the United States. Raw 
 sugar (from which at present millions of revenue are 
 
 * This is the English system. Corresponding to such excises 
 most governments allow the home producer a drawback on the 
 exportation of materials which when imported were subjected 
 to a duty. Unless this were done, the home producer would 
 be handicapped in foreign markets. 
 
 ' The contention that the enhanced price of the raw material 
 is reflected in a higher price of the finished product because 
 interest or profits are computed on a higher expense ait the 
 start and increase in a geometrical ratio on every turn-over 
 thereafter, is offset largly by the earlier date at which the 
 Treasury derives its revenue. The real reason for objecting 
 to the tax on raw material must be based rather on the hamper- 
 ing of industries using the raw material. 
 
 ^ Since this was written the Act of June 13, 1898, subjected 
 tea to a duty of ten cents per pound.
 
 178 CUSTOMS DUTIES. 
 
 derived) approximately meets the tests above mentioned. 
 Tropical fruits of various kinds are very properly re- 
 quired to contribute to our customs revenue. On the 
 other hand, it will readily appear that such articles as 
 the manufactures of wool and cotton are not fit subjects 
 for customs duties, although the large investments in 
 these manufactures may dictate moderation in any pro- 
 posed reduction or abolition of existing duties. 
 
 In general, it may be said that a revenue tariff will 
 embrace relatively few articles in its list of taxables. 
 When, on the contrary, protection is designedly afforded 
 to domestic industries, the tariff list must embrace hun- 
 dreds and even thousands of commodities. ^ Even in 
 this latter case it is generally found that the bulk of the 
 revenue comes from relatively few articles. In the 
 United States, for example, in 1895 four articles — sugar 
 and the manufactures of wool, cotton, and silk — consti- 
 tuted a third of the total value of the dutiable imports 
 brought to our shores. Six other articles — the manu- 
 factures of textile grasses, tobacco, chemicals, tin plates, 
 fruits, and liquors — made another third. Obviously the 
 fewer the articles taxed, the less will be the cost of col- 
 lecting customs duties. 
 
 Assuming then that choice has been made of such 
 articles as ought on the principles of a revenue tariff to 
 be taxed, what rates of duty ought to be imposed ? This 
 inquiry is entirely independent of the question whether 
 duties should be imposed on a specific or an ad valorem 
 basis. The tendency of specific duties to operate so as 
 to automatically increase the degree of protection when 
 the price of the taxed article falls has created a Hking for 
 
 'Such is the case at present in the United States; in Great 
 Britain, on the contrary, there are not more than half a hundred 
 articles liable to import duly, and but a dozen of these are 
 important as sources of revenue.
 
 THE REl^ENUE TARIFF SYSTEM. 179 
 
 ad valorem duties on the part of the opponents or protec- 
 tion. This question, however, of the basis on which duties 
 should be imposed is essentially a question of administra- 
 tion, and has no bearings on the proper issue here under 
 discussion. 1 On the supposition, therefore, that the arti- 
 cles chosen for tariff duties are to afford the maximum of 
 revenue, the rates of duty must be so set that the total 
 imports at those rates of duty must when multiplied into 
 the respective rates yield the maximum sum. Here a 
 certain amount of experimentation is necessary. But 
 theory as well as experiment goes to prove that such 
 rates of duty must be under the rates ordinarily imposed 
 by a protective system. This was clearly pointed out 
 by Adam Smith in the Wealth of Nations ^ where he 
 says : " High taxes, sometimes by diminishing the con- 
 sumption of the taxed commodities, and sometimes by 
 encouraging smuggling, frequently afford a smaller 
 revenue to the government than what might be drawn 
 from more moderate taxes. When the diminution of 
 the revenue is the effect of the diminution of consump- 
 tion there can be but one remedy, and that is the lower- 
 ing of the tax." This can be readily seen in the Hmiting 
 case. A tariff so highly protective as to exclude im- 
 ports altogether would produce as little revenue as abso- 
 lute free trade. To afford any protection, duties must 
 be so high that importation will be curtailed, and thus 
 one of the factors whose product determines the customs 
 
 * Under a revenue tariff there would of course be no neces- 
 ity for " mixed " or compen«r!tory duties. An example of such 
 " mixed " duties was afforded by the tariff on woolen goods 
 under the Act of 188,1 Raw wool was taxed to protect the 
 native wool grower. Then to protect the domestic wool manu- 
 facturer woolen g^oods were doubly taxed. First a tax was laid 
 on the estimated amount of raw wool required to make the 
 goods, and then a second tax was levied upon the goods in 
 order to protect the domestic manufacturer. 
 
 "Book v., Chap. 11., p. 481 in Vol. II. of Rogers' edition.
 
 l8o CUSTOMS DUTIES. 
 
 revenue is lessened. Hence revenue rates will normally 
 be below protective rates of duty.i 
 
 To foretell the future of our tariff policy in the United 
 States is, of course, impossible. Onr past history ought 
 to warn us from even attempting- to prophesy. But, 
 barring the case of war, there are what appear to 
 be at least significant indications of the course which 
 tariff legislation is likely to take. First of all, it will not 
 be likely to take very radical steps in any direction. The 
 power of vested interests alone will probably prevent 
 any rapid transition to a revenue system. On the other 
 hand it seems not improbable that tlie halcyon days of 
 ultra-protectionism are numbered. The woolen manu- 
 facturers have had a taste of free wool, and some of them 
 at least were not over-anxious to return to the old system. 
 Our manufacturers in many other quarters are begin- 
 ning to realize that there is a foreign market, and their 
 dreams of conquest include the markets of the world. 
 The farmer has recognized that, wool apart, his benefit 
 from protection is purely nominal. The transportation 
 companies also are realizing that their greater interests 
 are wrapped up in expanding commerce. So that it 
 seems not impossible that another generation may see 
 the proximate realization of a revenue system in the 
 United States. 
 
 ^ It is conceivable that a number of different rates of duty- 
 will net the same revenue. Thus if under a rate of 50 cts. a ton 
 100,000 tons were imported, the revenue would be $50,000; if at 
 a rate of $1 a ton 50,000 tons were imported, the revenue 
 would also be $50,000. Indeed it is possible that at the higher rate 
 the imports might be 60,000 tons, in which case the revenue 
 would be $60,000. Here the higher rate both affords 
 more protection and more revenue. Experience shows 
 that this is, however, an exceptional case. Moreover, the 
 higher price (resulting from the higher duty) charged to con- 
 sumers of the domestic product is an unseen extra tax which is 
 levied by virtue of the higher rate. It is an instance of the 
 curtailment of " consumers' rent."
 
 CHAPTER VIIL 
 
 THE INCOME TAX. 
 
 Nature of Income Taxes. — The preceding chapters 
 have described the system of taxation as it exists to-day 
 in the United States. The present chapter will treat of 
 the income tax, — a fiscal resource which most theoretical 
 financiers incline to think we cannot do long without, 
 but which has not as yet won for itself a lasting place in 
 our system. Besides the theoretical interest attaching to 
 the subject much that is valuable historically is found in 
 the history of such taxes in the United States, for we 
 have had two federal income tax laws, — 
 
 "... one dead, 
 The other powerless to be born." 
 
 and the untimely fate of either is big with significance. 
 But, first of all, what is meant by income f We may 
 be tempted at the outset to say of income, as Mill un- 
 fortunately said about wealth, that every one has a sufft- 
 ciently correct notion for general purposes of what in- 
 come is. Most people have, or think they have, a pretty 
 sharply defined idea of the size of their income, — at least 
 of last year's income, — which they commonly express in 
 terms of dollars and cents ; and this mercantile approxi- 
 mation is certainly indispensable in every-day life. But, 
 like many another idol of the market-place, the com- 
 mercial conception necessitates a somewhat sharper 
 
 i8i
 
 l82 THE INCOME T/1X. 
 
 complementary scrutiny than might be suspected.^ If 
 we confine ourselves to such kinds of wealth as be- 
 long to individuals in their private capacity, that 
 is to say, if we exclude goods like air and sunlight that 
 are free to all, and if we also exclude public property, 
 such as government buildings, which belong to us all 
 alike, we have a vast mass of property the use of which 
 affords the property owners a calculable amount of ad- 
 vantage. These advantages constitute the income, or a 
 part of the income, of society. It is not at all necessary 
 that property in order to afford an income should first 
 pay a certain amount of money into its owner's pocket. 
 One's stable affords as true an income as one's stocks ; 
 one's bicycle as true an economic advantage as one's 
 bonds ; the dwelling-house which one occupies, as indis- 
 putable an income as the tenement one lets to another 
 for a money rent. The commercial view is liable to err 
 just here, and to count as income those receipts only 
 which accrue in current coin. In addition to income 
 received from property, much income — 'perhaps the 
 greater part in the aggregate — comes from service 
 or labor ^ performed either directly for one's self or 
 for another, who makes a return, often in money. 
 Strictly speaking, therefore, one's income, from an eco- 
 nomic standpoint, consists for any given period in the 
 sum total of advantages he derives from his property 
 (directly or indirectly, by immediate use or through 
 handing it over to others for a consideration) plus the 
 advantages derived immediately or mediately from his 
 own labor or exertions. Or, briefly put, income is the 
 
 ^Vide Hadley, Economics, p. 5 sq.; Cannan, Elementary 
 Political Economy, p. 39 sq. 
 
 ' I'idc Nicholson, Money and Monetary Problems, 2d edition, 
 Part II., Ch, XII., The Living Capital of the United Kingdom.
 
 HISTORY OF INCOME TAXES IN ENGLAND. 183 
 
 sum of economic benefits received in a unit of time, or- 
 dinarily a year. When this flow of advantages, measured 
 in money terms, is taken as the basis for imposing taxes, 
 we are in the domain of income taxation.^ Paradoxical 
 as it may seem, the economic conception of income is 
 clear just because the conception is abstract. When 
 the legislator is compelled to frame an income tax law 
 he frames a ponderous inventory of concrete income 
 sources ; and fine as the tax net may be woven, much 
 that, in the economic sense, is real income slips through 
 its meshes. 
 
 History of Income Taxes in England. — The income 
 tax is not yet a century old, and is the most salient illus- 
 tration of the general tendency in modern finance to in- 
 crease the proportion of the national revenues derived 
 from direct taxation.^ Like so many other war expedi- 
 ents, the English income tax belongs to the numerous 
 progeny of Necessity, having been instituted by Pitt in 
 1799 as a war tax. It was temporarily repealed in 1802 
 on the prospect of peace, but the resumption of hostili- 
 ties the next year saw the tax reimposed, and that, too, 
 in ihe scheduled form which it still bears. The clamant 
 exigencies of the struggle with Napoleon induced the 
 British taxpayers in 1806 to submit to a ten per cent, 
 tax on incomes, and it is not surprising that, after stag- 
 gering under an incredible tax burden for years, England 
 rose in stubborn revolt in 181 6, after the final defeat of 
 her antagonist, and for a time shook ofif the income tax 
 
 * If the property which yields the income is taken as the basis, 
 the tax is the general property tax. I'idc Ch. V. 
 
 ' " The modern tendency in England has shown a remarkable 
 movement in this direction, over 40 per cent, of the national 
 income now coming from direct taxation, as compared with 25 
 per cent, a quarter of a century ago." H. Higgs, The Physio- 
 crats, p. 144.
 
 1 84 THE INCOME TAX. 
 
 altogether. Such radical action was very natural, very 
 excusable one might almost say, except that it led to a 
 long series of deficits and presented more than once the 
 lamentable picture of a " chancellor of the exchequer 
 seated on an empty chest, by the pool of a bottomless 
 deficiency, fishing for a budget."^ Not until 1842 was 
 the unpopular tax reimposed, and then only with the 
 understanding that it was to be but a stop-gap. Mr. 
 Buxton has concisely outlined its history .2 " Revived 
 as a temporary tax," says he, " for a specific purpose, 
 it still remains — il ii'y a que Ic provisoirc qui dure — and is 
 on a more permanent footing than ever. Originally im- 
 posed by Pitt as a war tax ; revived by Peel for three 
 years for the purpose of placing the finances of the coun- 
 try on a sounder basis and to promote fiscal and commer- 
 cial reform, it was renewed another three years for the 
 same purpose. Again renewed for a like period in order 
 to fill a void, annually renewed for a couple of years, it 
 was then in 1853 voted for a provisional period of seven 
 years, and was again combined with fiscal reforms and 
 remission of other taxation. But war ^ broke out almost 
 at once, and the tax was again utilized for its original 
 purpose. Subsequently reduced to the old sevenpence 
 (i.e. seven pence per pound, or about 3 per cent.), from 
 that time onward it has been a yearly tax, and has varied 
 in amount between the lod. of i860 and the 2d. of 1874 
 and 1875." 4 
 
 It is not uncommon in works on finance to hear of 
 the advantages and defects of income taxation, — by 
 which is ordinarily meant income taxation in Great 
 
 * Dowell, History of Taxation and Taxes in England, Vol. 
 
 II., P- 315. 
 
 ' Buxton, Finance and Politics, Vol. II., pp. 169, 170. 
 
 •The Crimean War, 1854. 
 
 *The rate at present is 8d. per pound.
 
 HISTORY OF INCOME T/iXES IN ENGLAND. 18$ 
 
 Britain, so that it will be worth while to describe the 
 present English tax somewhat in detail. The official 
 name of the tax, to wit, the " property and income tax," 
 serves as a sort of blanket title for five kinds of taxes 
 imposed on five separate sources of income. Generally 
 speaking, no attention is paid to the aggregate income 
 of any taxpayer, but each of his sources of income is 
 levied upon. Under Schedule A incomes derived from 
 lands or houses owned are taxed. In case the property 
 is mortgaged the tax paid by the mortgagor may be de- 
 ducted from the interest he owes the mortgagee. In es- 
 timating incomes under Schedule A an abatement of 
 one eighth in farm rentals and of one sixth in building 
 rentals is conceded as a sort of compensation for the 
 estimated cost of repairs and insurance required. Sched- 
 ule A comprises, therefore^ the incomes of the owners 
 of real estate. It is, however, the occupier of the property 
 who in most cases advances this tax, subsequently 
 deducting the amount thereof when next he pays his 
 rent. Schedule B includes the income of the occupiers of 
 land, especially tenant farmers, and also such owners as 
 are in actual occupation,^ the amount of such income being 
 based on a certain proportion of the annual rent. 
 Bondholders are taxed under Schedule C, and have 
 their taxes deducted by the Bank of England out of the 
 interest on the public securities they own or the annui- 
 ties they enjoy. Similarly, Schedule E comprises in- 
 comes derived from government salaries and pensions, 
 and from public corporation salaries, out of which the 
 
 ^" Originally the occupier pays both taxes (A and B) where 
 they are chargeable, and subsequently, if a tenant, deducts the 
 tax under Schedule A from the next payment of rent to his 
 landlord." Dowell, op. cit., Vol. III., p. 114.
 
 1 86 THE INCOAfE TAX. 
 
 tax is deducted before the residue reaches its final desti- 
 nation. In these four schedules the method of stoppage 
 at the source is applied with a fair degree of success, but 
 Schedule D, the drag-net tax, professedly covering all 
 other incomes, such as those derived from trade, profes- 
 sional service, and wages, is assessed upon returns made 
 by the taxpayer. This schedule yields nearly one half 
 of the aggregate revenue derived from the income tax, 
 and allows, of course, the usual amount of evasion which 
 self-assessment always produces. Incomes under £700 
 are assessed not on their full value, but are allowed abate- 
 ments, and all incomes under ii6o are exempted alto- 
 gether under Schedule D. The incomes of charitable insti- 
 tutions, schools, and provident societies are exempt from 
 the income tax, and life-insurance premiums are de- 
 ducted in computing income. 
 
 General Characteristics of Income Taxes. — Whether 
 a colorless, theoretical discussion of the general princi- 
 ples of income taxation is likely to prove very fruitful 
 may well be doubted. For income taxes, as we find 
 them in operation, are not a mere ' bloodless ballet of 
 categories ' financial, but generally a set of fiscal expe- 
 dients differing from country to country, originally im- 
 posed by necessity and retained through despair of 
 finding a less obnoxious substitute. Prussia, to be sure, 
 has a model income tax, " not ideally perfect," it is con- 
 ceded, " but laid down in accordance with the general 
 principles enunciated " ^ by sound finance, one of whose 
 dicta, it is rather curious to observe, is the declaration 
 of income by the taxpayer, — a device which, experience 
 has taught, leads always to fraud. Italy, too, has an 
 income tax which, like " the property tax in the United 
 
 * Plehn, Introduction to Public Finance, p. 236.
 
 GENERAL CHARACTERISTICS OF INCOME TAXES. 187 
 
 States, is ineffective through evasion." ^ But after mak- 
 ing all allowances for innumerable differences in detail, 
 there are certain considerations, somewhat attenuated to 
 be sure, which apply to income taxes generally. 
 
 Historically considered, income taxes have been more 
 or less successful efforts to throw an increased share of 
 public expenses upon the wealthy. Put into the techni- 
 cal language of finance, this phase of income taxation is 
 generally summed up in the phrase — Equalization of 
 Taxation. Evidently, where taxes are imposed upon the 
 great staples of consumption, whether manufactured at 
 home or imported from abroad, the consumer in gen- 
 eral 2 bears the burden of the tax. It will therefore often 
 happen that such indirect taxation absorbs a greater part 
 of the smaller incomes than of the larger incomes. Such 
 inequality sins against the canon of distributing public 
 burdens in proportion to each taxpayer's ability, and 
 may therefore be redressed, in part, by an income tax 
 exempting the lower incomes ^ or abating the rate of 
 income tax imposed thereon. How far existing in- 
 equalities of taxation may be redressed by an income 
 tax will depend, of course, upon conditions peculiar to 
 each nation. It is worthy of notice, however, that very 
 serious injustice may be perpetrated by this compensa- 
 tory scheme. It may happen, it sometimes has hap- 
 pened, that while the income tax has redressed inequali- 
 ties as between the recipients of the largest and the 
 
 ^ Bastable. Public Finance, p. 451 sq. Bastable admits, how- 
 ever, that " Italian finance has found a powerful source in this 
 form of taxation." 
 
 * See p. 174. 
 
 'Jevons estimated that in England families with incomes of 
 £40 paid in taxes 10% of their income; families with incomes of 
 £85, 8.2%; families with incomes of £500, 8%. See also Cliff e 
 Leslie's Essays, p. 393 sq.; also Buxton, Finance and Politic*, 
 Vol, I., p. 311.
 
 1 88 THE INCOME TAX. 
 
 smallest incomes, this gain has been purchased by un- 
 duly burdening the moderately low incomes. The 
 heaviest burden in England once fell, as Sir James 
 Graham expressed it, " where the fustian jacket ends and 
 the cloth coat begins." 
 
 " There is no class of the community," said Mr. Lowe 
 in 1872, " who are so severely pinched by taxation as 
 the lower class of income taxpayers. Everything seems 
 to hit them ; they pay income tax, they pay house tax, 
 and their principal consumption is the consumption of 
 articles on which taxes are and still will be retained. 
 Iheir tea, their cofifee, their sugar, their spirits, theii 
 beer, all contribute to the taxes, and then they are heav- 
 ily amerced in taxation in the shape of local rates. I 
 do not think that any class pay so much as the poorer 
 part of the income taxpayers." ^ 
 
 Naturally enough, it is proposed to obviate this injus- 
 tice by abatements in the tax rate on the smaller in- 
 comes, or by a progressive rate of taxation upon all 
 incomes. But the productivity of the tax will suffer 
 thereby, and its effective enforcement will be somewhat 
 impaired. Still, when everything is said by way of al- 
 lowance, it must be conceded that an income tax gen- 
 erally serves to modify the injustice of the tax burden 
 which indirect taxes invariably create. 
 
 Besides redressing the inequalities of taxation, an in- 
 come tax, it is often maintained, serves as a most useful 
 fiscal instrument quickly available in times of war — " a 
 third line of defence," as it has been termed — and capa- 
 ble also of quickly making good a deficit in times of 
 peace. The English income tax has acted as a buffer, 
 serving at one time to obviate deficits, and again as an 
 easy means of relaxing the strain on the taxpayer when 
 
 'Buxton, Finance and Politics, Vol. I., p. 311.
 
 GENERAL CHytRACTERlSTlCS OF INCOME TAXES. 189 
 
 a surplus of revenue seemed probable. The utility of 
 such a tax in time of war cannot be gainsaid, for, with 
 the administrative machinery in running order, no source 
 of revenue responds more quickly to present needs, or 
 yields supplies more steadily, than a tax on incomes. Less 
 can be said on the score of using the tax as an easy means 
 of securing equilibrium between current receipts and ex- 
 penses. In England alone is the annual rate of income 
 taxation readily variable, and that possibility involves 
 with it the English system of responsible cabinet gov- 
 ernment, which, be its merits what they may, is not 
 likely to be speedily domesticated in the United States 
 or (in its genuine form) on the Continent. 
 
 The defects of income taxes cannot be deftly covered 
 up by remarking that an income tax is but a part of a 
 system of taxation, and by suggesting that its imperfec- 
 tions may all be made good by the other taxes in the 
 system. The glaring defect in an income tax is that 
 much real income never is and never can be discovered 
 and taxed. The principle of stoppage at the source, 
 where applicable, is an admirable expedient for prevent- 
 ing evasion, but no income tax ever devised can prevent 
 fraud when the taxpayer is allowed or required to dis- 
 close his own income. This is deplorable, perhaps de- 
 rogatory to the dignity which hedges the citizen, but it 
 is demonstrably true, and is not likely to change yet 
 awhile. If the tax officials ar^i? charged with ascertain- 
 ing the income of the contributor, the result will be the 
 same — much income will escape — and the taxpayer's ir- 
 ritation will nevertheless be great. If certain legal pre- 
 sumptions are relied upon, such as the amount paid 
 annually for rent, the result must be arbitrary and vexa- 
 tious, while much income will not only not be disclosed, 
 but will be permanently hidden as it were behind a screen
 
 tgi> The income tax. 
 
 erected by law. If one is asked what is the remedy fof 
 this inevitable defect in income taxes, the answer is that 
 there is none. To suggest the general property tax as 
 a remedy — even as a complementary remedy to the in- 
 come tax — shows little knowledge of the true inwardness 
 of taxation. The two taxes taken together, if they are 
 fairly administered, may conceivably, under certain cir- 
 cumstances, be better than either by itself, but to sug- 
 gest that they " realize justice " is certainly to adopt a 
 complaisant view of finance. The other view, that jus- 
 tice in taxation can never be realized except in a very 
 moderate degree, is not pleasant either, but on the other 
 hand is rather nearer the truth. 
 
 The alleged defect of an income tax as it is gener- 
 ally set down in works of finance, is its failure 
 to discriminate between diflferent kinds of income. 
 There seems to be a tolerably general acquiescence 
 in the dictum that temporary incomes ought to be 
 taxed at a lower rate than permanent incomes, and 
 that incomes from personal exertions at a lower rate 
 than incomes from property. ^ Leaving for the moment 
 the source of income out of the question, it is certain that 
 no reason exists for the gentler treatment of temporary 
 incomes than of permanent incomes — if indeed there be 
 any permanent incomes. The income received for ten 
 years is taxed only so long as it is received, and if an- 
 other income accrues for thirty years it must bear its 
 burden for the longer period. 
 
 Whether property incomes should be treated in a dif- 
 ferent way from exertion incomes is a more difficult 
 
 L'impot generale sur le revenue doit demander une moindre 
 quote part aux revenues aleatoires, perissables et provenant de 
 I'activite personelle, qu'aux revenues fixes, certains, perpetuels, 
 qui proviennent d'un capital accumule." Leroy-Beaulieu, 
 Traite des Finances, Vol. I., p. 445.
 
 INCOME T^XES IN THE UNITED STATES. I9I 
 
 question. If the different rates were practicable, that is, 
 if the distinction could be made without leading to grave 
 administrative difficulties, — which is doubtful, — or if the 
 higher rate on property incomes served only as a coun- 
 terweight to the presumed evasion of taxes rightly due 
 by property owners as a class, something might be said 
 for the proposed plan of discrimination. But if it is to 
 the interest of society, as well as of the individual, that 
 property should be accumulated, the amercing of in- 
 comes derived from property at a higher rate than those 
 springing wholly from personal exertions would seem 
 to be a curious incentive to offer men to amass durable 
 property. Such discrimination in taxing the two kinds 
 of income would act in part as a premium upon such 
 production as takes the form of goods that perish wholly 
 in the using. 
 
 Income Taxes in the United States. — The story of 
 income taxes in the United States cannot be invested 
 with much novelty. It has been thoroughly exploited, 
 and that recently.^ The only effect invariably produced 
 by the study of the subject, whatever be one's personal 
 views, is multitudinous irritation. DifHcUe non scribere 
 satiram might have been truthfully written of this theme. 
 There is, however, in the first place, no demurrer to the 
 verdict that the state income tax, as it exists in three 
 commonwealths (Virginia, Massachusetts, and North 
 Carolina) is a mockery. Whether the federal war in- 
 come tax was a success depends largely upon the con- 
 ception one holds of success in matters financial. But 
 it will hardly be worth our time in this place to follow 
 the serpentine windings of the legislation which shaped 
 
 ^ See Professor Dunbar's article in the Quarterly Journal of 
 Economics, Vol. IX.; also Professor Seligman's article in the 
 EQonomic Journal, Vol. IV,
 
 I9» THE INCOME TAX. 
 
 and reshaped the war income tax.^ Congress in 
 i86l committed the nation, temporarily at least, 
 to the policy of taxing incomes, and for over ten years 
 (from 1863 to 1873, both inclusive) receipts from income 
 taxes figured among the federal revenues. The last 
 lease of life accorded the tax was a two-year extension 
 decreed in 1870. After 1873 this source of supply dried 
 up completely. 
 
 Into the ever-changing details concerning the tax 
 rate, the progressive charges on higher incomes, the limit 
 of exemptions, and the methods of enforcement, it would 
 be profitless here to enter. Sufftce it to say that the 
 highest rate ever in force was 10 per cent., the lowest 
 2^ per cent., while the exempted incomes varied from 
 $600 to $2000. The highest yield for any one year was 
 $72,982,159 in 1866. Perhaps of more significance than 
 anything about the war income tax is the fact that, 
 though Gallatin had suggested such an expedient at the 
 time of the second war with Great Britain, the federal 
 government had never before employed such a fiscal 
 agency. It was only one instance of the high-water 
 mark of the doctrine of federal powers. The law's re- 
 peal was due to its unpopularity in the older and wealth- 
 ier parts of the country, to the receding wave of cen- 
 tralization, and to the reduced expenses resulting from 
 the establishment of peace. Almost a quarter of a cen- 
 tury elapsed before another income tax was placed upon 
 the federal statute-book. 
 
 Most histories of the income tax of 1894 begin with 
 some reference to the * mandates ' of 1890 and 1892. 
 A * mandate ' is what the politicians of the successful 
 
 * A thorough study of the Civil War Income Tax by Mr. Jos. 
 A. Hill is to be found in the Quarterly Journal of Economies. 
 Vol. VIII., p. 416 sq.
 
 INCOME T/1XES IN THE UNITED STATES. 193 
 
 party think the electorate wants, when the majority in 
 the last election has been decisive. Such mandates might 
 serve as useful indices of the trend of public opinion, 
 if the electorate had not as many minds as an old woman, 
 and did not change them as frequently. But however 
 this may be, the inference from the general elections, 
 congressional and presidential, in the years above men- 
 tioned, seemed very obvious. General Harrison had 
 been elected on the issue of protection, and the Mc- 
 Kinley Tariff bill was certainly a vigorous redemption 
 of party and platform pledges. The success of the 
 Democrats in 1890 and 1892 could be construed only 
 as a popular condemnation of the principle of protection, 
 and accordingly the Democratic party leaders in 1893-4 
 began to shape a measure which would, as they hoped, 
 accord with the views of the majority of the people, as 
 indicated in the election of Mr. Cleveland and a Demo- 
 cratic Congress. The crisis of 1893, whose causes are 
 still a matter of dispute, came in to complicate the prob- 
 lem, and the early repeal of the silver purchase clause of 
 the Act of July 14, 1890, sowed the seeds of dissension 
 in the then dominant party. The dilemma which 
 now confronted the Democrats was to redeem their 
 pledges to scotch the principle of protection, and at the 
 same time to obtain adequate revenue to carry on the 
 government, for the deficit under the last year of the 
 McKinley bill, owing largely to the dwindling volume of 
 imports, was taking on portentous dimensions. It soon 
 became evident that there were two very divergent ele- 
 ments that had been consolidated under the Democratic 
 standard. There was the old-time conservative body 
 whose hereditary economic ideal was free trade (tarifif 
 for revenue only) and hard money. There was also the 
 faction of discontent, especially in the farming ^eg-
 
 194 THE INCOME TAX. 
 
 tions of the South and West, whose grievance was the 
 absence of such prosperity as they feh themselves en- 
 titled to, and who opposed protection, not so much be- 
 cause of any very carefully reasoned economic convic- 
 tions, but because it was a tangible part of a system 
 under which they did not seem to thrive. The two 
 branches could unite readily as a party of opposition, 
 but harmony in constructive legislation was to be ob- 
 tained only at a great cost. The radical section de- 
 manded that the tariff measure should redress the 
 grievances of the South and West. These parts of the 
 country were largely agricultural. They sold in a free 
 market and bought in a protected market. The South, 
 moreover, was in a still greater plight than the West, for 
 no considerable part of the lavish pension expenditure of 
 the federal government drifted back to the South, to alle- 
 viate the tax burdens it bore. The temper of the House 
 was aroused. It was not so much the yield of the new 
 revenue measure that concerned that body (as may be 
 judged from the way in which it rejected, at first, the 
 revenue duty on sugar), but it was upon a redistribution 
 of the burden of federal taxation that the House was 
 bent. The income tax became an integral part of the 
 Wilson bill, which was passed and sent to the Senate. 
 Here the House measure was subjected to a merciless 
 revision, generally in the direction of lessening the 
 breaches the original bill had made in the protective 
 svstem, and also in the direction of increasing the total 
 revenue to be derived from customs duties. The in- 
 come tax provisions, though opposed by the senior 
 Democratic senator from New York, remained intact, 
 though limited to five years' duration, and the re- 
 modelled measure was forced upon a reluctant House 
 and became lavv without the President's signature^.
 
 INCOME TAXES Ihl THE UNITED STATES. 195 
 
 What the result might have been had the law gone into 
 operation can only be surmised. But the Supreme 
 Court, in May of the next year (1895), first maimed and 
 then destroyed the tax by pronouncing it unconstitu- 
 tional. Perhaps no more pregnant decision was ever 
 handed down from that tribunal, for, be its future 
 eflfects what they may, the abolition of the tax took 
 from the administration its last financial resource, aggra- 
 vated the deficits that were already become chronic, 
 split the two wings of the Democracy into factions hope- 
 lessly embittered, and, as much as any other one thing, 
 made the question of the free coinage of silver the issue 
 in the presidential campaign of 1896. 
 
 Voltaire once remarked about some tax law that no 
 burden the law imposed could be compared with the 
 burden of reading the law through, and the remark 
 seems apposite after one has perused Sections 27-36, in- 
 clusive, of " An Act to reduce taxation, to provide rev- 
 enue for the government, and for other purposes," 
 passed by Congress August 15, 1894, and popularly 
 known as the Wilson bill. The sections above referred 
 to were those which provided for the taxation of in- 
 comes. They required that a tax of 2 per cent, on net 
 incomes 1 should be paid on or before July i, 1895, and 
 each year for four years thereafter. The basis on which 
 the estimate was to be made was upon the income for 
 the calendar year preceding. Private incomes enjoyed 
 an abatement of $4000, although the incomes of corpora- 
 
 ' In estimating incomes, deductions were allowed for neces- 
 sary expenses of production, for interest paid, for losses by fire, 
 shipwreck, and for taxes paid (except against local improve- 
 ments); the incomes of charitable and educational institutions, 
 building associations, mutual insurance companies, federal 
 bondholders, and certain savings banks were exempt from tax- 
 ation.
 
 19^ THE INCOME TAX. 
 
 tions were permitted no such privilege. The assessment 
 and collection of the tax were intrusted to the internal 
 revenue officials, and minute provisions were made for 
 the collection of returns, the exaction of sworn state- 
 ments, the imposition of penalties, the conduct of appeals, 
 and the enforcement of secrecy, which was enjoined upon 
 the administrative stafif. Individuals were required to re- 
 turn upon oath their total incomes. The principle of 
 stoppage at the source was applied sparingly, — only to 
 government salaries and to corporation dividends, but 
 not to the interest on corporate indebtedness.^ Another 
 curious feature was that inheritances of personal prop- 
 erty were included as income for the year in which the 
 inheritance was received. 
 
 Criticism of the Income Tax Law of 1894. — After the 
 income tax law of 1894 had been introduced into Con- 
 gress and had ceased to provoke surprise, it naturally be- 
 gan to excite praise or vituperation, as the case might be, 
 and shortly thereafter the period of naive criticism be- 
 gan. The supporters of the tax often contented them- 
 selves with the deliverance that income was the fairest 
 index of taxpaying ability, — a generality rather trite at 
 best, and in this instance wholly inconclusive. The op- 
 ponents of the tax rushed at the $4000 exemption clause, 
 and pronounced the measure " a tax on thrift " and es- 
 sentially socialistic. The innocent assumption underly- 
 ing this assertion was that prior to this tax the equities 
 of tax distribution had been so nicely adjusted that any 
 addition to our taxes must throw the delicate tax mech- 
 anism wholly out of equilibrium. Some opponents of 
 the tax contended that the tax was " inquisitorial." If, 
 as Doctor Johnson once remarked, " patriotism is the 
 last refuge of a scoundrel," " inquisitorial taxation " is 
 
 * Such as corporation bonds.
 
 CRITICISM OF THE INCOME TAX LAW OF 1894. ^97 
 
 likely to be the first objection raised by a reluctant tax- 
 payer. The same objection when brought against the 
 war income tax — and with much better reason ^ — was 
 readily met by Commissioner Delano, who answered 
 that he did not see why this objection might not, with 
 equal force, be urged against all taxes on personal prop- * 
 erty. " Such taxes," said he, " cannot be collected with- 
 out ascertaining the amount of taxable property pos- 
 sessed by the taxpayer. The law imposing a tax on in- 
 come does nothing more than this, if so much." 2 
 
 Of course any adequate estimate of the income tax 
 involves the careful weighing of a number of considera- 
 tions. Perhaps the question first worth asking is whether 
 the tax would have yielded the adequate amount of rev- 
 enue needed at the time it was passed. The Statistician 
 of the Treasury Department made an estimate while the 
 bill was pending that the tax would yield the first year 
 not less than 12 nor more than 39 millions of dollars, 
 and expressed himself as thinking that the lower limit 
 was nearer the probable yield. This was not borne out 
 by the returns made to the Internal Revenue Depart- 
 ment, for, even after the tax on rentals had (owing to the 
 first decision of the court) been given up, it was antici- 
 pated that the residual yield would be in the neighbor- 
 hood of 15 millions, so that had this tax stood intact 
 it might very likely have yielded 30 million dollars a year 
 in the aggregate — a sum which the Treasury sorely 
 needed, and which would have wiped out the greater 
 part of its recurring deficits. Though its administrative 
 defects, therefore, may have been grave, there is little 
 
 * Incomes during war time were sometimes printed in the 
 newspapers as items of public interest. 
 
 ' Bolles, Financial History of the United States, Vol. III., p. 
 406.
 
 ipS THE INCOME TAX. 
 
 to be said against the tax on the score of inadequacy. 
 It was not the least bitter part of the irony of fate that 
 the income tax, which the Administration accepted only 
 with reluctance, would have enabled it to avert its hu- 
 miliating deficits, while those who originally proposed 
 the tax designed it as an instrument to secure equity in 
 taxation rather than as a needed source of supplementary 
 revienue. 
 
 The tax would have operated also to reapportion the 
 burden of federal taxation more equitably. At least 
 there is very good reason to think so. Senator John 
 Sherman, in opposing the repeal of the war income tax, 
 said truly and prophetically : " A few years of further 
 experience will convince the body of our people that a 
 system of national taxes which rests the whole burden 
 of taxation on consumption, and not one cent on prop- 
 erty or income, is intrinsically unjust. It will not do to 
 say that such a person consumes in proportion to his 
 means. It is not true. Every one must see that the 
 consumption of the rich does not bear the same rela- 
 tion to the consumption of the poor as the income of 
 the one does to the wages of the other. As wealth ac- 
 cumulates this injustice in the fundamental basis of our 
 system will be felt, and forced upon the attention of 
 Congress." ^ Mr. Sherman's verdict in this matter was 
 indisputable, and much the same might be truly alifirmed 
 of the income tax law of 1894. Defects in the measure 
 there were, nor were they few in number or of slight im- 
 portance. The principle of stoppage at the source might 
 have been applied more extensively, especially to the 
 interest paid by corporations upon their bonded indebt- 
 
 ' Bolles, Financial History of the United States. Vol.^ ITL, p. 
 406. It is also rather curious to note that Senator Sherman 
 pronounced the former income tax " the most just and equitable 
 tax that is now levied in the United States, without exception."
 
 THE INCOME TAX DECISION. I99 
 
 edness.^ The productivity of the tax was markedly 
 lamed by this omission. The exemption limit of $4000 
 seemed also to countenance a propaganda of confisca- 
 tion, though it should be remembered that the exemp- 
 tion under the first income tax was finally set at $2000. 
 The productiveness of the measure also was largely 
 curtailed by this high exemption limit, and by the con- 
 sequent escape of the larger number of incomes from 
 taxation. Some of the privileges accorded to incomes 
 from special sources, such as building associations, 
 rested on no very solid ground, while the taxation of all 
 corporate dividends might have proved a hardship to 
 those whose incomes, however small, were derived from 
 such sources. The inclusion of inherited personal estate 
 as income for the year in which the property fell to the 
 heir was an unwise attempt to seize upon a source of 
 income best left to the commonwealths. 
 
 It would be an unprofitable task to inquire whether 
 the considerations in favor of the measure outweighed 
 those advanced against it. Many who thought the tax 
 hopelessly defective from an administrative standpoint 
 regretted the decision of the Supreme Court, for fear that 
 in case of war we should be deprived of an almost indis- 
 pensable fiscal agency. But it is not certain that the 
 war spirit may not in future so far penetrate that 
 court as to lead it to revoke a decision which came as 
 such a surprise in times of peace. Though we may not 
 finally be able to do without an income tax, we could 
 hardly have acquiesced permanently in such a tax as 
 that of 1894. 
 
 The Income Tax Decision. — The decision or, more 
 strictly, the decisions of the Supreme Court which killed 
 
 * Corporation bonds ought to be classed with their stock as 
 income sources.
 
 20(5 THE INCOME TAX. 
 
 the Income Tax of 1894 made a great deal of history, 
 and unmade, or, at all events, remade, a good deal of law. 
 It certainly traversed legal expectation,^ it jostled the 
 doctrine of stare decisis, it contravened previous deci- 
 sions, and it discredited a good many dicta which had 
 already become ' blessed words ' among authoritative 
 text writers and accredited authorities on constitutional 
 law. 
 
 The status of the case was as follows : A certain Mr. 
 Pollock, a citizen of Massachusetts, owned stock in the 
 Farmers' Loan and Trust Company, a New York cor- 
 poration. Said Pollock requested the company not to 
 disclose income or pay the tax voluntarily upon such part 
 of its income, or its wards' incomes, as might be derived 
 from land or rentals, or from state or municipal bonds. 
 The Farmers' Loan and Trust Company declined to ac- 
 cede to this request, and prepared to disclose and pay 
 taxes on incomes derived from the sources above speci- 
 fied. Thereupon said Pollock brought suit in the Cir- 
 cuit Court of the United States for the Southern District 
 of New York, and prayed for equitable relief, asking 
 that the Farmers' Loan and Trust Company, in accord- 
 ance with his request, be restrained from complying 
 voluntarily with the income tax law, which he asserted 
 was unconstitutional. That corporation in its demurrer 
 waived the point of adequate remedy at law as by man- 
 damus,^ cited want of equity, and maintained the con- 
 
 * I do not make this statement entirely upon my own author- 
 ity. While the decision was pending, T was told by the dean of 
 one of the largest law schools of New York City that the metro- 
 politan bar expected the court to uphold the constitutionality 
 of the law. 
 
 * Equity cannot be invoked so long as there is an adequate 
 remedy at law, but a mandamus, if issued, could have required 
 the corporation to pay under protest. The Revised Statutes 
 (§ 3224) prohibit federal cf)urts from entertaining suits for stop- 
 ping the assessment or collection of taxes.
 
 THE INCOME TAX DECISION. 201 
 
 stitiitionality of the law. The case was dismissed by 
 the Circuit Court on demurrer, and thereafter, as involv- 
 ing the constitutionality of a federal statute, was ap- 
 pealed to the Supreme Court. First, in March, the case 
 was argued by a distinguished array of counsel before 
 that body, which handed down its first decision April 8, 
 1895, and, after a rehearing before a full bench, its final 
 decision in the following May. The appellant's conten- 
 tions were essentially these : (i) that the law was un- 
 constitutional because it taxed rentals ; this, he alleged, 
 was essentially a tax on real estate, which was a direct 
 tax and as such contravened the fourth clause of Sec- 
 tion 9 (Article I) of the Constitution, which provides 
 that direct taxes shall be laid " in proportion to the 
 census or enumeration " therein provided for. The law, 
 it was contended, violated also the third clause of Sec- 
 tion 2 (Article I), which decrees that " direct taxes shall 
 be apportioned among the several states . . . according 
 to their respective numbers," etc. It was claimed (2) 
 that the law was unconstitutional because it taxed in- 
 come from personal property ; this also, it was con- 
 tended, was essentially a direct tax, and thus contravened 
 the same constitutional provisions. Moreover, the allega- 
 tion was made (3) that the law was unconstitutional be- 
 cause, even if not a direct tax, it was repugnant to the first 
 clause of Section 8 (Article I), which provides that " all 
 duties, imposts, and excises shall be uniform through- 
 out the United States " (the " uniform " requirement, 
 it was alleged, was sinned against by the $4000 exemp- 
 tion and the exemption of certain specified classes of 
 incomes). Lastly it was contended (4) that the law was 
 unconstitutional and void because the tax imposed on 
 incomes derived from state and municipal bonds was 
 an unwarrantable transgression upon powers reserved
 
 202 THE INCOME TAX. 
 
 to the states in Articles IV and V of the Constitu- 
 tion.^ 
 
 The last contention was practically conceded by the 
 government and may be dismissed without comment. 
 Such incomes as thus escaped the income tax would have 
 lessened the aggregate yield of the tax to no very damag- 
 ing extent. The third contention, that of lack of " uni- 
 formity," finally hinged upon the construction put on 
 the two prior contentions. The uniformity required by 
 the Constitution had been generally interpreted as a 
 mere geographical uniformity. If the indirect effect of 
 the law was to tax certain sections, notably the northeast- 
 ern, more severely than the others, it would seem to 
 follow that import duties imposed on goods mainly or 
 wholly consumed in certain sections are unconstitu- 
 tional. But this was not the pivotal point of the battle. 
 The point which the assailants of the law chiefly at- 
 tacked was the direct nature of the tax. Boiled down, 
 the argument against the law was this : the income tax 
 is a direct tax ; it is not apportioned to population, as 
 the Constitution provides direct taxes must be; it is 
 therefore unconstitutional and void. Perhaps never be- 
 fore was a phrase more twisted than the phrase " direct 
 taxation." The most desperate attempts were made to 
 discover some definite and consistent meaning that must 
 inevitably attach to the term direct tax. 
 
 It is one of the costs of a peaceful civilization ruled by 
 courts of justice, that grave issues sometimes take a shape 
 which the traditional" visitor from Mars" would find hard 
 to view with any measurable amount of gravity. Here 
 were two sections of a nation, each trying to unload on 
 
 ' Neither Congress nor the states may tax an official agency 
 of the other. To allow this, if the nominal tax were exorbitant, 
 would destroy or weaken the autonomy of the federal govern- 
 ment or that of the states.
 
 THE INCOME TAX DECISION. 203 
 
 the other a burden of taxation, and the issue was finally 
 to turn on the interpretation of a single phrase. It is 
 sometimes lucky, however, that a nation can afiford to 
 seem ridiculous. It is cheaper than fighting, and by far 
 more comfortable. 
 
 At the first hearing of the case the Attorney-General, 
 Mr. Olney, in behalf of the government, was inclined 
 to treat the contention that the income tax was a direct 
 tax (in the constitutional sense of the term) rather cava- 
 lierly. He declared that " whether an income tax is 
 what the Constitution describes as a ' direct tax ' is a 
 question as completely concluded by repeated adjudica- 
 tions as any question can be. It is not a direct tax 
 within the meaning of the Constitution, unless five con- 
 curring judgments of the Supreme Court have all been 
 erroneous." This was unquestionably the view of most 
 authorities on constitutional law. Judge Cooley in his 
 work on The Law of Taxation (p. 8) had explained the 
 phrase as follows : 
 
 " Question has several times been made as to the 
 meaning of the term direct taxes as thus employed. It 
 was held in an early case that a tax on carriages, by 
 number, was not a direct tax in the sense of the Consti- 
 tution, and it was strongly intimated in the same case 
 that only capitation taxes and taxes on land should be 
 deemed within the provision. More recently it has been 
 decided that a tax on incomes is not a direct tax. Neither 
 is a tax of a specified per cent, upon the circulation of 
 banks ; nor a tax upon succession to realty on the 
 death of its owner. And the intimation of the earliest 
 case is very distinctly affirmed in one more recently de- 
 cided where a tax on land was in question." ^ What 
 
 'The cases referred to in their order are: (i) Hylton vs. 
 U. S., 3 Dall. 171 ; (2) Pacific Insurance Company vs. Soule, 7
 
 204 THE INCOME TAX. 
 
 the meaning- of the phrase " direct taxes " was in the con- 
 stitutional convention can only be surmised. Probably, 
 like most other terms whose content has not been sub- 
 jected to minute scrutiny, it meant one thing to one 
 member, another to another, and nothing at all to a 
 third. Madison has recorded that " in tlic course of the 
 debates, and after the motion of Mr. Ellsworth that the 
 first census be taken in three years after the meeting of 
 Congress had been adopted, Mr. King asked what was 
 the precise meaning of direct taxation," and added sig- 
 nificantly, " No one answered." 
 
 The first tentative answer came in 1796, when 
 the Supreme Court, some of whose members had 
 been also members of the constitutional conven- 
 tion, decided the case of Hylton vs. U. S. and ex- 
 pressed the opinion obiter that only land taxes and capi- 
 tation taxes were direct taxes in the constitutional sense 
 of the term. The war income tax had also been tested 
 before the Supreme Court, which decided. In re Pacific 
 Insurance Company vs. Soule, that a tax on the income 
 of an insurance company was not a direct tax, and, In re 
 Springer vs. U. S., that an income tax was not a direct 
 tax, though here it was urged that the income sprang 
 in part from land. Indeed, both sides, in 1895, were 
 agreed that a land tax was a direct tax in the view of 
 the Constitution, but the government contended that, to 
 constitute a land tax, land must be taxed immediately 
 by quantity or valuation, while the appellants declared 
 that a tax on income derived from land was a land tax 
 and therefore a direct tax. The latter was the view 
 which the court by a narrow majority adopted. " The 
 name of the tax," said Chief Justice Fuller, " is unim- 
 
 Wall. 443; (3) Veazie Bank vs. Fenno, 8 Wall. 533; (4) Sholey 
 vs. Rew, 23 Wall. 33i; (5) Springer vs. U. S., 102 U. S. 586.
 
 THE INCOME TAX DECISION. 205 
 
 portant. The real question is, is there any basis on which 
 to rest the contention that real estate belongs to one 
 of the two great classes of taxes, and that the rent or 
 income which is an incident of its ownership belongs to 
 the other ? We are unable to perceive any ground for 
 the alleged distinction." All that a layman can say in 
 answer to this way of putting the case is that if lawyers 
 are universally to begin to lay aside all verbal distinc- 
 tions which enshrine precedents and no longer follow 
 their ancestral wont of discriminating between the tem- 
 ple and the gold of the temple, the altar and the gift 
 thereupon, there is a large amount of law which is in a 
 pretty " parlous " state. 
 
 Mr. Justice White's dissenting opinion commended 
 itself to the judgment of more than one jurist of 
 repute. " Here, then," says he, " is the dilemma : if 
 the framers [of the Constitution] understood the 
 meaning of the word direct, the practical effect which 
 they gave to it should remain undisturbed ; if they were 
 in doubt as to its meaning, the interpretation long since 
 authoritatively affixed to it should be upheld. . . . The 
 opinions in the Hylton case, so often approved and re- 
 iterated, the unanimous view of the text writers, all show 
 that a tax to be direct must be an assessment of the land 
 itself, either by quantity or valuation. Here there is no 
 such assessment." At the first hearing of the case eight 
 justices sat in banco. They declared the tax on incomes 
 derived from rent and from state bonds unconstitu- 
 tional, and divided evenly on the issue of the constitu- 
 tionality of taxing other incomes. When the case was 
 reheard before a full bench of nine justices the constitu- 
 tionality of the tax on all sources of income was denied, 
 inasmuch as the prior elimination of the tax on rent in-
 
 2o6 THE INCOME TAX. 
 
 comes had, in the opinion of the majority of the court, 
 fatally destroyed the orij:^inal intent of the law. 
 
 The deliverance of the court can be explained only 
 by reference to what has been happily termed " psycho- 
 logical climate." No one, in his senses, dreamt of im- 
 pugning the scrupulous honesty of our highest judicial 
 tribunal. Still, there were but few who hafl expected 
 a decision which ran in the teeth of dicta and precedents, 
 and the effect produced, even upon those who person- 
 ally had every reason for detesting the tax, was that of 
 surprise, none the less intense because very welcome. 
 The Supreme Court had reversed its own decision be- 
 fore, but except in the legal tender cases no modern 
 decision had been reversed which bore very directly 
 upon the stirring political issues of the day. But the 
 court evidently had not been appealed to in vain upon 
 the issue that the tax was a stride towards socialism, 
 and the " weightier matters of the law " seemed to have 
 been forgotten under the shadowy sense of dread which 
 the dim spectre of socialism invoked. The most venera- 
 able member of the court gave emphatic utterance to 
 the feeling which moved him. " The present assault 
 upon capital," said Mr. Justice Field, " is but the begin- 
 ning. It will be but the stepping-stone to other, larger 
 and more sweeping, till our political contests will be- 
 come a war of the poor against the rich, a war constantly 
 growing in intensity and bitterness." Whether the 
 prophecy come true or not, it is at least open to question 
 whether the decision, like the famous Dred Scott de- 
 cision, may not contribute to bring about the very end 
 it sought so sedulously to avoid.
 
 CHAPTER IX. 
 
 PUBLIC INCOME FROM QUASI-ECONOMIC 
 
 SOURCES. 
 
 The Contractual Income of the State. — It is not alone 
 through the drastic agency of positive law which always 
 stands behind the tax collector that the entire income of 
 the state is obtained. Alongside the state as a master, 
 stands the state as a business agency; and though no 
 two characters may seem less compatible than those of 
 " sovereign " and " trader," no state confines itself exclu- 
 sively to either. Just as an individual derives his income 
 from his property or his labor, so the government sup- 
 plements its income from taxation by such receipts as 
 it may obtain for the use of public property or for the 
 performance of public services. The public lands figure 
 among the resources for meeting public expenditure, 
 and the charges for postal services remind us daily that 
 not all we pay into the coffers of the public treasury 
 stands itemized on our tax duplicate. The quasi-eco- 
 nomic income of the state, then, will comprise such rev- 
 enues as accrue to the fisc from all sources except 
 taxation ; and as such receipts very generally presup- 
 pose a contract, specific or implied, between the state 
 and a private party, we may lump these receipts under 
 the head of "contractual income." ^ 
 
 *The subdivision of public income into two great categories, 
 tajc income and contractual or quasi-economic income, has many 
 
 ?07
 
 2o8 PUBLIC INCOME FROM QUASI-ECONOMIC SOURCES. 
 
 Looked at broadly, the contractual income of the state 
 invites a double treatment, partly descriptive, partly con- 
 troversial. There are certain fields of economic activity, 
 such as the post-office, which custom has, as it were, con- 
 secrated to government administration. Where the 
 state through long experience has become a fairly effi- 
 cient industrial agent, the task of the financier is prac- 
 tically narrowed to scanning with discrimination such 
 sources of public income and testing the principles upon 
 which they are based. 
 
 There are, on the other hand, certain enterprises under 
 private management, notably the business of transporta- 
 tion in the United States, where the evils resulting from 
 the absence of ordinary competition are alleged to re- 
 quire the extension of the state's industrial functions. 
 Where economic considerations of public policy are 
 
 advantages; and considering the scope of this work, where finan- 
 cial categories non sunt )nnltiplicanda, is all but inevitable. The 
 criteria distinguishing the two are: (i) the machinery of collec- 
 tion; (2) the somewhat voluntary character of contractual in- 
 come; and (3) the cost of collecting the two respectively. 
 Quasi-economic income is generally collected by administrative 
 agents distinct from the ordinary revenue or tax officials. The 
 time of the payment of contractual income is to a certain extent 
 at the option of the payer, thou.gh this is also true with reference 
 to indirect taxes. The ratio of gross receipts to net receipts 
 is almost always greater in the case of quasi-economic income 
 than the ratio of the total amount of taxes collected to the net 
 yield of taxes after the cost of their collection has boci 
 deducted. Seligman's acute distinctions^ between taxes, fees, 
 and prices (p. 302 sq. Essays in Taxation) would involve a split- 
 ting up of income from the same source to such an extent as to 
 make necessary a very intricate arrangement of public income 
 sources, — a point well urged by Bastable (Public Finance. 
 2d ed., p. 153 sq., note). Special assessments are, in this work, 
 subsumed under taxes though differentiated from taxes in the 
 ordinary sense. It is frankly admitted .Uhat certain minor public 
 receipts, such as registration fees and penal fines, do not easily 
 fall under either taxes or contractual revenue. Such receipt^, 
 however, are insignificant in amount.
 
 EXTANT SOURCES OF CONTRACTUAL INCOME. 209 
 
 raised, which if well founded would necessitate an en- 
 largement of the contractual income of the state, the 
 preliminary economic issue must first be disposed of be- 
 fore the financial problem can well be attacked. Ac- 
 cordingly, we shall first review the existing sources of 
 the state's quasi-economic income, and thereafter pro- 
 ceed to the question of investing the sovereign with en- 
 hanced industrial powers and duties. 
 
 Extant Sources of Contractual Income. — (a) Public 
 Land. — Almost all states still hold title to certain lands 
 from whose rental or sale they derive a certain amount 
 of income. Whether there was ever a time when all 
 land was held in common or tribal ownership is a vexed 
 historical problem, but certain it is that in all countries, 
 with the progress of civilization, the public lands have 
 tended more and more to pass into private possession. 
 Bastable cites the great public acreage of Russia to illus- 
 trate " the statement that the less the development of 
 the society the greater is the proportion of public land "; 
 and draws the evident conclusion that " the function of\ 
 the state as owner of agricultural land is sure to decline 
 in importance with the advance of society." ^ This fact 
 points to one of the sharpest contrasts between feudal 
 times and the present era,^ and the extension of private 
 holdings at the expense of the public domain bears signi- 
 ficant witness to the increased economic strength im- 
 parted to the state by the more careful and efficient 
 cultivation which private property in land has induced. 
 The recent movement for the nationalization of land by 
 the absorption of land rent through taxation, whatever 
 be its eventual outcorre, is certainly an attempt to row 
 against the stream of modern tendency. City growth 
 
 ^ Public Finance, p. 160 and p. 168, 
 *3ee p. i6.
 
 2ro PUBLIC INCOME FROM QU/tSI-ECOhlOMIC SOURCES. 
 
 and the parallel increase in urban rents, however, have 
 induced some financiers (e.i^. Wag'ner) to view with 
 favor the municipal acquisition of suburban districts, 
 while others think the retention of buildint^ sites when 
 they are already in public ownership the readiest solution 
 of the problem of taxing ground rents. ^ The whole 
 question of the single tax on land rentals is treated else- 
 where, and need not be considered here. 
 
 The public domain in the United States has had an 
 historical significance that can hardly be underrated. 
 Between the states whose perfect union was at fifibt only 
 sketched in the federal constitution the public lands 
 created the unifying tie of a common interest in a future 
 empire. The germ of nationality was to ripen with the 
 settlement and the domination of those vast tracts which 
 lay west of the Alleghanies to the Pacific. It was there- 
 fore wise prevision, pregnant with import, that led the 
 nation speedily to open up this territory to settlers whose 
 acquisition of land in fee simple was made almost with- 
 out money and without price. So, loo, to-day in the 
 matter of the public lands, the exhaustion of the available 
 arable area, the irrigation of arid soils, the quashing of 
 invalid titles, are issues of telling moment.^ But it is 
 largely because our agcr publicus has been of such tran- 
 scendent political and economic import that its financial 
 significance has been trifling ; for when to the cost of ac- 
 quisition of Indian and foreign titles there is added the 
 cost of government surveys, it turns out that the public 
 lands have proved a net drain upon the federal treasury .^ 
 
 ' Bastable, Public Finance, p. 178. 
 
 ' Cf. Hart, Practical Essays on American Government, 
 Essay X; also published in the Quarterly Journal of Economics, 
 Vol. I. 
 
 'Prof. Hart's computation {op. cit.) of the aggregate expense 
 of publig lands to the federal treasury ought to be offset by the
 
 EXTANT SOURCES OF QUASI-ECONOMIC INCOME. 211 
 
 Less than one per cent, of the ordinary revenue of the na- 
 tional government is at present derived from the annual 
 sales of public land,^ and but a trifle over three per cent, 
 of the commonwealth's receipts flows from the public 
 lands they hold.^ There is almost universal acquies- 
 cence in the advisability of alienating the public domain, 
 provided always that it be turned over to bona Hdc culti- 
 vators and not to syndicates of speculators. To pursue 
 another policy would imply the public exploitation of 
 the dcTjiain or an involved policy of leasing the public 
 lands to individuals. The stimulus of self-interest 
 would be lacking in the first, and the risks of specu- 
 lation would be present in the second. Besides, as 
 Adam Smith urged, if the public domain, when sold, 
 would cancel the public debt in whole or part, a virtual 
 mortgage on the public income could be lifted and the 
 expense of the public administration of the domain could 
 be abolished. When, moreover, it is notorious that in 
 agriculture the force of competition is so very apt to 
 insure fair prices, and that the public management of 
 lands has proved scandalously ineffective, the argument 
 for the alienation of public lands available for farms 
 seems conclusive.^ There are, however, certain dissen- 
 tient voices raised when the sale of mines and forests 
 
 income derived from public lands bestowed upon the states 
 and used by them as a source of income for educational and 
 other purposes. 
 
 ^ The net federal income for the fiscal year 1897-8 was 
 $405,321,335, of which $1,243,129 came from land sales. 
 
 ■ Cf. State Library Bulletin of the State of New York (Legis- 
 lation, No. 8). Public lands netted the commonwealths in 1890 
 $5,784,770; in 1895, $3,796,103. The total receipts for the years 
 in question are $111,195,003 and $124,925,920. 
 
 ^Thorold Rogers asserts that the waste incurred in the man- 
 agement of Crown lands in Great Britain is " enormous and 
 scandalous." See his note in his edition of the Wealth of 
 Nations, Vol. IL, p. 413.
 
 212 PUBLIC INCOME FROM QU/ISI-ECONOMIC SOURCES. 
 
 lying on the public estate is proposed. The exhaustion 
 of the nation's stock of metal and timber, which the ruth- 
 less exploitation of such property by private owners 
 would bring- about, is urged against the transfer of these 
 tracts to individual ownership. The speculative charac- 
 ter of mining, however, seems to fortify the other reasons •■ 
 that may generally be uged against the public prosecu- 
 tion of industrial ventures, but a strong case may be 
 made out for the public retention of forest land and its 
 administration by a competent official stafY. Individual 
 self-interest can be trusted to supply lumber from extant 
 forests, if the price for lumber will warrant, but the 
 process of re-afToresting requires such a length of time 
 that self-interest cannot be trusted to re-create the ma- 
 terial which it has destroyed. Moreover, it is urged that 
 the denudation of forest land causes or aggravates inun- 
 dations and floods, and thus indirectly destroys property 
 and involves expenditure for levees and similar protec- 
 tive works. Even the climate is said to be modified — 
 generally for the worse — by the devastation of wood- 
 lands. These reasons presumably justify the state's re- 
 tention of a certain amount of forest land. l)ut the net 
 money income from such land will probably be incon- 
 siderable.^ 
 
 (/;) Public Industries. — Public industrial enterprises 
 have varied in number and extent from time to time, 
 as at present they vary from nation to nation. The 
 maintenance of ordinary roads and systems of drainage 
 
 * A little healthy skepticism with reference to the climatic 
 influences of forest devastation may legitimately be indulged 
 in. Cf. Schoenberg, Handbuch, Bd. 3. P- 68. Moreover, it may 
 be observed passim that the preservation of the forest land m the 
 United States is not materially advanced by putting a duty on 
 the importation of foreign timber, and thus incidentally a pre- 
 mium on the annihilation of our own forests.
 
 EXTANT SOURCES OF QUASI-ECONOMIC INCOME. 213 
 
 which are now ahiiost everywhere inchided among the 
 proper and gratuitous tasks of the government was once 
 a business venture often taken up by private individuals 
 or companies for private profit. So to-day we find a 
 great contrast between states and municipaUties in re- 
 spect of the industrial undertakings they respectively as- 
 * sume. At one extreme stands the Prussian kingdom. 
 owning and operating its railroads, telegraphs and tele- 
 phones, and in great part managing its mines and forests. 
 to say nothing of its porcelain factories and other mis- 
 cellaneous government plants. Our own federal gov- 
 ernment, on the other hand, modestly confines itself, so 
 far as business hazards are concerned, to the administra- 
 tion of the post-of^ce. Great Britain has acquired its 
 telegraph system by purchase from the pre-existing pri- 
 vate companies, and manages it in conjunction with the 
 post. The Australian colonies alone among English- 
 speaking peoples own their railroad system and operate 
 it through their public functionaries, while in France we 
 find under state direction the entire manufacture of to- 
 bacco no less than the fabrication of such articles of 
 vertu as Sevres ware and Gobelin tapestries. Almost all 
 governments maintain certain public works, such as 
 dockyards for the equipment of their marine, while pub- 
 lic armories and gun-factories are found everywhere in 
 connection with the preparation of armament or war 
 material. Municipalities dilTer inter sc no less than cen- 
 tral governments in regard to their public industries. 
 The municipality of Birmingham, so we are assured, 
 furnishes the citizen with light, conveyance, literature — 
 almost everything he could desire ; while many of our 
 newer municipalities apparently rest satisfied when once 
 they have furnished the citizen with " freedom to worship 
 God." The public ownership and operation of water-
 
 2 14 PUBLIC INCOMH I- ROM QUASI-ECONOMIC SOURCES. 
 
 works, of gas and electric plants, and of surface roads 
 is very frequently found on the Continent and in Eng- 
 land, while our American cities, with but few exceptions, 
 have undertaken none of these ventures except that of 
 water-supply. As our primary task, however, is one 
 of description, we may begin with the consideration of 
 the post-office and of public waterworks, almost the 
 only industrial enterprises carried on in America by the 
 federal and local governments respectively. 
 
 Of all the caprices of nomenclature, none is more sm- 
 gular than the bequeathing of the martial term " post " 
 to that big industrial machine which more than any 
 other binds the world of to-day in the peaceful ties of 
 friendship and commerce. It is much as though by 
 some curious accident the word frontier had become the 
 peculiar designation of peace congresses or arbitration 
 conventions. But nevertheless the fact is that the post 
 in its original form was an organization for hastily send- 
 ing military orders between the centre and the confines 
 of the feudal state. It was only after swords began to 
 give way to plowshares that this bureau for the trans- 
 mission of military intelligence gradually took on the 
 functions, first, of forwarding private persons, and then 
 their letters and packets, from one part of the country 
 to another. As industry and commerce grew, this busi 
 ness became lucrative. It was farmed out to private 
 individuals or to corporations ; in France to the Uni- 
 versity of Paris, which paid annually for this monopoly 
 privilege a round ransom to the coffers of the state. 
 Finally, it was operated directly by the state, and has in 
 some countries taken to itself the cognate undertakings 
 of forwarding telegraphic and telephonic messages, of 
 expressing parcels of moderate size and weight, of trans- 
 mitting money, and of serving as a public savings bank
 
 EXTANT SOURCES OF QUASI- ECONOMIC INCOME. 215 
 
 and insurance agency. Everywhere it is a government 
 monopoly, and almost everywhere tl.e government man- 
 agement is efficient and generally satisfactory. This last 
 circumstance alone would be sufficient to suggest an in- 
 quiry into the nature of the business, for if the post- 
 office is to be taken without dispute as an exemplar of 
 state industrial administration, state socialism will be 
 upon us to-morrow. 
 
 The post-office, upon investigation, proves to be 
 unique in more ways than one. The risks involved in 
 the ordinary processes of trade and manufactures are 
 wholly absent. The system of transportation of which 
 it avails itself is ready to its hand. " It has made use 
 of existing and well-known agencies, where the only 
 difficulty was one of organization," says Lord Farrer, 
 who adds : " It is a merit of the undertaking, regarded 
 as an official institution, that there is very little of that 
 speculative element about it which is the life-blood of 
 commercial activity." ^ The capital which the state is 
 required to furnish is comparatively small in amount. 
 Even in private concerns, while the interest on invested 
 capital must be covered if the business is to prove a pay- 
 ing one, there is frequently too little allowance made for 
 the depreciation of fixed capital. Where the state fur- 
 nishes the capital for an enterprise the interest on the 
 investment is frequently forgotten when the industry's 
 profitableness is gauged, and so far as depreciation of 
 state owned capital is concerned, there is little official 
 disposition to wO'- " about that. Apres nous Ic deluge is 
 the comfortable solace of the department, as the taxpayer 
 finally learns to his cost. Again, the post-office is kept 
 under the constant espionage of the public, who can 
 
 *The State in its Relation to Trade, p. 107.
 
 2i6 PUBLIC INCOME FROM QUASI-ECONOMIC SOURCES 
 
 check its efficiency l)y railway time-tables, and note and 
 complain of the slig^htest mismanagement. Even the 
 matter of postal charges is comparatively simple. Nor 
 does the simplicity wholly consist, as we might at first 
 blush imagine, in the purely arbitrary uniformity of 
 postal charges irrespective of the distance traversed by 
 the letter or package. Nothing seems more transpar- 
 ently artificial than to make the same charge for carry- 
 ing a letter from New York to Brooklyn as for carrying 
 a letter from Alaine to California. But underlying tliis 
 seemingly incongruous postal tariff is the indubitable 
 fact that this uniform rate is perhaps as nearly propor- 
 tional to actual cost as any other (within decently mod- 
 erate limits) which could be framed. That great public 
 benefactor, Sir Rowland Hill, to whom England and the 
 world owe their systerns of cheap and uniform postal 
 charges, demonstrated as early as 1837 that the expense 
 of collection, sorting, superintendence, and delivery 
 (which were essentially the same for each and every let- 
 ter) far outweighed the varying expenses incurred in the 
 mere transmission of letters from place to place.^ A uni- 
 form postal tariff, therefore, is not only convenient so 
 far as it obviates difficulty and uncertainty on the 
 part of the postal officials, but is likewise dictated 
 in part by the underlying expense involved in the 
 process. This fact of itself is sufficient to separate toio 
 ccclo the question of postal rates on the one hand and 
 railway charges on the other. The really arbitrary fac- 
 tor in the matter of postal rates is "-■ :/ co much the uni- 
 form charge irrespective of distance, as the division 
 
 ' Cf. Jevons, Methods of Social Pefori'^ n. 369. The con- 
 ditions in the United States are widely different from those 
 prevailing in England in 1837- In the fiscal year 1897-8 the 
 amount paid for the transportation of the mails was $51,780,283; 
 for postmaster's services, $17,460,621.
 
 EXT/INT SOURCES OF QU^SI-ECONOMIC INCOME. 217 
 
 of mail matter into various " classes," and the arbitrary 
 fixation of rates for those different classes. We find 
 in the United States that while the carriage and delivery 
 of mail matter of the first class alone might seem profit- 
 able, the loss involved on matter of the second and lower 
 classes is sufficient to produce a net postal deficit. Still, 
 public opinion would not tolerate an increase in letter 
 postage, and to raise rates considerably on second, third, 
 and fourth class matter would probably reduce the pres- 
 ent volume of mail carried. There seems no very good 
 reason, however, why higher charges should not be im- 
 posed on second class matter so as to avoid the an- 
 nual postal deficit. It must be remembered that the 
 postal officials are not charged with this business of clas- 
 sifying mail matter. The classes are strictly defined by 
 law, and the department has simply to obey instructions 
 which, after all, are exceedingly simple. Add, finally, 
 to the other peculiar characteristics of the post-office 
 this, that an increase in its volume of business does not 
 ordinarily involve a corresponding increase in its work- 
 ing expenses, and that the great postal reforms and im- 
 provements have as often been forced upon the depart- 
 ment from outside as they have originated within its own 
 official circle, and we are in a position to understand 
 why, as Adam Smith says, it is " the only mercantile 
 project which has been successfully managed by . . . 
 every sort of government." ^ Where other enterprises 
 call for venturesome and speculative activity, the post- 
 office requires orderly routine ; where the former de- 
 mand much fixed capital, the post needs comparatively 
 little ; where in ordinary business transactions prices 
 vary even for the same service, the post-office lias al- 
 
 ^ Wealth of Nations, Book V., Chap. II. (p. 405 of Vol. IT.. 
 Thorold Rogers' edition).
 
 2i8 PUBLIC INCOME FROM QUASI-ECONOMIC SOURCES. 
 
 ways one price for the same service ; where other indus- 
 trial enterprises, if mismanaged, long escape exposure 
 and protest, the Argus-eyed public is daily inspecting 
 the efficiency of the postal service; where the freight 
 agent is puzzling over a complicated railway tariff, the 
 postal clerk has the same simple regulations to guide 
 him to-day and to-morrow. Under such circumstances 
 the government's successful administration of the post- 
 office can hardly be construed as proving that the gov- 
 ernment can profitably acquire and capal:>ly administer 
 other industrial enterprises. The admittedly successful 
 management of the post-office must not be understood 
 to imply that it is uniformly self-supporting. " England, 
 France, and Germany are the only countries that derive 
 a substantial amount [of money revenue] from the postal 
 service." ^ The post-office in the United States, with 
 the exception of two years, has not " paid its way " since 
 1865, and the ordinary deficit which now has to be met 
 by appropriation is almost $10,000,000 a year.2 Thus 
 in the department for the fiscal years 
 
 1895-6 the revenue was $82,499,208; expenditure $90,626,296 
 1896-7 " " " $82,665,462; " $94,077,242 
 
 1897-8 " " " $89,012,618; " $98,033,523 
 
 Obviously, where the state monopolizes an industry, 
 it may set such prices as net the maximum revenue, or 
 such prices as yield a fair profit, or such as will simply 
 cover cost. It may also render products or services 
 gratuitously and charge the expense upon the proceeds 
 
 ' Bastable, Public Finance, p. 194. 
 
 ' In 1882-3 and 1883-4 the post office yielded a minimum net 
 income (no allowances being made for depreciation of postal 
 property). The subsequent reduction of letter postage from 3 
 to 2 cents led to steady deficits thereafter.
 
 EXT/tNT SOURCES OF QU^SI-ECONOMIC INCOME. 219 
 
 of taxation. In a democratic state, however, two ten- 
 dencies are almost always at work when the govern- 
 ment enters the industrial field. One is a popular clamor 
 for low prices, and the other is popular indifference 
 to financial deficits which these low prices when ac- 
 corded tend to produce. Both tendencies showed them 
 selves in England in the matter of government tele- 
 graphs ; both are in operation in the United States in 
 regard to postal charges. There is almost every reason 
 to believe that a uniform letter charge of one cent an 
 ounce would largely increase the annual postal deficit, 
 and there is very little reason to think that a deficit so 
 produced would occasion any solicitude on the part of 
 the public. It is all well enough theoretically to discuss 
 which policy the state ought to pursue in fixing its 
 charges, — whether monopoly profits or fair profits, or 
 cost, or gratuitous service should be the rule, — but the 
 fact is, as stated above, that democratic sentiment will 
 incline toward the cost or gratuity principle. Conse- 
 quently, if it is a good rule that (except where services 
 are of universal utility, such as police protection or jus- 
 tice) the one who enjoys the music, and not the tax- 
 payers generally, should pay the fiddler, there is, in view 
 of this tendency of democratic finance, additional reason 
 for limiting the state's industrial functions to their nar- 
 rowest practicable limit. 
 
 The business of carrying and delivering the mails was, 
 as we have seen, an enterprise designed originally for 
 military and administrative purposes. When changed 
 industrial conditions had rendered it chiefly an instru- 
 ment of commerce, the state administration continued. 
 The peculiar character of the undertaking, moreover, 
 proved specially adapted to such public management, 
 and thus the state's monopoly of the post is, in a sense,
 
 2 20 PUBLIC INCOME FROM QUASI-ECONOMIC SOURCES. 
 
 an historical accident. Very different is the story of the 
 government's accjuisition and monopoly of industries of 
 more recent origin. Especially in the case of local gov- 
 ernments has such action been due to the rapid growth 
 of concerns which from their nature are aliens to the 
 commonwealth of competition. Prominent among such 
 industries are the so-called " natural monopolies " en- 
 gaged in supplying water, light, and local transporta- 
 tion. Characteristic of these typical monopolies are the 
 economy which results from their unified organization 
 and operation ; their large exclusion of competition by 
 reason of the general inconvenience which must result 
 from tearing up streets or cumbering their surface with 
 parallel competing lines of pipe, track, or wire ; and, 
 lastly, the indispensable nature of the services which 
 these monopolies render to the increasing part of our 
 population which dwells in cities. The " municipaliza- 
 tion " of these natural monopolies has gone farther in the 
 Old World than in the United States, but we have made 
 a beginning of erecting and operating public water- 
 works in most of our larger cities. Unquestionably, 
 too, we have begun at the right end. The article sup- 
 plied is one of prime and permanent necessity. The 
 technical apparatus has been -brought to a high degree 
 of perfection, and the engineering work required for the 
 construction of reservoirs and the placement of mains 
 embodies no particular mystery. The capital expendi- 
 ture, while enormous in the aggregate,^ is not prohibi- 
 tory or excessive for each city or town. The manage- 
 ment of the business involves no risk and little peculiar 
 difficulty. Responsibility for inefficiency is quickly 
 
 *The census of 1890 estimates local debts contracted for 
 waterworks at about $ig2,ooo,ooa
 
 EXTENT SOURCES OF QUASl-ECOhlOMIC INCOME. 221 
 
 brought home in the small areas of local government; 
 and the rates charged consumers, while they vary from 
 place to place, ought generally to cover the expense of 
 operation, the interest on the capital invested, with an 
 additional margin for the maintenance of the plant and 
 the ultimate extinction of the bonded indebtedness in- 
 curred to establish the works. Still, if the water rate is 
 reduced below cost, the very general utility of the com- 
 modity supplied may serve to cloak or palliate the de- 
 parture from the sound rule of finance above enunciated. 
 No municipality can be expected to be devoid of all 
 idiosyncrasies, and that city is fortunate which errs from 
 the strict path of financial duty only in the matter of 
 refusing to put " a tax on cleanliness." 
 
 In addition to the two typical industries, the post- 
 office and public waterworks, managed respectively by 
 the federal and local governments, passing mention must 
 here be made of several additional business ventures un- 
 der public management in the United States. Several 
 cities 1 have instituted or acquired plants for furnishing 
 illuminating gas, and many more have public electric 
 light plants. There are a few tentative instances of 
 municipal street railroads, while markets, bridges, 
 wharves, docks, and harbors have for a longer time been 
 under municipal management. The advisability of such 
 undertakings will come up later for discussion. Both 
 the federal and local governments are the recipients of 
 penal fines and of registry fees and other miscellaneous 
 fees. The federal government, moreover, has an addi- 
 tional source of profit in the seigniorage charge made 
 upon subsidiary coin. The bonds issued in 1862 and 
 
 * Philadelphia was for a long time the standing example of 
 a laree city ownine and operating its own gas plant. The prop- 
 erty has recently been leased to a private company, however.
 
 2 22 PUBLIC INCOME FROM QUASI-ECONOMIC SOURCES. 
 
 1864 to aid in the building of the Pacific railroads ^ rep- 
 resent the only extensive speculation in capital to which 
 the federal government (and then largely for non-com- 
 mercial reasons) has of late years committed itself. It 
 is probable that the loans made to construct these roads 
 will furnish little or no encouragement for another fed- 
 eral subsidy to similar commercial enterprises. Lastly, 
 it must never be forgotten that in connection with its 
 other work the federal treasury acts as a bank of issue. 
 Whether any profits in the long run accrue from this 
 source is a disputed question. The maintenance of a 
 credit circulation largely in excess of its metallic reserve 
 is held to imply that interest is saved on the uncovered 
 circulation, and it is plausibly argued that interest saved 
 is interest earned. At all events, whatever income, if 
 any, is derived from the Treasury's banking business 
 does not take the form of money income, and can only 
 be estimated by considering how far, if at all, govern- 
 ment banking makes the annual expenditure for interest 
 on the public debt less than such interest would other- 
 wise be. This question is reserved for examination in 
 Part III. 
 
 To recapitulate, the contractual public income in the 
 United States accrues mainly from the post-office and 
 municipal waterworks. Both of these undertakings, it is 
 almost universally conceded, are fit and proper subjects 
 of government monopoly and management. Analogous 
 
 ' The total amount of bonds issued to the Pacific roads was 
 $64,623,512. The interest paid on these bonds had increased 
 the railroads' indebtedness to the government by $71,097,610 
 on November i, 1893. This debt has been partly repaid, and 
 arrangements have been concluded for the repayment of the 
 residue outstanding, both principal and interest, within ten years 
 (from 1899), excepting only the interest on about $6,000,000 ad- 
 vanced to the Kansas Pacific Railroad.
 
 EXTANT SOURCES OF QUASI-ECONOMIC INCOME. 223 
 
 enterprises are in other countries under state control. How 
 far the extension of such governmental industry is advis- 
 able in this country remains to be considered. But even 
 though the limits of public industry eventually be wid- 
 ened, there is little reason for believing that the net in- 
 come which they will furnish the public chest will 
 approximate the much greater revenue collected through 
 the agency of taxation.
 
 CHAPTER X. 
 
 EXTENSION OF THE STATE'S CONTRACTUAL IN- 
 COME. 
 
 General Features of Railway Development. — So long 
 as we confine our discussion to the depiction of the suc- 
 cessful administration of the post and of waterworks by 
 governmental agency, our task is irenical. When we 
 trench upon the question of extending the industrial 
 sphere of the government, controversy at once grows 
 rife. To transport ourselves into the midst of the 
 fray it is only necessary to begin with " the railroad 
 problem." This well-worn phrase serves as a label 
 for many issues. For there are a thousand railroad 
 problems, or rather a thousand different aspects of the 
 same problem, which daily confront us. Ask the in- 
 vestor to define the problem, and he will tell you it is the 
 maintenance of dividends and interest payments on rail- 
 road securities. Ask the traffic manager, and you will 
 learn that the railroad problem which confronts him is 
 to increase the volume of his road's traffic. The shipper 
 is equally sure that low freight rates are " the one thing 
 needful " for all alike, and a special rate or rebate most 
 necessary for himself in particular. The socialist, on the 
 other hand, regards all these answers as distressingly 
 inadequate, and thinks to see the solution of the real 
 problem in the elimination of the element of private 
 profit, and in the diffusion of economic advantage which 
 
 324
 
 GENERAL FEATURES OF RAILU/AY DEVELOPMENT. 225 
 
 he thinks must result from state ownership and opera- 
 tion of our railway systems. It is this last contention 
 which will immediately concern us, for should it be sub- 
 stantiated, the financier must make up his mind to the 
 public acquisition of railroads, and to an incredibly vast 
 enlargement of the state's industrial domain, of its an- 
 nual expenditures and its annual income from quasi- 
 economic sources. Evidently the discussion of so 
 momentous an innovation will require a preliminary 
 glance at the salient features of railway development. 
 
 It is hard for us to realize vividly the condition of 
 economic society before the era of steam transportation. 
 We look to-day at the map with eyes grown accustomed 
 to the criss-cross and zigzag of railroad lines. Our no- 
 tion of the distance from New York to Boston, for ex- 
 ample, is an estimate of the time consumed and the 
 discomfiture entailed by so many hours on a moving 
 platform, and it requires a rather violent jogging of the 
 imagination to conjure up a picture of that utter isola- 
 tion which v^'as relieved only at intervals by the stage- 
 coach and the mounted messenger. It is not surprising, 
 therefore, that the generation which witnessed the incep- 
 tion of steam railroads should have failed miserably to 
 form any true conception of the nature and importance 
 of this new and revolutionary agency. They made no 
 pretensions to being prophets, and even if they had, it 
 was questionable whether their boldest flights would 
 have been such as to outwing the railway achievements 
 which we regard to-day as commonplace matter-of-fact. 
 The view first taken of railroads was, very naturally, that 
 which was most easily deduced from the supposed anal- 
 ogy of railroads to public highways. The received dicta 
 of the economists upon trade and industry in general 
 were supposed to apply rigorously to railways. How
 
 2 26 EXTENSION OF THE STATES CONTRACTUAL INCOME. 
 
 slowly the real nature of railway transportation was ap- 
 prehended may be judged from some of the popular 
 ideas current between 1830 and 1840. It was in the year 
 first mentioned that the first English railway, that from 
 Liverpool to Manchester, was completed. In 1836 there 
 was published by Henry Fairbairn a treatise entitled 
 " The Political Economy of Railroads," which was not 
 merely representative of the advanced thought of his 
 age on the subject, but which was fully abreast of expert 
 opinion as w^ell. Fairbairn, who was a man of no mean 
 penetration, argued in the manner of Adam Smith that 
 roads operated by private individuals were likely to be 
 superior to those managed by joint-stock companies; 
 that free competition in railroading was the certain guar- 
 antee of conforming rates to the cost of service ; he as- 
 serted that " the cost of transportation by steam is so 
 very expensive that little merchandise is carried upon 
 the railroad," and that " horse-power, in the present state 
 of our knowledge of the principles of motion, is, there- 
 fore, much cheaper than any of which we are possessed." 
 Canals he scouted as among the " rude inventions of a 
 former age." It was popularly supposed at first that rail- 
 way carriages and locomotive engines would be owned 
 by individuals, and would be used upon. the iron high- 
 ways as the personal convenience of the owners might 
 dictate. It is enough to humble the presumptuous fore- 
 cast of the economist to mark how a man of Fairbairn's 
 perspicuity was led to set up a series of propositions 
 about railroad economics every one of which experience 
 has flatly reversed. The railway corporation has en- 
 tirely displaced the private railway company ; rates are 
 based on almost everything but cost of service; and, 
 most important of all, freight traflfic has attained such a 
 magnitude that it entirely dwarfs the transportation of
 
 GENERAL FEATURES OF RAILIVAY DEVELOPMENT. 227 
 
 passengers, and furnishes roads with nearly four fifths 
 of their earnings. 
 
 Railroad building, however, progressed in utter un- 
 concern of the a priori speculations of the economists. 
 The wonderful growth in railway mileage in Europe and 
 America is too well known to require more than passing 
 mention here, and time itself would fail to tell of the 
 innumerable improvements in engineering, appliances, 
 speed, safety, and comfort which are all combined in 
 the world's railroad systems of the present.^ 
 
 This astounding development of a new system of high- 
 ways equipped with every appliance for the speedy trans- 
 portation of passengers and freight would have proved 
 universally acceptable had not the economic organiza- 
 tion of railroads and their rate sheets given grave cause 
 for concern. A network of superior toll pikes, each 
 for a few miles under the control of a toll pike company, 
 which was bound to meet the competition of hundreds 
 of similar companies, and thus under compulsion to ex- 
 act only reasonable charges, presented no very alarming 
 prospect in the early days of railroad building. It took 
 years, in some cases even decades, for the citizen to real- 
 
 * To get an idea of the growth of railroads, it may be well 
 to remember that it was in 1829 that the first line was con- 
 structed in the United States. Poor's Manual for 1897 gives 
 the following figures for the railroads in the United States for 
 1896: 
 
 Miles of railroad operated 180,891 
 
 Tons of freight moved 773,868,716 
 
 Freight mileage 93,885,853,634 
 
 Passengers carried 535,120,756 
 
 Passenger mileage 13,044,840,243 
 
 Earnings from freight $770,424,013 
 
 Earnings from passengers $265,313,258 
 
 Miscellaneous earnings $89,894,754 
 
 Total gross earnings $1,125,632,025 
 
 Net earnings %32,2<2,23<7S^ 
 
 Earnings per ton-mile 0.821 cents
 
 228 EXTENSION OF THE STATE'S CONTRACTUAL INCOME. 
 
 ize the fact that in abetting the hberal construction of 
 railways he had created an industry which was hkcly to 
 prove not his servant but his master. Even those pub- 
 Heists who had stood sponsors to the infant industry were 
 appalled to see it speedily develop traits of monopoly, 
 extortion, and unabashed favoritism. 
 
 In the first place the tendency to consolidation became 
 unmistakable. The first railroads were in length very 
 similar to our trolley roads to-day. The average length 
 of early English lines was about fifteen miles. \'ery 
 naturally short lines having one terminus in common 
 became united under a single management. Expenses 
 were reduced thereby, and transportation facilities, es- 
 pecially for through shipments, were enhanced. " If we 
 follow back the history of almost any railway in the 
 United States, we find the same tendency illustrated. 
 The line of the New York Central between the Hudson 
 and Lake Erie alone represents the union of what was 
 originally sixteen different companies." ^ In England 
 in 1847, with over five thousand miles of rail, there were 
 several hundred companies. Twenty-five years later, 
 with a mileage of thirteen thousand, the entire control 
 was virtually in the hands of a dozen companies.^ The 
 same tendency showed itself in France and on the Con- 
 tinent generally, while the movement has gone so far in 
 the United States that the Statistician of the Interstate 
 Commerce Commission declares that at present "over 
 83 per cent, of the business and 82 per cent, of the earn- 
 ings [of railroads] fall under the control of less than 
 forty associations of business men." Thus out of hun- 
 dreds of short, disconnected links there have been forged 
 by consolidation those gigantic chains of rail which to- 
 
 * Hadley, Railroad Transportation, p. 12.
 
 GENERAL FEATURES OF RAILIVAY DEVELOPMEhlT. 229 
 
 day span the continent. The day of the independent 
 road was brief. The era of the railway " system " suc- 
 ceeded. The importance of through traffic was partly 
 cause and partly effect of the tendency that made for 
 consolidation. The short cross-roads became feeders of 
 the systems they adjoined, and in hundreds of cases by 
 sale or lease were swallowed up in the greater organiza- 
 tions. The utter impossibility of competing with the 
 railroad in the transportation of freight or passengers 
 gave the companies a practical monopoly in cases where 
 the shipper had no access to another line of railroad or 
 to carriage by water. Instead of a new system of short, 
 multitudinous pikes employing improved instruments of 
 locomotion, and compelled by self-interest to ask only 
 reasonable (i.e. competitive) tolls, the business commu- 
 nity awoke to find itself parcelled out amongst a small 
 number of monopolist carriers whose rates at many 
 points were not in the slightest degree determined by 
 competition. 
 
 It was this last consideration which came home most 
 vividly to the public and the shipper. Some vague dis- 
 quietude was felt unquestionably at the tendency towards 
 consolidation. There were not wanting Cassandras to 
 plague the quiet hour with their uncomfortable alter- 
 native : " The state must rule the railroads or the rail- 
 roads will rule the state." Very likely, thought the ship- 
 per whose mind would revert to the very much more 
 pertinent inquiry why he must pay more for freight than 
 his competitor in X, or how he could get a rebate like 
 his neighbor in Y. This absorption of little roads by 
 big ones was all very dreadful, the farmer admitted, but 
 these freight rates were a thousand times more intolera- 
 ble. Not merely nor indeed mainly that they were too 
 high, absolutely considered, but that they were so im-
 
 2 3° EXTENSION OF THE STATE'S CONTRACTUAL INCOME. 
 
 possibly unfair as between himself and his competitors 
 in the towns near by. 
 
 The ' manifest destiny ' of short railroad lines to amal- 
 gamate was no more indisputable than the tendency 
 everywhere evident to fix rates iox transportation upon 
 principles which at first sight appeared most extraordi- 
 nary. It had been assumed that carriers by rail would 
 adjust their charges upon the basis of tolls, that is, upon 
 the actual cost of service. This, it was supposed, would 
 correspond roughly to the distance traversed. The rail- 
 road companies soon found that it was impossible in the 
 first place to estimate the cost of specific shipments by 
 rail, and in the second place that a tariff based upon a 
 system of tolls was impossible of enforcement. The im- 
 mense amount of capital invested in railroads requires 
 that a great part of every road's earnings be applied to 
 meeting the interest charges on the capital sunk. These 
 fixed charges are practically the same whether the total 
 traffic is great or small. The expense incurred in the actual 
 movements of cars varies only within certain moderate 
 limits. To move double the ordinary volume of freight 
 does not begin to double the expenses of the carrier. 
 To move a full train load costs little more than to move 
 the same cars half full. Hence it is impossible to esti- 
 mate even approximately the cost of any specific ship- 
 ment. ^ What the carrier has to secure, if possible, is an 
 aggregate revenue sufficient to meet fixed charges, pay 
 operating expenses, and maintain unimpaired the con- 
 dition of the railroad property. Even these require- 
 ments, it would seem, might be met by a system of tolls 
 producing revenue enough in the aggregate to defray 
 total expenses and to leave a margin for profit. But 
 
 ' Cf. Ackworth's article on Railroad Rates, Economic Jour- 
 nal, Sept. 1^97.
 
 GENERAL FEATURES OF RAILIVAY DEVELOPMENT. 231 
 
 such an attempt to apportion total expenses among ship- 
 pers charged severally in proportion to the distance 
 traversed by their respective consignments is absolutely 
 foiled by the unavoidable necessity imposed upon the 
 carrier of meeting at certain points the competition of 
 rivals by land or sea. The terminus of a railroad sys- 
 tem is not infrequently a competitive point served by 
 several railroads and often by steamship lines. To o - 
 tain traffic at such a point it is necessary to meet the 
 competition which centres there. So long as the rates 
 demanded at these points by shippers are barely enough 
 to cover the additional movement charges the carrier is 
 prompted to concede such rates. This means low rates 
 for through traffic and low rates for other points on the 
 same line where an intersecting road creates a competi- 
 tive nucleus. At such points each carrier has to grant 
 low rates or get no freight at all. But no such necessity 
 exists at other points on his line where competition does 
 not exist. Neither the imperious necessity of meeting 
 competition nor still less the a priori idea of proportion- 
 ing rates to distance traversed weighs in favor of accord- 
 ing low rates to local, non-competitive traffic. The car- 
 rier argues with great plausibility that, hard as the 
 discrimination seems against the local shipper, it is really 
 the best result attainable under the circumstances. To 
 lower all rates horizontally to the through traffic level 
 would result in the bankruptcy of the roads and in the 
 curtailment or abolition of transportation facilities for 
 through traffic and local traffic alike. To raise the rates 
 on through traffic to the level of local rates would be to 
 sacrifice the through traffic altogether, and would neces- 
 sitate the raising of local rates still higher. The local 
 shipper was practically told that he was the unfortunate 
 victim of circumstances, and that the exorbitant rates of
 
 ^32 EXTENSION OF THE STATE'S CONTRACTUAL INCOME. 
 
 which he complained were " the inevitable result of uni- 
 versal laws, with which, if it were not impious, it were 
 as hopeless to quarrel as with the law of gravitation." 
 God and Nature, not the railway company, had discrimi- 
 nated against him. It is not our purpose at this point 
 to sift the chaff from the wheat in these contentions. 
 Suffice it to say that rates as they were at first made 
 were not only not proportional to the distance traversed, 
 but on local traffic were not infrequently higher, in 
 certain instances six times higher,^ than rates upon 
 through traffic hauled a much longer distance over the 
 same line. This necessity of making special rates for 
 various points upon the carrier's line made his rate sheet, 
 as may be easily conceived, a curious labyrinth. But 
 these varying rates caused only the smallest part of his 
 perplexities. Traffic managers soon discovered that the 
 charges they could impose depended very largely on the 
 value of the various articles they transported. A rate 
 which the shipper would pay per car-load on manufac- 
 tured woollen goods was absolutely prohibitory if 
 charged on bulky articles like coal or lumber. Either 
 coal must be hauled at rates far below those imposed on 
 textiles or not hauled at all. If a special rate on coal, 
 therefore, would suffice to cover the small additional ex- 
 pense of hauling additional cars, such rates were ac- 
 corded. Freight therefore was classified on the com- 
 plex basis of value, perishability, and similar considera- 
 tions, and each class of freight had its own rate, to say 
 nothing of special rates, such as grain or cattle rates, 
 which were established on particular articles. The rate 
 sheets had become a veritable " wilderness of single in- 
 stances." In this hopeless position the traffic manager 
 
 * Lewis, National Consolidation of the Railways in the 
 United States, p. 97.
 
 GENERAL FEATURES OF RAILIVAY DEl/ELOPMENT. 233 
 
 was guided in the majority of cases by the rule of charg- 
 ing what the traffic would bear.^ Even at non-com- 
 petitive points, if a special rate would increase the 
 volume of traffic and leave the least margin over operat- 
 ing expenses, the rate was generally accorded. These 
 considerations will explain in a way the origin, the sin- 
 gular complexity, and the apparent anomalies of railroad 
 rates. It is comical therefore to see the dismay of legis- 
 lative commissions when they proceed to investigate the 
 subject of railway charges. The witnesses, generally 
 practical railroad agents, have inherited a volume of 
 rates of whose origin they are hopelessly ignorant. They 
 have made in the rate sheets a thousand empirical 
 changes to meet concrete circumstances, and when 
 summoned to explain the rationale of rate sheet con- 
 struction, they develop such abnormal powers of obfusca- 
 tion that the investigating Solons not infrequently leave 
 the subject of their quest with a mystified resignation 
 such as befits those who have confronted the unsearch- 
 able ways of an inscrutable Providence. 
 
 However disappointing may be the investigation of 
 the origin of any particular rate sheet, the forces which 
 have controlled the formation of such sheets in general 
 are the necessity of meeting competition at certain 
 points, of grading freight largely on the basis of value, 
 and of earning by all these means sufficient in the long 
 run to meet fixed charges, pay operating expenses, and 
 leave a possible margin for dividends.^ Rates, it is true, 
 
 \The two paramount considerations in fixing rates are: 
 (i) the necessity of meeting competition; (2) the necessity of 
 developing traffic. The first explains largely the low rates on 
 through traffic; the second the tarification of goods, i.e. im- 
 posing on them what rates they can be made to pay without 
 cutting down the volume of freight. 
 
 ' " The rates are governed by the nature and extent of the 
 traffic, the pressure of competition, either by water, by a rival
 
 234 EXTENSION OF THE STATE'S CONTRACTUAL INCOME. 
 
 have often been made on grounds of purely arbitrary 
 favoritism, either local or personal, but it can hardly be 
 questioned that this has been a secondary rather than a 
 primary factor in their creation. The extent to which 
 these rate determining agencies have been eflfective has 
 depended largely upon the varying conditions under 
 which railway systems have developed in various coun- 
 tries. The forces above specified have had freest play 
 ill England and the United States, where we have relied 
 on private and corporate initiative to build and develop 
 our railway systems under the stress of competitive 
 rivalry. The plan upon which the French railways were 
 constructed, with several large independent systems all 
 radiating from Paris, has served to release the French 
 companies in large measure from the restraints of their 
 mutual competition. The state railway system of Aus- 
 tralia and Prussia has operated in a measure to uphold 
 the system of tolls in those countries. But even here it 
 has been necessary to make exceptions in the toll system 
 where the competition of water-routes or foreign rail- 
 roads was encountered. Moreover the universal adop- 
 tion of schedules of classification for freight has proved 
 that the principle of tolls, i.e. of basing rates exclusively 
 on cost, is by itself impossible of application, whether 
 upon state roads or private lines. 
 
 Government Regulation of Railroads in the United 
 States. — In the very beginning of the railroad era there 
 was a strong a priori presumption in favor of govern- 
 mental control or ownership. A railroad after all was 
 
 railway route, or by other land carriage; but above all, the com- 
 panies have regard to the commercial value of the commodity, 
 and the rate it will bear, so as to admit of its being produced 
 and sold in a competing market with a fair margin of profit."— 
 The Working and Management o/ an English Railway, p. 264, 
 by George Findlay.
 
 FEDERAL RAILlV/tY REGULATION. 235 
 
 only a new variety of public highway, fitted no doubt 
 mainly, perhaps exclusively, for wagons of a certain 
 gauge, offering exceptional advantages to the use of 
 steam as a motive power, but still a highway. It did not 
 at that early day smack of socialism to hold a brief 
 for state railroads. Even Adam Smith found it entirely 
 consistent with " the system of natural liberty " that the 
 sovereign should erect and maintain " certain public 
 works which it can never be for the interest of any indi- 
 vidual, or small number of individuals, to erect and main- 
 tain " ; and though Smith's rule was formulated in the 
 ante-railway age, still his language might by implication 
 be construed as implying his approval of a state railroad 
 system, for he remarks that the " expense of maintaining 
 good roads and communication is, no doubt, beneficial 
 to the whole society, and may therefore, without any in- 
 justice, be defrayed by the general contribution of the 
 whole society." ^ In the United States prior to 1830 the 
 construction and maintenance of highways was very gen- 
 erally a task assumed by the state and local governments. 
 Some private toll pikes there were, but they were re- 
 garded as exceptional and as a temporary expedient. 
 Not only the commonwealths and their local subdivi- 
 sions, but even the federal government had made ex- 
 penditures upon the construction of public highways. 
 This policy of internal improvements came first to an 
 end so far as the federal government was concerned 
 when Jackson vetoed the Maysville-Road Bill.^ There- 
 after the task which had been laid aside by the federal 
 government was taken up and pushed with zest by the 
 
 ^Wealth of Nations, Bk. V., Chap. I. (p. 403 of Vol. II. of 
 Thorold Rogers' edition). 
 
 ' See H. C. Adams' Introduction to State Railroad Control 
 by F. H. Dixon.
 
 236 EXTENSION OF THE STATE'S CONTRACTUAL INCOME. 
 
 various commonwealths. The first period of railroad 
 history in this country covers the two decades between 
 1830 and 1850, when railway building was in its infancy, 
 and when most lines lay each entirely within a single 
 state. The construction and operation of both railways 
 and canals were in the hands of public officials. The 
 result of this attempt was failure, complete, indubitable, 
 and humiliating. Vast debts had been contracted for 
 the construction of these works, and the states had to 
 face the humiliating alternative of bearing crushing taxes 
 or repudiating their debts.^ The memory of this experi- 
 ment has long ago vanished from the public mind, but 
 the lesson which the experiment taught has been indeli- 
 bly embedded in the constitutions of most of our states. 
 These fundamental charters were overhauled and very 
 generally amended by hard and fast limitations put upon 
 the employment of the states' credit. Thus a practically 
 complete severance of the state governments from all 
 participation in industrial ventures was effected. The 
 period which followed, from 1850 to 1870, saw the pri- 
 vate corporation arise and undertake the work of railway 
 construction and extension.^ The belief in private and 
 corporate initiative as the surest guarantee of needed 
 railroad facilities was largely the result of a hard 
 bought experience, and not the outcome of mere 
 unthinking inclination or haphazard experiment. The 
 railroad corporations tried successfully during this pe- 
 riod to obtain public money and extensive grants 
 of land from towns, counties, or municipalities. The 
 Pacific roads received direct aid from Congress; but. 
 
 * For an account of this movement, see H. C. Adams, Public 
 
 Debts, p. 317 sq. , , , , j 
 
 ' These periods apply mamly to the northern, central, and 
 western states. The southern states, notably Missouri, aided 
 railroads as late as 1868.
 
 PEDER/iL R/ULlV/iY REGUUTlOt^. 237 
 
 with all these exceptions, the pubHc policy was to keep 
 the hands of the state off, and to encourage the develop- 
 ment of the railway system by giving private corpora- 
 tions the fullest opportunities to construct roads. Many 
 of the railroad charters contained stipulations prescrib- 
 ing the maximum charges that might be imposed, but 
 the public relied mainly upon the number of competing 
 carriers by rail to escape the extortionate demands of 
 a transportation monopoly. " Set the railroads at each 
 other's throats," argued the public, " and we shall get 
 fair play." 
 
 From this complaisant attitude the shock of awaken- 
 ing was most rude and unpleasant. But in 1870, after ' 
 an enormous mileage had been laid down, and com- 
 panies had multiplied by the score, complaints about 
 railroad rates, especially in the middle West, became too 
 violent to be longer disregarded. Since that time we 
 have been conscious of the existence of a railroad prob- 
 lem, for which the mere unshackled competition of rival 
 carriers is no solution, and we have made various efforts, 
 mostly legislative, to solve it. The Granger agita- 
 tion, as the movement in the West was called, was not 
 only a protest " against the high aggregate charge 
 imposed by the companies, but against the monstrous 
 inequalities of charge." ^ Not only were special rates ac- 
 corded where there existed natural causes, such as water 
 competition or the competition of other railroads (which 
 might justify or palliate the discrimination), but special 
 rates were made to certain places and to certain people 
 without the least warrant in reason or justice, and often 
 to the extreme detriment or ruin of other shippers. Pub- 
 Hc opinion, too, was alarmed at the beginning of the 
 process of " pooling," while the lavish grant of passenger 
 
 * A. B. Sticknev, The Railway Problem, p. 24.
 
 238 EXTENSION OF THE STATES CONTRy4CTUAL INCOME. 
 
 passes but added fuel to the flame. The uprising against 
 railroads occurred in various states about the same time, 
 and there were two important results of these earlier 
 struggles. One was the affirmation by the Supreme 
 Court that railroads are by their nature affected with a 
 public interest; that the legislature is the guardian of 
 that interest, and may (subject to constitutional restric- 
 tions) control by commissions or otherwise the fixing of 
 rates and the operation of the roads. The other result 
 of prime importance was the creation of railroad com- 
 missions in many of the states. Some of these commis- 
 sions had little power except that of investigating 
 and making public their conclusions. This apparently 
 was only " the power to scold," but where the commis- 
 sion, like that of Massachusetts, was able and impartial, 
 and where more conservative traditions ruled amongst 
 railroad men, the advisory commission through its in- 
 fluence on public opinion often proved to be powerful 
 for good. In other states,^ as in Illinois, the state rail- 
 road commission was intrusted with mandatory powers, 
 and was given authority to alter or fix rates. The 
 states very generally had passed statutes declaring that 
 all rates must be reasonable, and that facilities should be 
 afforded where possible for continuous carriage by the 
 interchange of trafitic. Discrimination in every form had 
 been stringently forbidden, and in a number of the states 
 the law prohibited a carrier from charging more for a 
 short haul than for a long haul over the same line in the 
 same direction, the circumstances and conditions of the 
 haul being substantially similar. This proviso was in- 
 tended to prevent discrimination against local traffic. 
 
 * See Dixon, State Railroad Control, for an account of Iowa's 
 experiments with railmafl cuniiiissions; also J. W. Million, 
 State Aid to Railways in Missouri.
 
 FEDERAL RAILIVAY REGULATION. 239 
 
 While it is difficult to generalize about the work of state 
 railroad commissions, and while it must be admitted that 
 much stringent legislation by crippling the companies 
 hurt the shippers no less than the carriers, it seems 
 probable that the state commissions effected a diminu- 
 tion in railroad discrimination. Complaints on that 
 score, while they have never ceased, became less numer- 
 ous, though this was doubtless due in part to the fact 
 that a certain redistribution of population was effected 
 by migration to the localities favored in the matter of 
 rates. 1 The difficulty which all state commissions were 
 alike powerless to meet was the existence of discrimina- 
 tion in the case of traffic which passed from one state 
 into another. The regulation of such interstate traffic was 
 jealously reserved by the decisions of the federal courts to 
 Congress, and the state commissions found themselves 
 simply impotent to prevent discrimination upon the 
 greater part of the tonnage moved by rail. Very naturally 
 there arose a cry for the federal regulation of railroads, 
 and in March 1885 a select committee of the United States 
 Senate was appointed to investigate the question of in- 
 terstate commerce. That committee, with Senator Cul- 
 lom at its head, began and successfully prosecuted a 
 searching inquiry into the subject. Their report con- 
 clusively showed that practically all of the complaints 
 against the railroads were traceable to the practice of 
 discrimination. Upon the basis of this report the Inter- 
 state Commerce Act was drafted, was passed by Con- 
 gress, and went into effect in April 1887. 
 
 This act, which is still the basis of our federal regula- 
 
 * ■' Statistics show that between 1870 and i8go the increases in 
 population in Illinois, Wisconsin, Iowa, and Minnesota were in 
 cities which had competitive rates; and that non-competitive 
 places decreased in popu^ntion." — A, B, Stickney, The Railr0c^4 
 Problem, p. 62,
 
 240 EXTENSION OF THE STATE'S CONTRyiCTUAL INCOME 
 
 tion of railroads, is in part only declaratory of the com- 
 mon law of carriers. It requires all rates to be reason- 
 able, and prohibits all kinds of pooling of traffic or of 
 the earnings therefrom. To this extent the statute 
 simply reenacts the common law.^ Beyond this the act 
 proceeds to forbid all kinds of discrimination in rates, 
 and prohibits the exaction of any greater compensation 
 for transportation for a shorter than for a longer distance 
 over the same line in the same direction under substan- 
 tially similar circumstances and conditions. This is 
 commonly known as " the long and short haul clause," 
 whose operation may be suspended at the discretion of 
 the Interstate Commerce Commission. This body was 
 created by the act, and consists of five members ap- 
 pointed by the President. They are clothed with power 
 to enforce the provisions already mentioned. They are 
 also required to see that rates and fares of interstate 
 carriers are printed and made public, and have authority 
 to inquire into the management of the business of such 
 carriers either at their own instance or on petition of 
 a plaintiff alleging that he is injured by the violation of 
 the law. The statute also prescribes penalties for dis- 
 obedience, and outlines various methods of procedure 
 necessary for the enforcement of the provisions of the 
 act. 
 
 The federal Interstate Commerce Commission has now 
 been in existence for more than ten years, and there seems 
 to be little likelihood of its speedy abolition. Like most 
 experiments of a similar sort it has neither justified the 
 fears of its early antagonists nor met the expectations 
 of its most sanguine promoters. The commission's own 
 
 * Pooling has been regarded as a contract in restraint of trade 
 and hence against public policy. The only change made by this 
 law was to affix specific penalties to pooling.
 
 FEDERAL RAILIVAY REGULATION. 241 
 
 Utterances indicate that the existing law does not give 
 them sufficient power to do the good they might, while 
 the acquiescence of railroad men in the present state of 
 things would indicate that they do not find their oper- 
 ations very seriously hampered by the commission. It 
 would be impossible without going into the subject at 
 great length to weigh carefully the efifect of the com- 
 mission's work in the last decade. It must suffice to say, 
 in passing, that both the commission and the railroad 
 companies recognize that the Interstate Commerce Act 
 fails to touch the real source of the railroad problem — 
 the control over the fixing of rates. Where the commis- 
 sion has done good is in dragging to light the practice 
 of discrimination, personal and local, and in mitigating 
 the evil of unjust discrimination while conceding the 
 necessity of discrimination which is founded in reason. 
 The declaration of the statute that all rates must be 
 reasonable has proved to be a mere brutuni fulmen, for 
 the fall in railroad charges has been due to causes over 
 which positive law exercises no control. The enforced 
 publicity of rates has been rendered ineffective by the 
 filing of thousands of tariffs amendatory to previous rate 
 sheets. Few have the temerity, the time, or the curiosity 
 to examine the shapeless bundle of rate sheets which 
 hangs limp and repulsive in the ordinary passenger sta- 
 tion, and the persistent and apparently ineradicable 
 granting of special rates or rebates to favored shippers 
 makes the published freight rates of little significance to 
 any except the printer. The long and short haul pro- 
 vision is frequently suspended with the sanction of the 
 commission. It is perhaps more often violated without 
 the commission's knowledge. The anti-pooling clause 
 has come in for more severe criticism than any other 
 single section of the law. It has been, however, to all
 
 24- EXTENSION OF THE STATE S CONTRACTUAL INCOME. 
 
 intents and purposes, evaded by the action of various 
 traffic associations comprising companies which vokm- 
 tarily maintain rates designed to equitably divide traffic 
 between them. 
 
 The Argument for Federal Acquisition and Operation 
 of Railroads. — The argument for a stale railroad system 
 m the United States is of necessity an argument for the 
 federal ownership and operation of that system. The 
 very number of states composing the Union, the in- 
 numerable ties of common interest between them, and 
 the total absence of any constitutional power in the 
 commonwealths to touch interstate commerce make the 
 ownership and control of transportation agencies by half a 
 hundred states and territories unthinkable. The argument 
 for federal ownership is based upon an indictment of 
 the present railroad system.^ To this indictment there 
 are three main counts which allege that the present or- 
 ganization of railway transportation is inseparably bound 
 
 Mention ou^ht here to be made of the proposal of federal 
 ownership and operation made by President Blackstone of the 
 Chicago and Alton Kailroad in the annual report for 1890. The 
 demand for state railroads is generally made in the interest 
 (real or supposed) of the public. President Blackstone, how- 
 ever, suggests federal purchase and control in the interest of 
 investors in railroads. "Under present conditions," he says, 
 " the politicians dictate railroad management, and those who 
 have been so unwise as to invest their money in railroads 
 sufifer the loss. Apparently the people see no wrong in this, 
 etc." I cannot help suspecting that this advocacy of state rail- 
 roads was either the outcome of peculiarly exasperating cir- 
 cumstances then rife, or that there is a bit of irony at the bottom 
 of it all. No one's vision of the whole railway question is 
 keener than that of the C. & A.'s president. He wrote a 
 correspondent in 1891 as follows: "If I correctly understand 
 the matter, the real ol)jection to government ownership and 
 management of railroads is based upon the belief in the minds 
 of the people that they cannot trust politicians with the man- 
 agement of railroads under conditions which would require the 
 people to sufTcr losses resulting from their mismanagement." Sec 
 C. H. Lewis, Nationjil Consolidation of the Railways, p. 188,
 
 PBDERyiL OPERATION Oh RAILROADS. 243 
 
 Up with (i) unjust discrimination, (2) competitive waste, 
 and (3) unendurable extortion. These charges must be 
 considered seriatim. 
 
 (i) Discrimination by railroad companies may take 
 two forms, local and personal. Local discrimination is 
 imposing upon the traffic of certain places rates which 
 apparently are relatively unfair as compared with the 
 rates imposed upon the traffic of other places. Personal 
 discrimination consists in charging different shippers in 
 the same locality different amounts for substantially 
 similar services. Obviously either kind of discrimina- 
 tion may be effected through the agency of freight clas- 
 sifications. Goods which ought in all fairness to be put 
 in the same class may be put arbitrarily into different 
 classes and subjected to different charges; or a special 
 rate may be conceded upon some article only when 
 shipped from a particular town, though this concession 
 may work injury to other places not similarly circum- 
 stanced. The most common form of making discrimina- 
 tions, however, is by giving discounts, special rates, and 
 rebates to favored shippers. Passenger passes instance 
 one of the most irritating kinds of personal discrimi- 
 nation, though they are not very important in the 
 aggregate. 
 
 This part of the indictment drawn against the carriers 
 contains a great amount of truth. It is admitted that a 
 considerable amount of apparent discrimination against 
 certain localities is justified. Either the competition of 
 water routes or of foreign (e.g. Canadian or Mexican) 
 railroads renders inevitable a lower rate on through 
 traffic than other places not served by a number of car- 
 riers have any right to demand or expect. Even when the 
 company charges less for hauling freight from New York 
 to San Francisco, for instance, than for hauling the same
 
 244 EXTENSION OF THE STATE'S CONTRACTUAL INCOME. 
 
 load over the same line from New York to Ogden (Utah)^ 
 the seeming disparity may be inevitable and right.^ There 
 can, however, be no question of the fact that in many cases 
 the surcharge upon local traffic is capable of no pallia- 
 tion. It is extortion pure and simple. Nor can there be 
 any doubt of the existence to-day of thousands of special 
 rates, rebates, and discounts made to favored shippers 
 in violation of the law. No one can begin an inquiry 
 on that score without finding special rates at almost 
 every other turn. On the other hand it seems probable 
 that the evil of discrimination is less extensive and 
 less irritating than it was twenty years ago. In 1879 
 the New York City local freight agent of the New York 
 Central and Hudson River Railroad admitted that 
 " there was no such thing as a tariff for the whole of 
 the local freight carried over that line within the state 
 of New York," and that " every rate was a special rate 
 varying according to circumstances and conditions." ^ 
 The growing conservatism of railroad companies them- 
 selves has had much to do with abating the evils of ex- 
 travagant discrimination. Some companies have real- 
 ized that charging moderate rates for non-competitive 
 freight is in general a prudent device for building up 
 local traffic. On the whole, we may say that while it 
 would be Utopian to expect to see discrimination alto- 
 gether disappear, still it is evident that the evils from this 
 source have somewhat abated. Twenty-five years ago 
 there was a general outcry over discrimination, each ship- 
 per fearing that he was worse abused than his neighbor ; 
 to-day the public complaints on the score of discrimina- 
 
 ' Alexander, Railway Practice, p. 16. 
 
 "This has been so decided by the Interstate Commerce 
 Commission, /« re' Louisville and Nashville Railroad Company. 
 See the Commission's Annual Report lor 1890, p. 139. 
 
 'Simon Sterne in "The Citizen " for Sept. 1896.
 
 FEDERAL OPERATION OF RAILROADS. 245 
 
 tion are far less noisy and frequent. Each shipper deludes 
 himself with the idea that he has secured the lowest 
 rate. Should the practice of unjust discrimination again 
 grow virulent, the remedy proposed by Mr. Stickney ^ 
 might become law. This would allow the Interstate 
 Commerce Commission, upon convicting a company of 
 unjust discrimination, to operate the road through a re- 
 ceiver until ample security had been given against any 
 repetition of the ofifence. 
 
 When all is said in mitigation of the practice of 
 discrimination, it must be allowed that the evil is 
 very grave, and perhaps impossible of extirpation 
 so long as roads are operated by private corpora- 
 tions. The evil exists in England 2 as well as in the 
 United States, and would seem to be the inevitable re- 
 sult of a competitive railroad system. 
 
 (2) Competitive Waste. The advocates of state rail- 
 roads do not content themselves with unearthing the in- 
 justice now wrought through unjust discrimination. 
 They allege that the corporate operation of railroads is 
 a wasteful system, and that the wrong it perpetrates by 
 granting special rates and secret rebates is aggravated 
 rather than offset by the unnecessary waste of the na- 
 tion's resources which railroad rivalry entails. In par- 
 ticular they assert that railroads are now frequently built 
 where they are not needed, or before they are needed ; 
 that the motive which prompts to their construction is 
 to blackmail existing companies into buying the new 
 road on pain of losing traffic ; that the value of a new 
 road depends not on its power to serve the public, but 
 on " its power to do mischief " ; that the building of 
 roads through the agency of construction companies 
 
 * Cf. The Railway Problem, p. 211. 
 
 •Cf. J. S. Jeans, Railway Problems, p. 293.
 
 246 EXTENSION OF THE STATE'S CONTRACTUAL INCOME, 
 
 in the United States is replete with corruption and ex- 
 travagance ; that the cost of construction and operation 
 is less on state railroads than on private roads, and that 
 the rivalry of competing- carriers necessitates the main- 
 tenance of many extensive staffs, and numerous other 
 competitive agencies which might be cut down or abol- 
 ished were the system entirely in the hands of the gov- 
 ernment. 
 
 It is undoubtedly true that many single instances may 
 be cited which go to illustrate the foregoing contentions, 
 but it is doubtful if such instances in the aggregate are 
 sufficient to prove the general allegation of the greater 
 wastefulness of the present system over the state system. 
 The testimony on the cost of railroad construction by 
 the state and by private companies respectively is drawn 
 almost entirely from foreign experience and is far from 
 being conclusive. ^ Very much the same must be said 
 about the testimony bearing upon the cost of operation 
 of state and private roads. There is something to be 
 said for the contention that the joint operation of the 
 railroads, the telegraphs, and the post (as in Prussia) 
 affords an opportunity for economy through unity of 
 administration and extended division of labor. On the 
 other hand it is notorious that it is more difficult in 
 slack times to discharge unnecessary agents from the 
 state civil service than from a private concern. At all 
 events the variations in the cost of operating railroads 
 in different countries seem to indicate that there are 
 factors of much greater importance in determining the 
 
 * Picard (Traite des Chemins de Fer, I., p. 539) pronounces 
 
 the following fjuarded conclusion: "A tons ces points de vue, 
 nous considerons la construction par I'fitat comme donnant 
 des resultats, sinon superieurs, au moins egaux a ceux de la 
 construction par les concessionnaires."
 
 FEDERAL OPERATION OF RAILROADS. 247 
 
 cost of operation than the character of the directing 
 agency.! 
 
 Unquestionably there is in all competition a certain 
 amount of expenditure purely wasteful when considered 
 by itself. The maintenance of huge advertising bureaus, 
 the multiplication of ticket agencies, the vast commis- 
 sions paid to freight and passenger promoters, the diver- 
 sion of traffic over circuitous lines, especially during 
 railway " wars," the rapid change in rates (happily less 
 frequent than formerly), and the disastrous gambling in 
 railroad securities must all be recognized as among the 
 social costs of competitive railroading. Still it remains 
 an open question after all whether these wasteful ex- 
 penditures are not the inevitable concomitants of com- 
 petition, which, be its drawbacks what they may, is the 
 most reliable guarantee yet evolved of cheap and efficient 
 transportation. 
 
 (3) Extortion. The charge preferred against the pres- 
 ent railroad system on the score of widespread and 
 systematic extortion may be dismissed with but few 
 words. It is of course conceded that numberless instances 
 are on record where railroad companies have used their 
 
 ' Leroy-Beaulieu (Traite des Finances, I., p. 104 sq.) argues 
 for the superior economy of corporate management. He points 
 out that the ratio of net receipts to gross receipts per mile 
 operated, (coefficient d'exploitation) is less on private roads 
 than on state roads in Europe generally. This would indicate 
 that, ceteris paribus, it takes a greater fraction of gross earnings 
 to pay expenses on state lines than on private lines. Jeans 
 (Railway Pro'blems, p. 461 sq.) cites tables to prove that on 
 private lines a greater percentage of the total working expenses 
 is laid out on the administrative staff and traffic expenses than 
 is the case on state lines. The maintenance of way on the 
 other hand, he admits, absorbs a greater part of the total 
 expenditure on state roads than on private roads, though he 
 ascribes this to the superior care taken of state roads. Picard 
 (Traite des Chemins de Fer, I., p. 624) asserts that the co- 
 elticient d'exploitation, when all circumstances are considered, 
 is about the same in France, Belgium, and Germany.
 
 248 EXTENSION OF THE STATE'S CONTRACTUAL INCOME. 
 
 monopoly power to exact the last cent that could 
 be wrung from the helpless shipper. But a comparison 
 of our railroad charges, both passenger and freight, with 
 those levied on Continental lines will effectually dispel 
 the idea that the average charge for transportation in 
 the United States is exorbitant. It is easy to attach 
 too much importance to these statistical averages; but it 
 was estimated that in 1892 while the average rate per 
 passenger-mile in Europe (including Great Britain) was 
 1.93 cents, the corresponding charge in the United States 
 was 2.143 cents. On the other hand, while the average 
 "European freight charge per ton-mile was 2.02 cents, the 
 average rate in this country was 0.967 cents. ^ Equally 
 significant is the steadily decreasing rate of freight earn- 
 ings per ton-mile in the United States, the decline being 
 from 0.839 cents in 1895 to 0.821 cents in 1896.2 In 
 view of these considerations and of the very moderate 
 average rate of earnings on the real capital invested in 
 our railroads, the cry about exorbitant dividends result- 
 ing from general extortion falls flat.^ 
 
 The advocates of state roads do not generally content 
 themselves with descanting upon the evils ingrained in 
 a competitive system, but usually cite the success of 
 state railroads (Prussia and Austria are favorite illus- 
 trations), as a clinching argument in favor of inaugurat- 
 ing a similar system in the United States. Without 
 attempting here to rebut this assertion of the success 
 
 ' These comparisons are taken from Facts and Figures by 
 J. H. Benton. The Statistician to the Commission (Report for 
 1805, p. 75) makes the average revenue ftom freight per ton- 
 mile in the United States, in 1892, but 0.898 cents. 
 
 ' Poor's Manual of Railroads for 1897. 
 
 ^" The deficit for the year ending June 30, 1S94, was $45,- 
 851,294. showing that the railroads have run behind during the 
 two years in question $75,696,535. Should this continue, either 
 the investments or the credits of railways must disappear." 
 Statistics of Railways in the United States for 1895, p. 58.
 
 THE ARGUMENT AGAINST STATE RAILROADS. 249 
 
 oi state systems elsewhere, or to break the force of the 
 argument by alluding to conspicuous failures of state 
 systems (in Italy or Victoria for example), it may not 
 be amiss to point out that a state system superimposed 
 on what was originally a competitive system hardly gives 
 a fair index of what state railroads, pure and simple, are 
 likely to be and do. He is a rash judge, moreover, who, 
 even though he be convinced of the success of an in- 
 dustrial experiment in one nation, argues that differences 
 in national character, political habits, and business 
 usages are likely to prove disturbing factors of but 
 minor importance when the same venture is tried again 
 under other skies. 
 The Argument against State Railroads. ^ — At the risk 
 
 ' Certain compromise systems seeking to secure the advan- 
 tages of both state and private railways without the defects of 
 either have from time to time been proposed. Lack of space 
 prevents more than the merest mention of some of them. 
 Competent opinion, however, seems adverse to their practica- 
 bility. The scheme of having a part of the railway system 
 owned and operated by the government has been tried in Bel- 
 gium and in Prussia. It was supposed that the private com- 
 panies would be held in check by the necessity of meeting the 
 competition of state lines. The actual outcome was very 
 different. In Belgium the private roads set the pace, and the 
 state roads were compelled to follow. (See Hadley. Railroad 
 Transportation, p. 214 sq.) The government was finally com- 
 pelled to buy up the greater pirt of the independent lines, and 
 to enter into pooling arrangements with the remainder. In 
 Prussia it would appear that the competition offered by the state 
 roads had in some instances very seriously lessened the earning 
 power of private lines, even to the extent of a partial confis- 
 cation of certain properties. These lines were afterwards pur- 
 chased by the state. (See von der Leven in Conrad's Hand- 
 worterbuch. Bd. I., pp. 176, 177). Permanent regulation of 
 private companies bv the concurrent competition of independent 
 state lines seems to be impossible. 
 
 Some have advocated a plan which would combine state 
 ownership of railways with their operation bv private companies 
 leasing the roads from the state. The Italian system is, in a 
 way, built on this foundation. It is found, however, that such a 
 lease must be conceded for a long term of years. The requi- 
 site amount of capital will not be invested unless some guarantee
 
 250 EXTENSION OF THE STATE'S CONTRACTUAL INCOME. 
 
 of burning our bridges behind us at the outset, we mav 
 preface the case against state railroads by conceding that 
 much of the milder and tentative legislation against rail- 
 road abuses has proved abortive. Especially true is this 
 of laws setting maximum rates for railway service, and 
 of laws limiting the dividends of railway companies. 
 Self-interest in the first case has generally been sufficient 
 to induce the companies to ask rates below the maxima 
 legally set. In the second case, where railway earnings 
 have been large enough to pay dividends whose rate ex- 
 ceeded that fixed by law, some device such as the issue 
 of watered stock has commonly served to transfer the 
 extra earnings to the stockholder's pockets without any 
 infraction of the letter of the statute. The limitation of 
 dividends in certain cases may even operate against the 
 public interest, for if railway earnings and dividends can 
 be increased by a reduction in railway rates, both the 
 public and the railroad owners will gain thereby, whereas 
 a limitation of dividends, if enforced, may serve not only 
 to keep railway incomes down, but also to keep railway 
 rates up. 
 
 If, then, laws limiting rates and dividends are univer- 
 sally ineffectual, and laws against unjust discrimination 
 are frequently evaded or defied, we must admit that a 
 
 is made of the investmerrt's duration. In Italy, for example, the 
 leases run for sixty years, and to vacate them twenty years' 
 notice is necessary. The idea, therefore, that the state, by being 
 the legal owner of the railways, can exercise any effective 
 control over a tenant, who cannot be ousted until after a 
 generation, is evidently illusory. (See von Scheel in Schoen- 
 berg's Handbuch, Bd. III., p. 93). The plan of having the 
 government, instead of purchasing the railways outright, lease 
 the roads and operate them, differs only technically from com- 
 plete ownership and management. Instead of paying interest 
 on the purchase money borrowed to buy the property, the state 
 would pay an annual rental for its use. Indeed this may be 
 considered as a species of state railroads rather than a com- 
 promise system.
 
 THE /IRGUMENT AGAINST STATE RAILROADS. 251 
 
 certain persistence of unjust discrimination as well as 
 of competitive waste seems under present circumstances 
 to be inevitable. The economic surd resists all attempts 
 at elimination. But whether, in despair of a complete 
 solution on present lines, we are ready to assume that 
 sta^e management is the inevitable remedy remains for 
 consideration. Wagner urges with great force against 
 a private system of railways that their management is 
 necessarily dictated by the peremptory demands of pri- 
 vate profit.i A " beneficent despot," if intrusted with the 
 management of a national railway system, would not be 
 exclusively actuated by the motive of increasing the net 
 earnings of the railroad companies. Rates that merely 
 cover cost or which perhaps result in actual loss that 
 taxation must make good, may conceivably imply an in- 
 crease in general well-being so great as to dwarf the 
 temporary loss of dividends to the investors. Where 
 the state owns and operates the roads, it is not, in deter- 
 mining railway charges, shut up in a narrow place like 
 the private corporation, but with freer hand and more 
 far-sighted vision may prescribe rates designed to secure 
 the greatest public good. This possibility, however, 
 would be realized, it must be remembered, only to the 
 degree in which the government approximated an all- 
 wise and " beneficent despot." Make concrete our idea 
 of government by calling to mind that it consists to all 
 intents and purposes of two rather numerous bodies of 
 men of like passions as the rest of us, with conflicting 
 views upon most subjects, and united mainly in "going in 
 for the old flag and an appropriation," each for his own 
 section, and we may easily understand how far our gov- 
 
 * " Der Vortheil beim Staatsbahnwesen besteht jedoch eben 
 darin, dass eine solche Verwaltung nach dem rein gewerblichen 
 Grundsatz nicht unbedingt ndtig ist." Finanzwissenschaft, Bd. 
 I., p. 659.
 
 252 EXTENSION OF THE STATE'S CONTRACTUAL INCOME. 
 
 ernment falls short of the stature of the " beneficent 
 despot " required. It is absurd to think we ever shall 
 have a government that does all things well. The most 
 we have any right to expect is one which does but few 
 things mischievously. For this very reason we may 
 with a good conscience renounce the hypothetical possi- 
 bility of good inherent in state railway management, and 
 fling ourselves boldly into the arms of competition. It 
 is true that each and every system will accordingly be 
 run with an eye single to corporate profits. But if cheap 
 and efficient transportation results therefrom, we shall 
 have solid compensation for the nebulous possibilities 
 of good we have foregone. Does a competitive railway 
 regime result in cheap and efficient transportation? Of 
 the eflfectiveness of private initiative to lay out and con- 
 struct the original network there is little question. The 
 advocates of state systems seem to forget that there is one 
 thing worse than having railroads operated ill, and that 
 is not having them operated at all; and no more indis- 
 putable claim can be made for private initiative than that, 
 where allowed free play, it has speedily and intelligently 
 furnished the necessary transportation facilities. Gov- 
 ernments have practically conceded their inferiority to 
 private companies in the matter of projecting and build- 
 ing the original lines; and where the lack of private 
 enterprise has compelled governments to take up the 
 work of construction, it has been chiefly in those nations 
 where the spirit of industrial self-reliance and venture- 
 someness has been traditionally repressed. Lord Farrer, 
 a competent judge of the matter, testifies that the " devel- 
 opment of railway communication in Great Britain has 
 been such as no government management, however 
 good, could possibly have produced." ^ " In railroad- 
 
 * The State in Relation to Trade, £• 109.
 
 POOLING. 253 
 
 ing," says Mr. Croker, the chairman of the Massachu- 
 setts Board of Railroad Commissioners, " competition 
 has wrought the work of improvement more wonderfully 
 than in any other industry." ^ Evidence has already 
 been cited to show how, in the United States, rates have 
 been steadily reduced until they are as a whole unrivalled 
 for cheapness. Whatever be the ultimate character of 
 our railway system, the judgment of the future can hardly 
 fail to acknowledge the wisdom of the past in that with 
 singular clear-sightedness our century has realized its 
 own great need, to wit, cheap, extensive, and efficient 
 transportation, which it has secured by a courageous 
 and thoroughgoing reliance upon private agencies act- 
 ing under a fierce competitive pressure. It is true that 
 we trusted to competition to secure what it could not 
 secure, namely, rates based on cost of service. It is true 
 that we relied on competition to prevent injustice, or 
 relative extortion, as between shipper and shipper. In 
 both cases our hopes were grounded on the sand. But 
 the net result has convincingly vindicated our policy in 
 the past. Rates are cheaper than any system of basing 
 them on cost of service would have secured; and if the 
 persistence of unjust discrimination, and of occasional 
 railroad dishonesty, and the thousand and one abuses of 
 power may give us real apprehension for the future, we 
 may on the other hand, from the survey of what has 
 already been accomplished, find abundant ground for 
 hope. 
 
 Pooling. — A careful analysis of what we may reason- 
 ably expect from competition in the future brings us 
 very rear the heart of the real " railroad problem " of 
 to-day. The possibilities of public good involved in 
 competition are so vast that any proposal to curtail its 
 
 'The Railroads and the Public, p. 7.
 
 254 EXTENSION OF THE STy^TES CONTRACTUAL INCOME. 
 
 free play is justly the subject of prima facie suspicion. 
 Still we have seen that competition has been incapable of 
 securing universally that reasonable equity in railway 
 rates which positive law contemplates. Mr. A. B. Stick- 
 ney and others go so far as to say of competition in 
 railroading that " where it prevents extortion it pro- 
 duces discrimination." Evidently the results of such 
 competition are not all of a kind. It remains therefore 
 to inquire what its detrimental effects are and whether 
 any bounds should be set to its operation. To be health- 
 ful, industrial competition in transportation must evi- 
 dently secure not only efficient service to the public at 
 reasonable rates, but to the investor such a return as 
 w^ill guarantee the extension of transportation facilities 
 when and where such extensions are needed. Nor ought 
 such healthful competition to involve a destructive pres- 
 sure upon competent rivals or any part of the public. 
 Such healthful competition in railroading cannot be 
 secured without the violation or circumvention of the 
 "anti-pooling clause of the present Interstate Commerce 
 Act. The reasons are these. Railroad systems in this 
 country constitute an interlaced network of lines. A 
 change in the rate sheets of any one line inevitably oper- 
 ates upon the trafffc receipts of other lines. The bound- 
 aries of the various territories drained by these arteries 
 of commerce are thus arbitrarily dislocated by changes 
 in a single rate sheet. The volume of competitive traffic 
 is reshifted, the stream seeking an enlarged outlet over 
 the line which has cut its rates, until a retaliatory cut 
 has been made by other companies. Thus the equilib- 
 rium of the whole transportation system may be dis- 
 turbed by any one of four or five hundred independent 
 rate making bodies. Of course this is true of small pro- 
 ducers of manufactured goods where a cut in prices must
 
 POOLING. 25 s 
 
 be met by competing producers. But the capital invested 
 in such enterprises is relatively small, and continued 
 sales below cost mean speedy dissipation of the capital 
 and equally speedy elimination of reckless or incompe- 
 tent producers. Hence cost forms a level below which 
 such prices cannot remain for any length of time. The 
 immense capital invested in railroads, and the practical 
 impossibility of ceasing to operate them, when bank- 
 rupt, prolong the evil of excessive railroad competition, 
 and prevent the total disappearance of the competing 
 road. It may be absorbed, if bankrupt, by its successful 
 rival, which becomes thereby absolved in a measure from 
 the necessity of setting reasonable rates; or, if the bank- 
 rupt road is reorganized by an independent corporation, 
 the battle-ground is but prepared again for a struggle 
 like the first, unless through some joint arrangement 
 the companies agree upon a modus vivcndi. 
 
 The necessity of meeting cut-throat competition for 
 competitive traffic impels roads having a virtual mo- 
 nopoly over the traffic of certain districts to extort from 
 this traffic the highest practicable return. Thus they 
 shift a certain part of the competitive pressure upon un- 
 fortunate shippers or localities. It is undoubtedly true that 
 many shippers and the general public enjoy low rates dur- 
 ing a railroad war. But the fluctuations produced first 
 by the carriers' cuts, and then by the arbitrary increase 
 of rates resulting from the patching up of a temporary 
 truce, are fatal to all commercial calcvilations based upon 
 steady freight charges. Besides the element of uncer- 
 tainty thus introduced into all business where freight 
 charges are a considerable item, the disappearance of 
 railway profits in the immediate present acts as a brake 
 upon the extension of railway facilities in the future. 
 Hence the idea that railway wars are public benefits is
 
 256 EXTENSION OF THE STATE'S CONTRACTUAL INCOME, 
 
 lamentably short-sighted. The truth is that competition 
 among railway carriers has l)een so extreme that the 
 public interest no longer consists in spurring them on 
 to internecine strife, but ratlier in legalizing their pooling 
 arrangements,^ without which the companies must con- 
 tinue a policy ruinous to themselves and dangerous as 
 well to the public. It was owing to the fear of mo- 
 nopoly that the anti-pooling clause was incorporated in 
 the Interstate Commerce Act. But this provision tended 
 to perpetuate and even to augment that discrimina- 
 tion which it was the main object of the law to destroy. 
 The competition which the anti-pooling clause sought to 
 foment gave the carriers a new motive to discriminate 
 where possible, in order thereby to lessen their losses 
 on competitive traffic.^ The law enjoined upon the car- 
 rier the duty of undeviating competition, and then 
 turned around and sought to deprive him of the only 
 means of recouping the losses which such unflagging 
 competition inflicted upon him. The only avenues of 
 escape from bankruptcy were consolidation of compet- 
 ing roads, or evasion of the anti-pooling clause. The 
 possible danger inherent in pooling is the imposition of 
 extortionate charges by the companies. But this dan- 
 ger is rather imaginary than real. Rates fixed by pool- 
 ing agreements must conform to the requirement of 
 being " reasonable and just," and, unless the law w^ere 
 
 ' Pooling- arrangements take different forms. The most com- 
 mon form is a voluntary acquiescence on the part of carriers 
 in dififerential rates recommended by a Joint Traffic Association 
 Board, or similar body composed of representatives of the 
 various roads. These rates are based upon the length of route 
 and the character of service of the respective roads. The earlier 
 pools sought to divide joint earnings, or to distribute competi- 
 tive territory, or to fix each road's share of the total volume 
 of traffic. 
 
 ' Cf. H. T. Newcomb's article in the Popular Science Monthly 
 for Oct. 1897.
 
 POOLING. 257 
 
 Otherwise chang^ed, would continue to be subject to re- 
 view by the federal commission. There is also evidence 
 to show that " as a rule the rates on pooled traffic have 
 been reasonable and equitably adjusted, and have been 
 brought into comparatively harmonious relations with 
 local rates." ^ Nor must it be imagined that the legiti- 
 mation of such pooling contracts would destroy com- 
 petition. The competition of carriers by water would 
 still continue. Even with the stiffest maintenance of 
 diflferential rates, the competitive struggle would largely 
 persist in the form of offering to shippers and passengers 
 superior railway facilities. Whatever be the ultimate 
 outcome of the railroad problem, one thing is certain, 
 that the possibility of deranging all rates at the mere 
 caprice of any one of several hundred rate fixing bodies 
 cannot continue. Exactly how this chaos-breeding 
 power will be chained it is difficult to say. It may be 
 that hard won experience will make carriers voluntarily 
 conform to rates recommended as at present by traffic 
 associations. It may be that specific rates based on 
 the principle of making aggregate earnings cover ag- 
 gregate expenses will be prescribed and enforced by the 
 federal commission.^ It is possible that the actual con- 
 solidation of all systems under a single board of control 
 will destroy conflicting interests by unifying them. Sev- 
 
 ^ W. D. Dabney, The Public Regulation of Railways, p. 152. 
 
 "Mr. A. B. Stickney in Ch. XIX of the Railway Problem, 
 argues that there is no other remedy. Prof. H. C. Adams has 
 advocated a similar plan. He suggests that the Commission 
 might (i) determine the proper total income of railway com- 
 panies; (2) the share of traffic naturally belonging to each 
 company; (3) a uniform classification of freight; and determine 
 (4) on each class, rates that should be sufficient when multiplied 
 by the physical volume of traffic to produce the aggregate 
 income. (See Compendium of Transportation Theories edited 
 by C. C. McCain, p. 134 sq.) To suggest only one of a thou- 
 sand difficulties, how would such rates be aflfected by largQ 
 unforeseen fluctuations in the volume of traffic ?
 
 258 EXTENSION OF THE STATE'S CONTRACTU/tL INCOME. 
 
 eral ineffectual attempts at a solution have already been 
 made. The federal commission has been foiled in its 
 attempt to prescribe in advance specific rates to be ob- 
 served by carriers ; and the efforts made hitherto by 
 carriers to establish mutual agreements to maintain 
 reasonable rates have been annulled by the decisions of 
 the Supreme Court. The Interstate Commerce Act, so 
 the Supreme Court has decided, confers upon the com- 
 mission no power to prescribe rates for the future ;i and 
 the Anti-Trust Law of July 2, 1890 (in the opinion of the 
 same tribunal) prevents a railroad company from enter- 
 ing into any combination with competing roads even to 
 maintain reasonable rates.^ These decisions apparently 
 block progress along their respective Hues so long as 
 the statutes concerned stand unrepealed or unamended, 
 but in some way the control over the fixing of rates must 
 be secured. 
 
 The advocacy of pooling, then, is far from being an 
 admission of the failure of competitive railroading. The 
 necessity for pooling is rather an index of the thorough- 
 ness with which competition has done its work in the 
 past. Moreover, the compatibility of such pooling ar- 
 rangements with cheap and efficient transportation is a 
 strong argument against governmental experimentation 
 with railroads. 
 
 The Political Aspect of the Question. — If, by proving 
 the indispensable advantages of reasonable competition, 
 a tolerably strong argument for retaining our present 
 system of private railroads may be made, a conclusive 
 demonstration of the folly of a federal railroad system 
 
 ' In re Interstate Commerce Commission vs. The Cincinnati, 
 New Orleans and Texas Pacific Railway Co. ct al. 
 
 '^ In re U. S. vs. The Trans-Missouri Freight Association et al. 
 For a clear presentation of both decisions see Prof. E. R. 
 Johnson's article. Current Transportation Topics, in Annals of 
 the American Academy, Sept. 1897.
 
 THE POLITICAL ASPECT OF THE QUESTION. «59 
 
 may be drawn from weighing the political dangers which 
 such a system must certainly entail. 
 
 The dangers of a national railroad system are many. 
 It would miraculously multiply the " loaves and fishes " 
 for the politicians to dispense ; it would make transpor- 
 tation facilities the football of political " dickers " ; it 
 would plunge the Treasury into straits whenever there 
 came a slump in railroad earnings ; and, worse than all 
 else, it would raze to the ground our constitutional struc- 
 ture based on a balance of power between the govern- 
 ment and the people. 
 
 Let us endeavor to substantiate these propositions. 
 The Statistician to the Interstate Commerce Commission 
 reported that on June 30, 1897, there were in all 823,476 
 men in the employ of the railroads of the United States.^ 
 Substantially 800,000 citizens, representing a population 
 of about 4,000,000 souls, would become employes in the 
 federal civil service under a state railway regime. This 
 number added to the present civil service roll would 
 make the total number of places under the federal gov- 
 ernment largely in excess of 1,000,000. The advocates 
 of state roads when confronted with this situation try 
 to meet it by saying that all these 800,000 places must, 
 of course, be filled under a system of competitive exami- 
 nations. Obviously there would be thousands of places 
 that could not be thus filled. The more important posi- 
 tions, the superintendencies of divisions and the like, 
 would be conceded to be the proper political patronage 
 of every administration. Promotions and transfers 
 would afiford another mass of plunder to the politicians. 
 
 The maintenance of the reforms already efifected in 
 the public civil service is no easy labor ; and the exten- 
 
 ' Statistics of Railways in the United States, 1897, p. Z7- 
 The number employed in 1896 was 826,6^20.
 
 26o EXTENSION OF THE STATE'S CONTR/iCTU/IL INCOME. 
 
 sion of the competitive system of appointments and pro- 
 motions to a field indefinitely vaster than the present 
 one might not improbably prove a superhuman task. 
 To argue that the inefficiency of partisan railroad ser- 
 vice would make patent the necessity of the merit sys- 
 tem, and w^ould thus lead to an overwhelming popular 
 demand for the universal establishment of the merit sys- 
 tem in the administration of state railroads, does not 
 appear to be a very cogent argument. Popular opinion 
 in America will always demand and obtain a very 
 considerable degree of administrative efificiency even 
 from a partisan civil service. Indeed it may fairly be 
 doubted whether the superior efficiency and economy re- 
 sulting from a non-partisan civil service are more im- 
 portant than the elevation of politics which results from 
 the merit system. Place and power are and always will 
 be the incentives to political activity. The political ex- 
 perience of our race has demonstrated the necessity of 
 limiting by constitutional prohibitions the power of our 
 rulers. We are beginning to learn the wisdom of limit- 
 ing the places to be scrambled for in the political mclcc. 
 It is therefore doubtful whether a partisan railway ad- 
 ministration would be so inefficient as to engender an 
 indefeasible clamor for extending the merit system to 
 the public railway service. Even if such a movement 
 arose, the " vested interests " of the vast army of incum- 
 bents might easily block the attempted reform. How- 
 ever, even though \ve concede that the government rail- 
 way service would be ultimately brought under the merit 
 system, the dangers that might arise from the united 
 action of a compact body of a million government em- 
 ployes are not illusory. The fact that a man got his 
 position by merit is no guarantee that he will not try 
 to raise his salary by political agitation. The bidding
 
 THE POLITICAL ASPECT OF THE QUESTION. 261 
 
 for the " labor vote " (with which we are already fa- 
 mihar) would be child's play to the havoc wrought by 
 bidding for the railroad vote. When Congress sets the 
 wages for a million men, somebody's fingers are going 
 to get burned; and whose they will be we may judge 
 from our pension experience. There are indeed those 
 who are hardy enough to suggest that the railway em- 
 ployes of the government " forego suffrage," or, as 
 President Blackstone in semi-ecclesiastical phrase puts 
 it, that " railroad operators ... be in no greater degree 
 under the influence of politicians or political parties than 
 the army militant." The " army militant," it may be re- 
 marked in passing, has numbered in times of peace about 
 25,000 men. To suggest wholesale disfranchisement of 
 a million citizens is puerile : and to hope for their polit- 
 cal indifiference when rival parties are riotously bidding 
 for their votes is to hug a delusion. The dilemma is 
 plain. A state railway system must adopt the merit 
 system or reject it. If the merit system be rejected, we 
 invite the politicians to go through our pockets ; if the 
 merit system be adopted, the very number of state rail- 
 road employes and their conscious power will tempt 
 thcin to go through our pockets. In the second place 
 a regime of state railroads in this country would imply 
 the submission of rate fixing to political influences. The 
 pressure now exerted on congressmen to secure legis- 
 lation for special sections is admitted. Not an appro- 
 priation bill for rivers and harbors passes Congress but 
 it is loaded with special favors of this kind. Not a tariff 
 measure, whether protective or otherwise, has passed 
 Congress in this generation but special interests, indus- 
 trial and sectional, have employed it as an engine for 
 legislative favoritism. Let the fixation of transportation 
 rates and facilities be flung into the political arena, and
 
 262 EXTENSION OF THE STATE'S CONTRACTUAL INCOME. 
 
 ihe " woes unnumbered " of the unrepresented nation at 
 large may be faintly conjectured. It does very well to say 
 that a federal railway system will make the government 
 the guardian of every interest, the patron saint of inves- 
 tor, shipper, employe, and every competing interest. 
 but it is tolerably safe to predict that the very struggle 
 of locality with locality and of interest with interest for 
 preference in the matter of rates will soon reveal in this 
 general benefactor a universal scourge.^ 
 
 The Financial Aspect of the Question. — Lastly, the 
 purely financial tasks of the Treasury would become 
 freighted with insurmountable dangers. The total 
 ordinary federal expenditure at present is in the 
 neighborhood of $350,000,000 a year. The capital in- 
 vested in railroad property in the United States is es- 
 timated at $11,000,000,000. In case the federal govern- 
 ment in order to purchase this property issued bonds to 
 this amount, the interest upon so stupendous a debt 
 would more than double the total annual expenditures. 
 To offset this increased expenditure the government 
 would receive the earnings of the railroads. In times of 
 commercial depression these earnings, sometimes for 
 several years running, are a negative quality. Even as- 
 suming that the government administration is as eco- 
 nomical as that of the railroad corporations, the 
 necessity of paying ofT each year some part of the prin- 
 cipal of the debt incurred for the purchase of the roads 
 would about absorb the surplus of net earnings over 
 interest charges. It may readily be surmised that the 
 Secretary of the Treasury in a lean year would have a 
 
 'Picard (Traite des Chemins de Fer, I.,p.625) remarks sagely: 
 " Q"f)i qu'il en soit, sur ce point comme sur celui que nous dis- 
 cutions precedemment. il est dilncile d'envisager sans quelque 
 apprehension I'influence que pourraient avoir en France les 
 pressions politiques sur le nombre des trains, la consistence du 
 personnel et les autres elements du prix de revient de I'ex- 
 ploitatioD."
 
 THB PlNy^S/CUL ASPECT OF JHH QUESTION. 263 
 
 riddle to read, an easy answer to which would be Re- 
 pudiation. 
 
 All of the dangers, however, which inhere in a federal 
 railroad system but constitute the greater danger al- 
 ready adverted to, of building up a bureaucracy dis- 
 proportionate to our political system, and of intrusting 
 to the government a power so great as to dwarf the in- 
 dividual units balanced against it. Professor H. C. 
 Adams has put this admirably where he says ^ : " The 
 question involved is a constitutional and not an indus- 
 trial question. The discussion pertinent to the problem 
 takes into consideration the influence which government 
 ownership of a railway will have upon the fundamental 
 structure of the state. The Constitution of the United 
 States is unique in that it aims to guarantee the con- 
 tinuance of liberty through a balance between the vari- 
 ous governmental powers ; and . . . the great body of 
 the American people hold to the political ideas expressed 
 in the Constitution. More than this is true. Not only 
 is the theory of the balance of governmental powers 
 relied upon for the perpetuation of political liberty, but 
 the conception of a balance as between governmental 
 functions on the one hand and industrial functions on 
 the other is accepted as a criterion of a justly organized 
 society. . . . The administration of railroads by govern- 
 ment would increase the importance of the administra- 
 tive department of government as compared with the 
 other departments, and it would also throw so prepon- 
 derating an influence into the hands of government as 
 to destroy the hope of maintaining any just balance be- 
 tween governmental and individual interests." 
 
 The last resort of the advocate of state railroads is to 
 argue from the successful management of the post-office, 
 
 ' Introduction to Dixon's State Railroad Control, pp. 13, 14.
 
 264 EXTENSION OF THE STATE'S CONTRACTUAL INCOME. 
 
 or the brilliant administration of Prussian railroads, 
 that our federal government is able to undertake the 
 business of transportation. The many differences be- 
 tween the post and the railroads have already been ex- 
 plained, and the analoi^ical argument that Prussian 
 success with railroads presages similar good fortune for 
 our federal government in a similar venture is far from 
 conclusive. If we are to make use of analogy as a guide 
 in such matters, the experiment which deserves our most 
 careful study is the English experiment with the tele- 
 gi-aphs. Here was a nation whose industrial habits 
 were most nearly like our own. Here was an industry 
 whose acquisition cost far less than the railroads, and 
 whose administration was immensely simpler. More- 
 over, conservative financial opinion had pronounced in 
 favor of the experiment. So careful a student as Jevons 
 had concluded that state telegraphs would be successful 
 largely for the same reasons which had made the state 
 management of the post successful.^ It was found, 
 however, that tlic economics secured by unity of man- 
 agement were offset by the higher salaries paid to em- 
 ployes, and that the government had to obtain a 
 monopoly for the state telegraph, though formerly such 
 an intention had been disclaimed. The financial failure 
 of the experiment is hardly in question. A successful 
 pressure of the telegraph personnel for higher pay. and 
 an invincible demand by the public for lower rates, 
 proved to he the uj^per and nether millstones between 
 which the financial success of the undertaking was 
 ground to powder.^ 
 
 Compare Jevons, Method.s of Social Reform, p, 281. 
 Bastable, Public Finance, pp. 197, 198.
 
 CHAPTER XL 
 
 MUNICIPAL MONOPOLIES. 
 
 Nature of Urban Monopolies. — " All the conditions 
 that made a uniform system of local self-government 
 possible," Mr. Wilcox ^ tells us, were " swept away by 
 the rise of cities." He might have added that the con- 
 ditions which made a uniform system of industrial com- 
 petition feasible were also largely shattered by this same 
 exodus from the country to the town. For as the grow- 
 ing concentration of population into cities at once created 
 a closer dependence of social welfare upon intelligent 
 city government, so the very fact of urban residence 
 created a milieu in which the beneficent force of free and 
 equal competition could no longer freely ' orb about.' 
 The machinery of the town meeting could not cope with 
 the inert masses to be moved within great manufactur- 
 ing and commercial centres, nor could the unrestricted 
 industrial rivalry of an agricultural era afford an ade- 
 qva^i rule of economic policy for the growing munici- 
 pality. With the growth of cities came, of necessity, 
 the concurrent growth of the city plant. The old village 
 lanes were transformed into thoroughfares paved, 
 graded, and curbed. Public buildings were multiplied. 
 Public bridges, and markets, and docks, and wharves, 
 and ferries supplanted earlier and ruder contrivances. 
 The uncouth rural constable gave way to the uniformed 
 
 * Study of City Government, p. 9. 
 
 265
 
 266 MUNICIPAL MONOPOLIES 
 
 patrolman, and in place of the voluntary hose company 
 came the salaried fire department. 
 
 It is hardly surprising that in a period of such rapid 
 material progress there should have been few misgiv- 
 ings about the danger of extortionate charges for ser- 
 vices which city residents were sure to require. The 
 levelling effect of industrial competition upon prices had 
 exerted a sedative or at least a reassuring influence upon 
 city people ; and they were slow to grasp the fact that 
 in certain important urban industries the action of com- 
 petition is impeded or wholly checked. The}- understood 
 from the first that the city was a governmental organ of 
 the state, but they assented only gingerly to the broad 
 doctrine that the city was also the normal minister to 
 peculiar local needs. They assumed that their officials 
 would employ a part of the city plant, such as the public 
 administrative buildings and the schools, and would 
 render gratuitous services in connection therewith. But 
 the citizens generally saw nothing inconsistent with this 
 policy in granting (often in perpetuity, and without any 
 remuneration) the use of another and greater part of 
 the city plant, to wit, the streets, to companies or cor- 
 porations whose object was to make money by supply- 
 ing the city with water, gas, electricity, or the means of 
 local transit. 
 
 If the times of this ignorance cannot now be ' winked 
 p*^ ' they may at least be partly condoned. When fran- 
 chises were originally accorded, entitling the grantee to 
 the use of the streets, the necessity for the services to 
 be rendered was often urgent, the success of the project 
 was often doubtful, and the monopoly character of the 
 privilege was often but dimly perceived. Many city gov- 
 ernments pursued the somewhat illogical, if on the whole 
 advantageous, policy of supplying the city with water,
 
 NATURE OF URBAN MONOPOLIES. 267 
 
 while turning over to private companies the business of 
 supplying the citizens with hght and transportation. The 
 necessity of an adequate water-supply was too imperative 
 and too obvious to wholly escape public attention and 
 interest even at the first, and it was naively imagined that 
 extortionate charges for other services, if imposed by a 
 private company, would speedily call into existence 
 plenty of rivals to whom it would be but necessary to 
 grant a similar use of the streets in order to bring down 
 prices to a competitive level. This proved to be a mistake. 
 Jt was found in the first place physically impossible to 
 lay more than a certain number of car tracks upon the 
 surface of the street, or more than a certain number of 
 pipes and wires below that surface. In the second place, 
 this perpetual tearing up of the public thoroughfares, 
 with the consequent interruption of public traffic, was an 
 intolerable nuisance. In the third place, the apportion- 
 ment of the city between competing companies render- 
 ing public service gave the public far less efficient 
 service than could be rendered through a single manage- 
 ment. Competing street-car lines, for instance, would 
 naturally not give transfers upon each other ; whereas 
 a single system could frequently be coerced into con- 
 ceding such a privilege. Moreover, competition was a 
 wasteful system, as the unnecessary duplication of tracks, 
 mains, and apparatus showed; and to crown all, such 
 competition tended naturally to disappear, as consoli- 
 dation of competing interests promised such obvious ad- 
 vantages to the former competitors. 
 
 In short, the rapid increase of the city population led 
 to the creation of an immense public plant. The ser- 
 vices connected with the supply of water, gas, electricity, 
 and local transportation involved the use of portions of 
 this public plant. Such services tended to become mo-
 
 268 MUNICIPAL MONOPOLIES. 
 
 nopolies, and the attempt to raise up rivals to these urban 
 monopolies proved radically ineffective. 
 
 Choice of Policies — -I'ndcr conditions such as have 
 been described the choice was forced upon our munici- 
 palities of renderinj;^ directly to their citizens such ser- 
 vices as required the use of the streets, or of exacting 
 in the future from private companies some adequate 
 compensation for their franchises. The water-supply 
 had been very generally undertaken by our city govern- 
 ments 1 and a few cities, notably Philadelphia and Rich- 
 mond, Va., had instituted municipal gas-works. r)Ut there 
 were in general two great obstacles to the ' municipali- 
 zation ' of these public service industries. One was the 
 widespread feeling against the government's entering 
 upon industrial ventures ; the other was the fact that 
 the public service corporations already existing were 
 frequently in possession of privileges and concessions 
 which could not legally be revoked, nor bought back 
 except at exorbitant prices. When electricity began to 
 be used, American cities, either because they had begun 
 to realize the true nature of urban monopolies, or, more 
 probably, because they were moved by representations 
 
 * In 1835 only 27.8 per cent, of the waterworks in the United 
 States were owned by the public. The percentage of publicly 
 owned works steadily increased, being 45.3 in 1855 and 54 in 
 1875. This is practically the percentage of public waterworks 
 at the present time (1897). It is noteworthy that there are but 
 nine of our fifty largest cities now supplied by waterworks 
 owned by private companies. What changes have been made 
 have been in the line of replacing private waterworks with 
 public plants. The public ownership of gas works is much 
 more common in England and on the Continent than in the 
 United States. In England and Wales the private gas works 
 number 426 to 160 owned by the local authorities. It is not 
 infrequent to find that the trackage of tramways in England 
 is owned by cities, and let by them to operating companies 
 which supply the cars and service. Several municipalities in Great 
 Britain have followed the example of Glasgow in both owning 
 and operating their street-car lines.
 
 PUBLIC OPERATION z's. CORPORATE OPERATION. 269 
 
 of the supposed saving to be effected, instituted in more 
 than a hundred instances municipal electric light plants. 
 Even where our cities have adhered to their earlier policy 
 of letting private corporations render public services, the 
 city governments have been more exacting than for- 
 merly in the various stipulations inserted in the fran- 
 chises. Originally, such franchises were to be had 
 almost for the asking. In certain cases they were per- 
 petual instead of being limited in duration, and they often 
 conferred what were practically exclusive rights to serve 
 certain localities or districts. Franchises granted to-day 
 are likely to be hedged about with many restrictions. The 
 right is frequently reserved to the city government of 
 prescribing the conditions and character of the service 
 to be rendered ; the franchise is limited in duration, and 
 a special tax of a certain percentage of the gross receipts 
 or of the net receipts is often inserted. Even the right 
 to fix the prices to be charged is not infrequently re- 
 served to the city, though the exercise of this last-named 
 right is likely to be treated very cavalierly by the courts. 
 
 It is almost needless to add that the municipal owner- 
 ship and operation of urban monopolies is what is vul- 
 garly termed one of the ' burning questions ' of the day. 
 To assess the arguments for and against such a policy 
 we must have regard first, to certain general considera- 
 tions, economic and political, and thereafter we must 
 weigh the positive evidence to be drawn from experience 
 and statistical inquiry. 
 
 Direct Municipal Service vs. the Franchise Policy.— 
 The advocates of direct municipal ownership and opera- 
 tion of urban monopolies hold out the alluring promise 
 of transmuting private profits into public benefits. The 
 supply of light and water, no less than local transporta- 
 tion, they contend, is ordinarily a monopoly. The prices
 
 270 MUNICIPAL MONOPOLIES. 
 
 exacted for these services, they aver, are monopoly 
 prices, sufficient to Hne the pockets of the private cor- 
 porations with exorbitant profits. Even admitting that 
 private watchfuhiess depresses cost below the cost levei 
 of municipal service, the consumer, they argue, is not 
 benefited thereby. The pressure exerted on the cor- 
 poration's employe does not lessen the consumer's water- 
 rate, nor his gas bill, nor his car fare. Instead of help- 
 ing either consumer or employe, the monopoly, it is 
 maintained, robs the one and tyrannizes over the other. 
 And even though it be admitted that public manage- 
 ment is less economical than private control, still it is 
 argued that the possible risk of public waste is slight 
 as compared with the certain danger of corporate 
 greed. 
 
 In criticism of this position it may be said, first, that 
 this elimination of private profit is possible, generally 
 speaking, only as regards enterprises to be established 
 in the future, where the city government assumes the 
 risk of failure as well as of success ; secondly, that the 
 element of cost is not the item of trifling importance it is 
 represented to be, but that it measures the waste incurred 
 in operating an industry, and is therefore of cardinal sig- 
 nificance ; and thirdly, that even if public management 
 secured lower prices to the consumer in the immediate 
 present, such a plan would be dearly purchased at the 
 cost of slackened industrial improvement. To illustrate : 
 if a street-railway company has a franchise which is un- 
 limited in duration and which carries with it the exclu- 
 sive right to operate on certain thoroughfares, such a 
 franchise cannot be revoked, nor its value be indirectly 
 destroyed by the city. Such action would be both un- 
 wise, as endangering private property, and unconstitu- 
 tional, as it amounts to taking private property without
 
 PUBLIC OPERATION vs. CORPORATE OPERATION. 271 
 
 just compensation.^ If through the exercise of the right 
 of eminent domain the franchise become the property 
 of the state, the price paid by the city would normally 
 be based on the earning power which the franchise for- 
 merly conferred on the company. Even though the ex- 
 piry of a corporation's charter should allow the city 
 government to establish a municipal plant and render 
 services directly to the citizens, the obvious utility of 
 acquiring the existing private plant would generally lead 
 the city to pay a price for it high enough to cover and 
 more than cover the cost of the plant's duplication. 
 When the city therefore is under the necessity of making 
 the earnings of its enterprises cover the interest and 
 redemption of this purchase money, there is no certainty 
 that such charges will not prove fully as onerous as the 
 corporate profits from which municipal public service 
 was intended to deliver us. Where there is no necessity 
 imposed on the city of buying back a franchise, the city 
 may be able to furnish the service at a smaller price than 
 the consumer would otherwise pay. Still, such ventures 
 may prove to be failures, in which case the loss will have 
 to be made good out of the proceeds of taxation instead 
 of out of the pocket of private investors as at present. 
 Finally, it is urged that the substitution of public manage- 
 ment for private management would disparage that per- 
 sistent search for economizing expedients and new appa- 
 ratus, and thus in the domain of urban monopolies might 
 not improbably lead to what John Stuart Mill was fond 
 of describing as " the stationary state." 
 
 The advocates of the franchise system ground them- 
 selves firmly on the high probability of lower cost of ser- 
 vice under private management than under public, and 
 
 * See article V of Articles in addition to, and amendment 
 of, the Constitution of the United States.
 
 2 72 MUNICIPAL MONOPOLIES. 
 
 contend that this lower cost in the present, and still more 
 this constantly lowering cost in the future, mean a mini- 
 nuun waste of social capital, and in the long run lower 
 prices to the consumer than direct pul^lic service is ca- 
 pable of affording. It is hardly necessary to point out 
 that, in purchasing supplies or in contracting for labor, 
 private self-interest, stimulated by the hope of gain no 
 less than by the fear of loss, will drive a sharper bargain 
 than will public authorities who have nothing particular 
 at stake. 
 
 Of even more importance than holding down running 
 expenses to the lowest figure compatible with adequate 
 service is the public gain derived from the solicitous in- 
 quiry made by private companies into improved kinds 
 of apparatus and the generally speedy introduction 
 of such improvements. Public ofificials rendering 
 industrial service to the community may try to pal- 
 liate the more obvious discomforts attaching to anti- 
 quated methods ; they are not especially likely to trouble 
 themselves about experimenting with new and promising 
 appliances. The case has been well put recently by an 
 expert in local transportation ^ : " Governments in gen- 
 eral, and municipalities in particular, are essentially con- 
 servative in trying new things. Private capital, on the 
 contrary, is essentially eager to anticipate the future and 
 preempt all possibilities of profit. TTerein lies the real 
 and fundamental reason why nnmicipal ownership and 
 operation of public service enterprises is not, nor ever 
 will be, a success from the broader points of view — from 
 the standpoint of the people's progress." 
 
 Before proceeding to ask how far these opposing eco- 
 nomic considerations arc affected when viewed in the 
 
 ^ Mr. Edward E. Iliggins. in Municipal Affairs for Sept. 
 1S97,
 
 PUBLIC OPERATION vs. CORPORATE OPERATION. 273 
 
 light of experience, it will be necessary to glance for a 
 minute at the political considerations involved in this 
 issue. The notorious dishonesty of many of our city 
 officials, no less than the prevalence of the spoils system 
 in city politics, would seem at the first blush to create a 
 strong presumption against the public ownership and 
 operation of urban monopolies. But the advocates of 
 this policy fairly take the bull by the horns when they 
 insist that corruption in municipal legislatures is very 
 largely rooted in the present system under which fran- 
 chises are granted, confirmed, or extended. " Legisla- 
 tive corruption finds its opportunity in this situation, " 
 Both the city legislature (the council or the board of 
 aldermen) and the private company needing the fran- 
 chise are tempted ' beyond that they are able,' the first 
 to sell, the last to buy, the right to use the streets for 
 a consideration which, however satisfactory to the im- 
 mediate parties to the sale, almost always amounts to a 
 corrupt betrayal of the public interests. Nothing com- 
 parable to the legislative corruption in the granting of 
 franchises is to be found, it is contended, in the adminis- 
 tration of public water-works, in the street-cleaning ser- 
 vice, in the renting of city docks, or in similar public 
 undertakings. Mr. Albert Shaw puts this side of the 
 case in a nutshell where he says ^ : " The wear and tear 
 upon the morals of a weak municipal government are 
 greater by far when it comes to the task of granting 
 franchises — that is to say, of making bargains with pri- 
 vate corporations — than when it is attempted to carr)- 
 out a business undertaking directly on the public ac- 
 count. ... In the United States the scandals and diffi 
 culties attendant upon . . . municipal ownership . . , 
 would not be as great as those involved in making bar 
 
 * Cf. Symposium in the Independent, May 6, 1897,
 
 2 74 MUNICIPAL MONOPOLIES. 
 
 gains between municipal governments and the gas trusts 
 and illumination companies, and in the exercise of an al- 
 leged public control." 
 
 The obvious reply to this presentation of the matter 
 is that to scatter corruption is not necessarily to destroy 
 it ; that public ownership and operation will involve 
 consta>it opportunity for dishonesty ; and that the moral 
 standard of public officials will not be raised by merely 
 depriving them of the power to grant franchises. Indeed 
 there is much reason to believe that under municipal 
 operation we should find corruption continuous instea 1 
 of occasional, and efficiency occasional instead of con- 
 tinuous. 
 
 Evidence Bearing upon the Two Policies. — It is to 
 be feared that the evidence of statistics and of concrete 
 experience in this matter will tend, as it often does, to 
 confirm pre-existing prejudices rather than to aid sus- 
 pended judgments to an unbiassed decision. Sometimes 
 it proves the ripest wisdom after the examination of con- 
 flicting statistics ^ to doubt them all rather than to ac- 
 
 * The United States Commissioner of Labor Statistics in 
 conjunction with the heads of similar state bureaus is con- 
 ducting at this time an investigation into water, gas and elec- 
 tric light plants; and will undertake to ascertain the cost to the 
 producer, and the price to the consumer, of these products under 
 public and private management respectively. This will be the 
 first official report covering the United States that has yet been 
 made. 
 
 For the statistical presentation of facts involved, consult 
 Municipal Affairs tor March, 1897. which contains a bibliography 
 of works on city government. The same journal for June and 
 September, 1897, contains articles presenting statistical evidence 
 on the points involved. Municipal Ownership: Its fallacy, 
 by M. J. Francisco; the publications of the American Economic 
 Association; Municipal Monopolies and their Management, by 
 A. H. Sinclair; and the Proceedings of the National Associa- 
 tion of Officials of Bureau of Labor Statistics in the United 
 States for 1896 may be consulted with profit. 
 
 Especially sharp-sighted is Prof. Willcox in his remarks in 
 the Ifist mentioned pamphlet, where, in speaking of th? difticulty
 
 EyiDENCE BEARING UPON THE TIVO POLICIES. 275 
 
 cept any. Especially is this the case when there are 
 many complicating factors, some of them peculiar to a 
 given time, place, or form of local government. 
 
 The evidence which purports to bear upon the plan 
 of pubHc operation as compared with the franchise sys- 
 tern ought to be scrutinized sharply. Not only must 
 comparisons be made of the prices charged the con- 
 sumer, but the quality of the service rendered and tlie 
 question of cost must also be investigated. A public 
 gas company which charges the consumer on his gas- 
 bill a dollar per thousand cubic feet, and which runs be- 
 hind in its current expenses so that it must be aided out 
 of the proceeds of taxation, may obviously be exacting 
 more from the consumer than a private company which 
 charges a dollar and a quarter per thousand cubic feet, 
 pays taxes on its property, and is a going concern. Dif- 
 ferences in local conditions also must be borne in mind. 
 The cost of gas obviously depends largely on the price 
 of coal. That in turn depends largely on the geographi- 
 cal situation of the gas plant. So that the same charge 
 which in one place might be regarded as truly exorbitant 
 might elsewhere not cover the actual cost of production. 
 
 of obtaining reliable statistical data bearing on the problem, he 
 observes: " Yet, on consideration, it appears that public and 
 private plants do not render the same service except by accident, 
 and hence, assuming that the true cost can be obtained, it would 
 be the cost of different services. The aims of public plants and 
 of private plants are different. The aim of a municipal plant is 
 primarily to satisfy the voters, and in subordination to that to be 
 self-supporting or remunerative. The aim of a private plant 
 is primarily to earn money for the corporation, and in sub- 
 ordination to that to please the patrons. Hence the manage- 
 ment of a public plant is tempted to make it appear that the 
 plant is remunerative, by twisting the figures if necessary, and at 
 the same time be lavish with the light, as a means of securing 
 the favor of the voters. On the other hand, the management 
 of a private plant is tempted to keep its financial condition 
 secret, or to represent it unfavorably to the public, in order to 
 prevent competition or municipal interference."
 
 276 MUNICIPAL MONOPOLIES. 
 
 Similarly, the street-car trackage required for a com- 
 pactly built city like Glasg-ow is not more than a sixth 
 of that required for a city that spreads out like Brook- 
 lyn. Obviously, the difference in capital invested in the 
 plants must be enormous, and differences in price may 
 thus be justified. Besides distin_c:uishing between the 
 real and the nominal prices charged to consumers, and 
 after making some rough allowances for differences in 
 local conditions, we must assure ourselves, if we would 
 profitably compare public with private prices, that the 
 system of accounting is essentially the same in both. 
 Unfortunately this is seldom the case. If language was 
 invented, as the cynic said, to conceal thought, the lan- 
 guage of municipal book-keeping is certainly eloquent. 
 The loss which occurs to the city by foregoing the taxes 
 which would be paid on a private company's plant sel- 
 dom troubles the municipal accountant. The risk in 
 which the city government is involved by the possibility 
 of having to give up the business by reason of failing 
 therein never clouds the horizon of the city manage- 
 ment.^ Still allowance for interest on the indebtedness 
 incurred in building the city plant is being made in an in- 
 creasing number of public reports. Gratifying as this con- 
 cession is to sound finance, it is still a melancholy reflec- 
 tion that the allowance made in municipal accounts for 
 annual repairs, replacements, and contingencies still ex- 
 cites either the wrath or the derision of the advocates of 
 the franchise system. The differences in two systems of 
 accounting are sometimes very considerable. For ex- 
 
 ^This is not a purely theoretical risk. Several of our Ameri- 
 can cities have been compelled after a public trial to betake 
 themselves to the franchise system. A private company will 
 properly take the element of risk into account. Thus a private 
 company once offered to light Detroit at $124 per lamp per 
 year if they were given a three year contract, and at $102 per 
 lamp per year on a ten year contract.
 
 EVIDENCE BEARING UPON THE TIVO POLICIES. 277 
 
 ample, the Mayor of Philadelphia recently reported to 
 the City Council an annual net profit on the city gas- 
 works of $1,600,000. A committee of the Massachusetts 
 legislature at the same time investigated the Philadel- 
 phia plant and reported back that the city was losing by 
 it $100,000 a year. Recent developments would seem 
 to show that the committee was much nearer the truth 
 than the Mayor. 
 
 A careful sifting of the evidence presented on both 
 sides seems to establish the following conclusions as 
 highly probable : (i) The price charged by private com- 
 panies for the supply of water exceeds by twenty-five to 
 forty-three per cent, the price charged by municipal 
 water-works ^ ; (2) the cost of the water-supply by mu- 
 nicipalities probably exceeds the cost incurred by pri- 
 vate companies, though how far the increased cost 
 augments general taxes it is difficult to say; (3) while 
 the price of gas in England under both systems is mark- 
 edly less than the price of gas under either system in the 
 United States,^ the rate of reduction in gas prices in the 
 United States since 1870 seems to have been more rapid 
 than in England ^ ; (4) the cost of producing gas has 
 probably been less under private than under public man- 
 agement. At all events in England the private com- 
 panies have constructed their plants on the average at 
 a lower cost, have produced more gas from the average 
 ton of coal consumed, and have delivered a slightly 
 
 ^ Cf. Conkling, City Government in the United States, pp. 
 95 and 187: Sinclair, Municipal Monopolies and their Manage- 
 ment, pp. 28, 29; also Baker, Manual of American Water Works. 
 
 'The American Gas Light Journal for Nov. i, 1897, gives the 
 average per capita consumption in England as 4245 cu. ft.; the 
 average per capita consumption in the United States as 1770 cu. ft. 
 
 'Cf. Municipal Affairs for 1897. P- 283: also the Reports of 
 the Board of Gas and Electric Light Commissions of Massa- 
 chusetts.
 
 278 MUNICIP/iL MONOPOLIES. 
 
 larger percentag-e of the total amount of gas manufac- 
 tured than the local authorities have been able to do. 
 Still, in 1889 the expense per thousand cubic feet manu- 
 factured by private companies in England was slightly 
 in excess of the expense similarly incurred by the public 
 companies ^ — a difference which conservative account- 
 ing may possibly explain. It is practically certain that 
 municipalities have paid more than private companies for 
 labor both in England and in the United States. " This 
 failing," says Professor Bemis naively, " if it be a failing, 
 is quite common in public works. Many consider it an 
 advantage for public works thus to set the example of 
 good wages." ^ Our complacency on this score might 
 perhaps be just if the example set by our public works 
 were uniformly an example of good wages for good 
 work. When, as is so common, the practice of our pub- 
 lic works amounts to high pay for the inefficient service 
 of party hacks, the " advantage " of such a policy is more 
 than dubious ; (5) the price charged for gas by public 
 companies in England appears to be less by seven or 
 eight per cent, than the charge made by private com- 
 panies, but no such general assertion can be made with 
 respect in the United States ; (6) public electric light 
 plants in this country cannot be said generally to furnish 
 electricity at a lower cost or price than private com- 
 panies. The evidence rather tends to show that the ad- 
 vantage lies with private companies, especially as long 
 as electrical apparatus is evidently in the transitional 
 stage ; (7) local transportation has been undertaken by 
 several British municipalities with varying success. In 
 this country it is as yet untried. When all circumstances 
 
 ' Cf. Sinclair, op. cit., p. 30. 
 
 ' Publications of the American Economic Association, 1891, 
 p. 78.
 
 BHDENCE BEARiNC UPON THE TlVO POLICIES. 2)9 
 
 are taken into consideration it would appear that our 
 transportation service is not only immeasurably more 
 efficient than the British tramway service, but that the 
 charges for distance traversed are really less in the 
 United States than upon the most successful of munici- 
 pal lines in Great Britain.^ 
 
 The generalizations which may be drawn from this 
 summary are that cost is almost certain to be less under 
 a private company than under city management ; that 
 the price charged the consumer may be less under muni- 
 cipal public works, but that there is no assurance that 
 this zvill be the case ; that efficiency of service is likely 
 to be greater under a private system where improve- 
 ments are rapidly introduced than under a public system 
 where they are slowly adopted. When to these tenta- 
 tive conclusions we add that the largest experiment in 
 municipal industries in the United States, the Philadel- 
 phia gas-works, after an experience of over half a cen- 
 tury has proved an unquestioned financial failure, the 
 presumption against direct municipal service in this 
 country at the present time gathers great strength. Po- 
 litical conditions being what they are, it seems fairly 
 safe to assert that the city taxpayer would probably be 
 hit harder by public waste and public stealing than by 
 private profits. Obviously, the conclusion drawn is fa- 
 vorable to the franchise system rather than to a system 
 of municipal industry. 
 
 It is requisite under a franchise system to secure to 
 the city the full value of the privileges granted, and at 
 the same time so to shape the franchise that under it 
 the service afforded shall be as efficient and as low- 
 priced as possible. This task is one of detail where local 
 
 ^ Cf. Municipal Affairs, 1897, p. 483.
 
 aSo MUNICIPAL MONOPOLIES. 
 
 conditions may often properly be taken into account. 
 Certain general principles there are, however, which 
 ought to be observed. Evidently the longer the period 
 for which the franchise is granted, the less will be the 
 annual charge imposed on the company for the risk it 
 runs of finding its plant an elephant on its hands. In 
 other words, the assured duration of the franchise acts as 
 a sort of insurance against lack of employment for the 
 capital invested. The more exclusive are the privileges 
 accorded the company by the franchise, the less will be 
 the dread of the competition of rivals. Hence this in- 
 surance against future competition ought still farther to 
 lessen the company's risks. While, therefore, it may be 
 unwise public policy to grant perpetual franchises, " all 
 inclusive and exclusive," the public interest is undoubt- 
 edly furthered by minimizing the risks which attend the 
 investment of private capital in a public service industry. 
 There is much to commend in the policy of selling fran- 
 chises at auction every twenty-five years for a certain 
 percentage of the gross receipts. Theoretically, a certain 
 percentage of the net profits would be better still, as 
 they more nearly measure the annual value of the fran- 
 chise. But the item net profits can be juggled with, 
 whereas the item gross receipts is ' of no private in- 
 terpretation ' ; and this is a case where clearness and 
 certainty are to be preferred to theoretical equity. There 
 may l)e some force in the contention that selling fran- 
 chises by auction increases the expenses of the operating 
 company, and thus tends to keep prices high or service 
 poor. But it must be remembered on the other hand 
 that so far as public service industries are analogous to 
 monopolies the tax will be difficult to shift. Moreover, 
 if the franchise is absolutely untaxed, or is given away 
 instead of auctioned off, there is every reason to belieye
 
 FMANCUL CONCLUSIONS. 281 
 
 that the prices charged will be set with exclusive regard 
 to corporate profits. ^ 
 
 Financial Conclusions. — The real issue in the matter 
 of the state's quasi-economic income centres in the pro- 
 posal to extend the state's industrial functions. Such a 
 policy is advocated not merely on financial grounds; it is 
 urged on social and economic grounds as well. It is 
 a problem to whose solution mere watchwords can con- 
 tribute nothing. The bugaboo of socialism rouses the 
 fears of the ordinary citizen as little as the shibboleth of 
 hisses faire rouses his enthusiasm. So that it would be 
 nothing surprising if the experiment of the municipal 
 ownership and operation of industries were tried in the 
 United States on a large scale within the next two dec- 
 ades. 
 
 It is indeed not impossible that a policy of municipal 
 industries may become in the future far less hazardous 
 than it would be at present. There may be a more per- 
 vasive interest in our city politics. The extension of the 
 competitive civil service system may contribute its aid 
 to this desirable end. Public policy, after all, is relative 
 to conditions of time and place, and, provided responsi- 
 bility for industrial mismanagement can be definitely lo- 
 cated, the municipal experiment may be tried under fairly 
 favorable conditions. Hardly as much can be said for 
 the possible success of a policy of federal experimenta- 
 tion. 
 
 * Where a street-car company or a gas company cannot law- 
 fully exceed a certain price for the service afforded, a tax 
 imposed on the franchise may be partly shifted by impairing 
 the quality of the service rendered unless this be prevented by 
 the city. Street cars may be crowded, or the candle-power of 
 gas lessened. This possibility serves to differentiate the cast 
 from the abstract case of a tax on monopoly profits. The im- 
 plied assumption there was that the quality of the product would 
 remain constant, and that if it deteriorated the demand at the 
 former price level would fall off.
 
 282 MUNICIPAL MONOPOLIES. 
 
 In any case it is fair to assume that only where the 
 industry is an actual monopoly is the state warranted in 
 entering' the industrial lists. Jevons ^ has given the 
 characteristics of the monopoly whose business the gov- 
 ernment may undertake with least danger. It is op- 
 erated on a few routine principles, as is the post-office. 
 It supplies a permanent and widespread want, as does 
 the water supply. Its administration is under the 
 public eye. The amount of capital required is not 
 excessive, — this to render misleading accounting im- 
 possible. Its technical apparatus is no longer in the 
 experimental stage, unlike the electric apparatus of to- 
 day. Professor Hadley acutely criticises this summary 
 by saying it is restrictive rather than positive, indicating 
 where the risk of government experiment will be least 
 rather than where government industry will be abso- 
 lutely superior to private enterprise. Still, to a commu- 
 nity bent on experimenting, Jevons's criteria may be 
 helpful. The experiment may be fooHsh or ill-timed or 
 dangerous, but even among such experiments there are 
 some less hazardous than others. 
 
 It has already been indicated what latitude the govern- 
 ment has in setting prices upon its services. The private 
 concern knows that its sales must in the long run cover 
 its expenses. The public concern knows a higher law 
 than that of cost, and can make good a deficit out of the 
 proceeds of taxation. Evidently, the government may 
 set its prices below cost, at cost, or (where it asserts for 
 itself a monopoly) as much above cost as it pleases. 
 
 ' Methods of Social Reform, p. 297. Cf. also Hadley, 
 Economics, p. 397, who adds another desirable criterion, viz., 
 that the industry be one like the supply of gas, of whose services 
 the city government largely avails itself. This will secure a due 
 regard for (luality and cost of production as well as for the price 
 to the private consumer.
 
 FINANCIAL CONCLUSIONS. 283 
 
 Where the service rendered is purely or dominantly 
 poHtical, a necessary function, such as the protection 
 of Hfe or property, or the furnishing of education 
 in the pubUc schools, the question of price does not 
 arise. The necessary services of the state must be gra- 
 tuitous and must be paid for out of taxation. 
 
 The same may be said of those ' optional ' public ser- 
 vices which are warranted by public utility rather tha'i 
 by absolute political necessity, but which cannot be split 
 up and imputed with any definiteness to individuals. 
 Such, for example, is the maintenance of lighthouses 
 by the federal government, or the lighting of the streets 
 by a city government. Expense incurred for such ser- 
 vices must be met by general taxation. 
 
 Where, on the other hand, the service rendered is in 
 character like that of the supply of gas or water, where the 
 special benefits derived by individuals are measurable, 
 numerically comparable, and specifically imputable, the 
 principle of cost should regulate the price charged by the 
 public industry. Cost, of course, ought to cover all 
 charges, fixed as well as current, such as are ordinarily 
 allowed for in a similar private concern. Cost may prop- 
 erly cover an annual amount necessary to wipe out the 
 principal of the public debt incurred on account of the 
 public plant. But no margin for clear profit ought to 
 enter into the fixation of such prices. The government 
 has no interest distinct from that of its citizens to justify 
 it in making a commercial profit from the services it 
 renders. Nor can such procedure be justified on the 
 ground that the profit so obtained may be appHed to 
 lessen ordinary taxes. If there is any good ground for 
 a public gas plant, for example, it is because that plant 
 can furnish gas at a lower price than a private concern 
 will. If the public plant can do this, it ought to be
 
 284 MUNICIPAL MONOPOLIES. 
 
 willing to show that it can do so by setting prices merely 
 high enough to cover cost. The aggregate of taxation 
 is the same whether a larger or smaller part of it be col- 
 lected as taxes or as gas-bills ; and a clear-cut distinction 
 between what the citizen pays for taxes and what he 
 pays for gas will prevent any hocus-pocus by which he 
 is often hopelessly befuddled as to what he pays for 
 either. It is small consolation when one pays a high 
 price for poor municipal gas to be assured that he is 
 thereby paying part of his taxes ; especially when one 
 afterwards learns that in reality the case was just re- 
 versed, and that, instead of his gas-bill covering a part 
 of his taxes, his tax bill covered a part of the cost of his 
 gas.
 
 PART III. 
 
 TREASURY MANAGEMENT. 
 
 CHAPTER I. 
 GOVERNMENT BORROWING, OR PUBLIC CREDIT. 
 
 The War-chest Policy. — Second only to the necessity 
 of furnishing the government with money, is the 
 necessity of furnishing this money within the period 
 in which the government needs it. Roughly speak- 
 ing, the ordinary yield of taxes about suffices to pay 
 for the ordinary requirements we make of our pub- ' 
 lie servants. But this is not always the case. Industrial de- 
 pression, for example, may cause the revenues temporarily 
 to shrink, just as unusual undertakings, such as war, may 
 suddenly multiply expenses. Either event will put the 
 government in the strait of not having sufficient means 
 to meet the special needs that have arisen. To be sure, 
 the opposite situation sometimes confronts us, but more 
 rarely. Redundant revenue may result from booming 
 trade, or from the re-establishment of peace. But the 
 notorious prodigality of governments has prevented any 
 very prolonged embarrassments from surpluses. It is 
 the deficit, actual or threatened, which generally occa- 
 sions the gravest financial concern. 
 
 From one point of view the state runs into debt for 
 much the same reason as the individual does. The pri- 
 
 285
 
 286 GOyERhlMENT BORROlVlNC, OR PUBLIC CREDIT. 
 
 vate citizen as a general rule must earn enough each 
 year to pay his year's bills. Still, various accidents, such 
 as sickness or slack trade, may plunge him into debt. 
 But there is this difference between tlie state and the 
 individual : the state cannot speedily increase its in- 
 come, as the individual with good fortune may some — 
 times do. The mere belating necessity for legislatiyfi— ^ 
 sanction to raise more money or to spend less, as well 
 as the tardiness of most new tax laws to yield revenue, 
 will explain this difference between the problems which 
 respectively confront the public financier and the domes- 
 tic economist. Unless, therefore, the government keep a 
 store or horde in reserve for emergencies, it will be un- 
 able at a pinch to get the money it requires, unless it 
 can borrow. As a matter of fact modern governments 
 do borrow. The sovereign doffs his gaudy trim of sov- 
 ereignty, and with hat in hand enters the waiting-room 
 of the private capitalist alongside of other humbler ap- 
 pHcants for loans. It is by these private capitalists, most 
 of them the subjects of the state, as public law with 
 unconscious irony calls them, that the credit of the bor- 
 rowing government is gauged and the terms upon which 
 it can obtain loans is determined. Credit, whether public 
 or private, may be defined as the power to obtain capital 
 by a promise of some counter service or payment in the 
 future. It is the nature of the state's power thus to ob- 
 tain capital that we are to discuss in this place ; but be- 
 fore entering upon that subject we may clear the way 
 by briefly disposing of the alternative to public borrow- 
 ing, that is, the policy of keeping a reserve or a " war- 
 chest," as it is sometimes called, to meet a sudden fiscal 
 emergency. The objections to this policy of keeping a 
 reserve fund for use in time of need are very strong. 
 (*) In the first place, the extraordinary expenses occasioned
 
 THE IVAR-CHEST POLICY. 287 
 
 by modern wars are so vast that no nation could or 
 would submit to making the necessary sacrifices required 
 to collect a reserve even approximately equal to meeting 
 the war's probable cost, especially if an enormous con- 
 tingent indemnity to the victor were included in the es- 
 timate. To advise a nation to avoid a war debt by keep- 
 ing a war-chest is much like advising an individual to 
 avoid penury by always keeping a shilling in his pocket, 
 yy In the next place the time of the occurrence of extraor- 
 dinary need cannot be calculated. The maintenance of 
 a huge reserve entails a certain and present sacrifice to 
 meet an uncertain and remote danger. If the reserve 
 be kept in the form of coin, the buried treasure subtracts 
 just so much from the nation's circulating medium. The 
 Germans alone of modern people pursue this policy. 
 They have not yet learned the Horatian warning : 
 
 Nullus argento color est avaris 
 Abdito terris . . . 
 
 If the war reserve be in the form of securities, the state 
 runs the risk of their depreciation and the danger of 
 having to unload them on a falling market in case of 
 need. Besides, if the interest on such securities is used 
 to meet every-day expenses, the sale of the securities will 
 necessitate a new provision for the wants which the van- 
 ished income of the securities no longer provides for. 
 The danger which some insist inheres in the war reserve 
 policy of affording the government the power of initia- 
 tive in hastily precipitating a struggle has probably been 
 exaggerated, for modern wars are most frequently forced 
 by the people upon a reluctant government. Indeed 
 about the only intelligent defence that can be made of 
 the war reserve policy under modern conditions is, not 
 that it obviates a war debt, but that it renders easy the
 
 288 GOyERNMENT BORROIVING, OR PUBLIC CREDIT. 
 
 transition to a state of hostilities by putting at the ready 
 (Usposal of the government the sinews of war for the 
 beginning of a conflict. In general, then, the policy of 
 the war-chest may be pronounced unwise and ineffectual. 
 These reserves are not large enough to begin to cover the 
 cost of war ; they do not obviate a war debt ; they in- 
 volve a certain loss without affording any guarantee of 
 adequate protection when the uncertain hour of need 
 has struck. Moreover, their infrequent occurrence at 
 the present time warrants us in passing over them 
 lightly, and in taking up the unattractive but inevitable 
 alternative of public borrowing and public debts. 
 
 Peculiarities of Government Borrowing. — Ever since 
 Adam Smith writers in describing the peculiarities of 
 public as contrasted with private borrowing have insisted 
 upon certain pre-conditions which must exist before 
 states can borrow money. These pre-conditions appear 
 to be two in number, >^ First, there must exist a money- 
 market where capital is to be had in exchange for a 
 pledge of future counter service or repayment. The 
 obvious necessity of a money-market might go without 
 mention were it not wise to insist that the money-market 
 in its modern form is historically coeval with the ap- 
 pearance and political power of the commercial classes, 
 and dates back only two centuries in modern Europe. 
 The other necessary prerequisite according to most 
 financial writers is political in its nature rather than eco- 
 nomic, and consists in some adequate security to assure 
 the lender of the fulfilment by the state of the promises 
 it makes when the loan is contracted. This security is 
 thought to consist substantially in the power and influ- 
 ence exerted by the propertied classes upon legislatures 
 to prevent them from repudiating public obligations. 
 The public creditor, Professor Adams contends, prac-
 
 PECULIARITIES OF GOVERNMENT BORROIVING. 289 
 
 tically lends to a corporation (the government) con- 
 trolled by himself, or by the class he belongs to. The 
 germ of this idea of " commercial constitutionalism " ap- 
 pears in the " Wealth of Nations." ^ " The same com- 
 mercial state of society," says Adam Smith, " which, by 
 the operation of moral causes, brings government in this 
 manner into the necessity of borrowing, produces in the 
 subjects both an ability and an inclination to lend. If 
 it commonly brings along with it the necessity of bor- 
 rowing, it likewise brings along with it the facility of 
 doing so." While a money-market and some political 
 security against repudiation must unquestionably under- 
 lie government borrowing, it seems likely, as Bastable 2 
 remarks, that the " mere existence of constitutional rule 
 does not suffice to create borrowing, nor its absence to 
 stop it, as the French debt of the eighteenth century 
 and that of Russia at present will suffice to prove." The 
 hostility of late years manifested in the United States 
 against the increase of the federal bonded indebtedness 
 except for war purposes, and our general acquiescence 
 in the wisdom of expunging public debts in time of 
 peace, seem both of them to qualify the conclusions 
 drawn of the inevitable connection between constitu- 
 tional rule and public debts.^ The essential peculiarities 
 
 'Vol. II., Bk. v., p. 509 (Thorold Rogers' edition). 
 
 * Public Finance, p. 579. 
 
 ° The most illuminating depiction of the evolution of state 
 borrowing appears in Cohn's National Oekononiie (Vol. II., p. 
 707 sq.). He points out how (i) the security afforded by the 
 borrowing state has changed from an objective material pledge, 
 such as territory, to the general reputation modem states have 
 acquired for financial trustworthiness; (2) how formerly states 
 could borrow only for short time periods, whereas now they 
 can borrow in perpetuity, if necessary; (3) how the occasion 
 for borrowing is no longer a simple lack of resources, but 
 unusual expenses especially for public industries which in time 
 will be defrayed by public industrial earnings and by normal 
 revenue; (4) how forced loans are being replaced by voluntary
 
 290 GOk'ERNMENl BORROIVING, OR PUBLIC CREDIT. 
 
 of State borrowing- as compared with borrowing by indi- 
 viduals are but two in number : ,fijcst, the unique legal 
 status of the state which borrows ; and second, the unique 
 efifcct produced by the state's fulfilment of its financial 
 obligations to its creditors. It will hardly do, as Bas- 
 table would have us believe, to elevate into this cate- 
 gory of salient characteristics of public borrowing the 
 difficulty states find in avoiding debt. Many private in- 
 dividuals, if we are to judge by their conduct, experience 
 a similar difficulty. Nor does any generic difference 
 arise from the fact that the state is, as Leroy-Beaulieu 
 puts it, an ctrc impcrissablc. States are mortal no less 
 than men, and private corporations are often longer lived 
 than governments. 
 
 First, then, the borrowing state is unlike an ordinary 
 debtor in that the state is sovereign, and cannot against 
 its will be forced to observe its bargain with its creditor. 
 It may repudiate without having to abscond ; it may 
 default and not fail. Our commonwealth governments 
 cannot be forced against their will to observe their finan- 
 cial obligations. Some of them have repudiated their 
 debts more than once. The minor units of government, 
 however, such as incorporated cities, can generally be 
 cited into court by private persons and made to fulfil 
 their contracts. This peculiar legal status of govern- 
 ments loses much of its importance from the fact that 
 while no legal remedies may be at the command of the 
 public creditor, there is an economic sanction which the 
 legal sovereign cannot escape. This sanction is the ac- 
 tual or anticipated refusal of the private capitalist to lend 
 
 loans; (5) how adventitious inducements such as lotteries are no 
 longer necessary to cajole capitalists into proffering their capital 
 to the state; and (6) how special organs of haute finance, such 
 as the Rothschilds' houses, have been evolved to take and plac^ 
 the securities a state issues when it contracts a loan.
 
 PECULIARITIES OF GOl^ERNMENT BORROIVING. 291 
 
 again to a defaulting government, or, if at all, only at 
 such rates of interest as will insure him against any haz- 
 ard of future bad faith on the part of the state. Indeed 
 it seems that the legal sovereignty of debtor states, so 
 long as it has mirrored any part of their actual power to 
 repudiate, has warranted and compelled private capital- 
 ists to charge higher rates of interest on pubHc loans 
 than otherwise would have been exacted. It is only 
 when the power to repudiate has been renounced, to all 
 intents and purposes, that a state can borrow on the 
 most advantageous terms. The real significance of sov- 
 ereignty from a financial standpoint is mostly historical, 
 and consists in the record of how governments have 
 learned by experience that honesty is the best policy. 
 So far as sovereignty is operative in the actual world of 
 finance, it is mainly as an element of risk which the 
 capitalist may think it worth his while to consider in 
 offering to loan capital to a semi-civilized or a semi- 
 honest government. 
 
 The second unique factor about public borrowing is 
 the effect produced by the state's fulfilment of its obli- 
 gations to its creditors. When a loan is contracted be- 
 tween two private parties the payment of interest is made 
 for the use of borrowed capital. The use of such bor- 
 rowed capital generally results in gain to the borrower 
 as w^ell as to the lender. The capital is invested ordi- 
 narily in some business enterprise and is the ground of 
 the profits out of which the interest is paid. Where this 
 is not the case the payment of interest must eventually 
 cease. Normally, therefore, the payment of interest by 
 one individual to another connotes a mutual benefit, as 
 well as an industrial service to society at large. The 
 payment of interest by the state to its bond-holders often, 
 though not always, connotes, not a public benefit, but a
 
 292 GOyERNMENT BORROlVING, OR PUBLIC CREDIT. 
 
 public sacrifice. The state may be paying- its creditors 
 interest upon a loan of capital where the actual capital 
 borrowed was destroyed years ag^o in prosecuting a war, 
 or wasted outright in some industrial venture. Such in- 
 terest payments are made (except where there may be 
 productive public property, such as railroads operated at 
 a profit) by taxing the state's citizens. The bond-holder's 
 income in such cases is simply taken from the taxpayers' 
 pockets. Sometimes, it is true, the results of a war have 
 been so beneficial to a nation that the interest paid to 
 those who furnished the capital for the war is more than 
 made up for by the advantages the taxpayers at present 
 enjoy. But war, unlike industry, is a game at which 
 only one party can win, and at which, if we consider 
 everything, both parties not infrequently lose. So that 
 in general the statement must stand that the payment of 
 interest or the repayment of the principal to the public 
 creditor implies a synchronous sacrifice on the part of 
 the taxpayer instead of a mutual benefit, as in the case 
 of ordinary industrial loans. Th.is must not be taken, 
 of course, as any justification for repudiation, but simply 
 as a colorless picture of the actual operation of public 
 debts. The evils inherent in the system would be en- 
 hanced, not abated, by a policy of repudiation. The pay- 
 ment of interest to the public creditor, however, differs 
 from the analogous transaction between private persons 
 in this also, that, barring any attempt at repudiation and 
 assuming a strong government, interest on the public 
 debt is much more certain to be paid than on a private 
 loan. The ability of a railroad to pay dividends on its 
 stock will depend on that particular railroad's earnings. 
 If these shrink, the dividends will be passed. Not so 
 with the interest on the public debt. Depending as it 
 does on the proceeds of taxation, the bond-holder is as-
 
 PECULIARITIES OF GOVERNMENT BORROIVING. 293 
 
 sured of his income so long as the tax-gatherer is sure 
 of his harvest. This is one reason for the low rate at 
 which governments often borrow, that the security they 
 ofTer is largely independent of the state of any particular 
 industry, and depends on industry in general. The 
 broad base upon which the borrowing power of the state 
 rests is without question the most significant feature of 
 public credit. Public debts are thus in essence a lien 
 upon the income of the taxpayers. 
 
 Since the interest payments made by the state, as well 
 as the repayment of the principal of public debts, must 
 eventually fall upon the taxpayers, the question may 
 naturally arise, — why not resort to taxes at the very out- 
 set, instead of borrowing first and taxing afterwards ? 
 Some such suggestion is not infrequently made, espe- 
 cially at the beginning of a war, when the subject of ways 
 and means comes up for discussion. If it were possible 
 to obtain the requisite amount of capital by suddenly 
 increasing taxes, and if such an unexpected increase of 
 taxes could be borne by the community without serious 
 protest, there might be much to say in favor of a policy 
 of taxation and against a policy of loans. Unfortunately 
 the yield of new taxes is uncertain and often tardy, and 
 popular repugnance to a sudden violent increase of taxa- 
 tion makes necessary the use of both loans and higher 
 taxes to meet such fiscal emergencies as war.^ If, how- 
 ever, the plan of defraying all war expenses by taxation 
 is extreme In its severity and practically impossible, the 
 opposite policy of attempting to raise all supplies by 
 borrowing is as dangerous as it is alluring. This exclu- 
 
 * There is also some truth in the statement that if the entire 
 cost of war were borne during the war by taxes, certain income 
 recipients who profit by the war would be absolved in future 
 from paying any part of the cost of the conflict whose benefit 
 they share.
 
 294 GOyERNMENT BOR.ROIVING, OR PUBLIC CREDIT. 
 
 sive reliance on loans was tried by us in the revolutionary 
 war, with the result that the general government went 
 bankrupt. It was essayed in the beginning of the war 
 of 1812, and to a certain extent in the civil war.i and 
 again in both instances the credit of the government 
 fell, its obligations were sold at a discount, and the debt 
 incurred was vastly in excess of what was actually neces- 
 sary. Sane financial policy in time of war requires that 
 capital be obtained at the outset by borrowing, and that 
 additional taxes be at once imposed to meet the addi- 
 tional interest charge thereafter to be borne by the gov- 
 ernment on account of the increased debt. Sound policy 
 also requires that at least a part of the extra capital 
 needed be raised by taxing the present age instead of 
 unduly burdening future generations. The reason why 
 a reliance wholly upon loans fails as a financial resource 
 in time of war is this: Buyers of government bonds 
 want to be assured of an annual income regularly paid. 
 This income the state can secure with certainty for its 
 creditors — the bond-holders — only through the agency of 
 taxation. If instead of resorting to taxes the state trusts 
 to future loans out of which to pay the interest guaran- 
 teed on the loans already made, future buyers of bonds 
 will be chary of an investment whose yield is so uncer- 
 tain. Either they will not buy bonds at all, or only at 
 a discount, or they will exact exorbitant rates of interest. 
 On the other hand, the policy of attempting to meet all 
 the extraordinary expenses of war by means of current 
 taxation has never been successful on any great scale. 
 Even in England, where the willingness and ability to 
 follow such a plan have been greater than elsewhere, 
 two thirds of the costs of her wars since 1688 have been 
 
 'Cf. H. C. Adams, Public Finance, p. ^Z^sq.
 
 EFFECT OF GOyERhlMEhIT BORROIVING. 295 
 
 provided for by borrowing, and but one third by en- 
 hanced taxes.* 
 
 Effect of Government Borrowing. — Ever since states 
 began to pile up public debts the policy of resorting 
 to public credit has been discussed by publicists and 
 economists with singularly little unanimity of opinion. 
 Head-shakings have characterized the wise and prudent 
 who prophesied certain disaster from the loan policy, 
 while others, regarding mainly the concomitant growt'i 
 of national industry, have boldly declared that public 
 debts were as desirable as gold mines, and that a national 
 debt was a national blessing. More judicious observers 
 have attempted to steer a middle course, and have drawn 
 up lists of objects for whose attainment the creation of 
 public debt is justifiable.^ Such hsts, however, go a very 
 little way in solving the riddle. Indeed, it is doubtful 
 whether any formula can prove in this matter of much 
 real assistance. When it is remembered that the pay- 
 ments made to the public creditor come from current 
 taxation, the common sense test of state borrowing will 
 consist in weighing well the benefits accrued and accru- 
 ing from the proceeds of any concrete loan, with the 
 sacrifices (taxes) which the loan in question has caused. 
 Such benefits are often very imperfectly measurable in 
 money terms. Indeed, there is but one generic case 
 where the advantage of public borrowing can be proved 
 in black and white. Where the loan has been made to 
 construct public works of general utility, water-works 
 for example, for whose services charges are imposed, 
 and where the plant has proved to be financially success- 
 ful as well as mechanically efficient, the success of the 
 
 ^ Leroy-Beaulieu, Science des Finances, II., p. 258 sq. 
 
 ^ H. C. Adams, Public Debts, p. 78, mentions temporary 
 deficits, war, and public works, as justifying a resort to the loan 
 policy.
 
 ^9^ GOyBRNMHNT BORROIVING, OR PUBLIC CREDIT. 
 
 loan can hardly be questioned. On the other hand, 
 where the government borrows to construct or acquire 
 property whose usufruct is enjoyed without any specific 
 charge to the citizens, the wisdom of the loan policy must 
 be gauged by the estimate we place upon the advantages 
 obtained from the property in question. Money esti- 
 mates fail almost altogether when we try to judge of 
 the wisdom of a policy of selling bonds to acquire parks, 
 improve highways, or build iron-clads. So long as men 
 differ in opinion upon questions of public policy, so long 
 will they differ upon the utility of specific public loans. 
 Where the result of public borrowing is not only not 
 measured in dollars and cents, but where the result of 
 such borrowing is partly or wholly intangible and im- 
 material, the difficulty of pronouncing an enlightened 
 judgment is immensely enhanced. Take for example 
 the case of public borrowing for educational purposes, 
 such as the building of high schools or their equipment. 
 Can we be absolutely certain that the education imparted 
 will result in such mental training as to compensate 
 wholly for the sacrifices entailed by the heavy taxes paid 
 on the school bonds ? If the plant and equipment have been 
 bought at a fair price, and are not disproportionate to 
 the needs of the community, there are perhaps few who 
 would dispute the wisdom of the loan. But, to take an- 
 other case, where recourse to public credit has been 
 necessary to preserve the national life or honor, there 
 are few rash enough to lament the cost of the loan policy. 
 There are times when neither the state nor the individual 
 can stop to count the cost. But we are much too prone 
 to assume that war loans have been necessitated by such 
 lofty and ideal motives. There is more than a grain of 
 truth in Rnskin's bitterly ironical depiction of a public 
 debt. A civilized nation, says Ruskin in Fors, "in modern
 
 EFFECT OF GOVERNMENT BORROWING. 297 
 
 Europe consists essentially of (a) a mass of half-taught, 
 discontented, and mostly penniless populace calling' itself 
 the people ; of (b) a thing which calls itself a government 
 — meaning an apparatus for collecting and spending 
 money ; and (c) a small number of capitalists, many of 
 them rogues and most of them stupid persons, who have 
 no idea of any object of human existence other than 
 money-making, gambling, or champagne-bibbing. A 
 certain quantity of literary men, saying anything they 
 can get paid to say, — of clergymen saying anything they 
 have been taught to say, — of natural philosophers saying 
 anything that comes into their heads, — and of nobility 
 saying nothing at all, combine in disguising the action, 
 and perfecting the disorganization, of the mass ; but with 
 respect to practical business the civilized nation con- 
 sists broadly of mob, money-collecting machine, and 
 capitalist. 
 
 " Now when this civilized mob wants to spend money 
 for any profitless or mischievous purposes — fireworks, 
 illuminations, battles, driving about from place to place, 
 or what not, — being itself penniless, it sets its money- 
 collecting machine to borrow the sum needful for these 
 amusements from the civilized capitalist. 
 
 " The civilized capitalist lends the money on condition 
 that, through the money-collecting machine, he may tax 
 the civilized mob thenceforward forever. The civilized 
 mob spends the money forthwith in gunpowder, infernal 
 machines, masquerade dresses, new boulevards, or any- 
 thing else it has set its idiotic mind on for the moment; 
 and appoints its money-collecting machine to collect a 
 daily tax from its children, and children's children, to be 
 paid to the capitalists from whom it had received th< 
 accommodation thenceforward forever. 
 
 " That is the nature of a National Debt."
 
 298 GOVERNMENT BORROlVING, OR PUBLIC CREDIT. 
 
 The primary effect of public debts is heavier taxes, 
 but there are certain collateral effects of public borrow- 
 ing that cannot be dismissed without a word of comment. 
 First in order comes the effect of public borrowing upon 
 industry in general. When the state enters the money- 
 market it bids for the control of some of the capital 
 which hitherto has been offered by private capitalists to 
 each other. The state's control of a part of the loan 
 fund lessens the amount available for use in private in- 
 dustry, and will often result in driving up the rate of 
 interest. The more capital the state absorbs, the less 
 will there be left ordinarily for private persons to 
 control and use, unless foreigners come forward and 
 throw their capital upon the market. In case the gov- 
 ernment uses its loans exclusively for some purely com- 
 mercial or industrial purpose, such as the acquisition, 
 construction, or operation of railroads, and in case it 
 successfully manages the industry in question, the effect 
 upon the real income of the people will not be great. 
 What private enterprise has hitherto done the state now 
 manages successfully ; and, barring the difficulty of the 
 transition from private to public ownership, the result 
 has not been of great moment. The rate of interest may 
 not be permanently affected, as the capital thereafter 
 controlled by private concerns may suffice for the nar- 
 rowed industrial field to which they have been restricted. 
 When, however, we remember that the government bor- 
 rows as frequently for war or armament as for indus- 
 trial ventures, and is so unlikely to succeed in the latter, 
 the conclusion is inevitable that government borrowing 
 is likely to raise the rate of interest. The supply of con- 
 sumable commodities is likely to be reduced on account 
 of the smaller amount of capital employed in their pro- 
 duction, and the price level is likely to rise in the long
 
 EFFECT OF GOVERNMENT BORROWING. 299 
 
 run for the same reason. Some compensating effects 
 arise from the greater energy exerted under the stimulus 
 of necessity, and the more efficient utiUzation of what 
 capital remains available for private industry, but the 
 real incomes of all classes except the capitalists and the 
 speculators are likely to fall because of the curtailed sup- 
 ply of necessities and comforts. One cannot eat his 
 cake and have it too ; and if a nation increases its force 
 of soldiers and sailors, it must decrease the number of 
 its farmers and mechanics ; if it spends more on gun- 
 powder and guns, it must spend less on bread and butter. 
 There will be numerous exceptions to this general rule. 
 Army contractors will obviously wax fat. The time of 
 war may coincide with a period of industrial revival. 
 Work may be plenty ; discontent may be hushed. But 
 until there is a safe way found to get something for noth- 
 ing, we may rest surely in the conviction that much of 
 the apparent prosperity has no real or lasting foundation, 
 that the rise in prices, especially if irredeemable paper 
 money has been emitted, is purely nominal, and that 
 our fool's paradise will prove eventually a house of cards. 
 Besides the industrial effects of a public loan policy 
 there are certain political and social influences springing 
 from the same source. Obviously, a man must have 
 capital — must even be a capitalist on a small scale — be- 
 fore he can lend money to the government, so that public 
 borrowing cannot be charged with creating a distinct 
 class in the community whose interests are not at one 
 with those of society. But the assured income from 
 such loans to the public, it is maintained, absolves the 
 public creditor from the necessity or inclination thereafter 
 of working for his living, and keeping in healthy touch 
 with his industrial environment. So, too, it is asserted 
 that the payment of the bond-holder and the extinction
 
 300 GOVERNMENT BORROIVING. OR PUBLIC CREDIT. 
 
 of the public debt will convert this formerly torpid class 
 into active men of business and imbue them with a solici- 
 tous concern for investing in some kind of productive 
 industry the capital which the state has returned to them. 
 
 "The bond, a beggar now, 
 Seeks investment anyhow. 
 Anywhere." 
 
 It is hardly likely that this is altogether the case. Sup- 
 pose that a definite amount of the nation's property were 
 turned over to the bondholders in full satisfaction of their 
 claims upon the state. In so far as this property is in 
 the shape of lands and houses, the public creditors might 
 use, occupy, or let them ; in so far as the property trans- 
 ferred is in the shape of industrial capital, it seems not 
 unlikely that the entrepreneurs (if we may assume for 
 a minute that they are totally distinct from the bond- 
 holding class) would still control this capital, and pay 
 interest for its use to its owners, the ex-bond-holders, 
 rather than as formerly to the state as an intermediary 
 agent collecting the bond-holders' interest under the 
 guise of taxes. Indeed the influence of public borrow- 
 ing in creating a class of capitalists is nil; its influence 
 in perpetuating such a class is not very much greater. 
 Much stress is laid by some writers on the stimulus given 
 to saving by affording the opportunity to invest in pub- 
 lic securities. But here again we may doubt the extent 
 of such an influence. It is not very likely that a man 
 who will not save to invest in a savings-bank which he 
 has seen will save to lend to a government which he hqs 
 not seen. 
 
 Lastly, there is a political influence exerted by the loan 
 policy, though publicists are hardly agreed on the exact 
 nature of this influence. Professor H, C. Adams ^ thinks 
 
 * Public Debts, pp. 22, 23.
 
 THE TECHNIQUE OF PUBLIC BORROIVING. 3^1 
 
 that government borrowing tends to weaken public con- 
 trol over the purse by allowing legislatures to embark 
 on ventures whose cost would prove a deterrent if the 
 cost had to be met by the immediate imposition of taxes, 
 and argues that any method of procedure " which allows 
 the government to enter upon any great enterprise with- 
 out bringing the fact fairly to the knowledge of the pub- 
 lic must work against the realization of the constitutional 
 idea." Before the imposition of constitutional checks 
 upon the powers of state legislatures to borrow on the 
 public credit, there was much to be said for this aspect 
 of the case. But the danger that the public credit will 
 be employed surreptitiously in future is a vanishing 
 danger in the United States. The state legislatures for- 
 tunately are hampered now by constitutional amend- 
 ments from taking such a course ; and the public keeps 
 a sharp lookout on any proposal by Congress to author- 
 ize the issue of bonds. Indeed it is far more likely that 
 the chief political effect produced by federal borrowing 
 is to attach more firmly to the federal government the 
 interests of the public creditors who, it is to be feared, 
 may exert in time an influence on that body to prolong 
 the public debt beyond the limit dictated by general ex- 
 pediency.^ 
 
 The Technique of Public Borrowing. — An intelligent 
 apprehension of the subject of public credit involves, in 
 addition to an understanding of the peculiar nature and 
 effects of government loans, some knowledge of the tech- 
 nical handling of public debts. This will embrace a 
 description of the various forms or classes of public 
 debts ; of the way in which they are negotiated or sold ; 
 
 * Leroy-Beaulieu, Science des Finances, Vol. II., p. 309, 
 speaks of " I'habitude en France si inveteree de sacrifier les con- 
 tribuables aux rentiers."
 
 302 GOVERNMENT BORROlVlNC, OR PUBLIC CREDIT. 
 
 of their conversion or exchang-c for other evidences of 
 indebtedness; and of their ultimate redemption or ex- 
 tinction. 
 
 (a) Classification of Public Z)r&/.?.— Public debts may 
 be classified in several ways. The commonest classifi- 
 cation divides such debts into funded and unfunded or 
 floating debts. Funded debts are such as have been for- 
 merly acknowledged by the government and whose in- 
 terest is regularly provided for by law. The name was 
 applied because the interest due the holders of such debts 
 in England was originally paid out in certain specified 
 funds or taxes. The funded debt exists ordinarily in the 
 shape of bonds or annuities. Unfunded or floating debts 
 consist often of various unpaid accounts charged against 
 the state for supplies furnished or services rendered to the 
 government or its agents. These debts are largely cur- 
 rent outstanding accounts which, though unpaid, ordi- 
 narily draw no interest. The holders of such claims 
 against the government sometimes are allowed to ex- 
 change them for evidences of the state's funded debt. 
 The funded debt of the United States is in the form of 
 bonds, either registered at the Treasury with the name 
 of the owner, or in the owner's hands in the shape of 
 coupon bonds. The government remits the interest di- 
 rect to the owners of the registered bonds, and cashes 
 the coupons of the other class of bonds as these coupons 
 mature. Unfunded debts often are rolled up when the 
 government purchases supplies with great rapidity and 
 in great quantities, and omits to make immediate pay- 
 ment. Thus after our late Civil War the unfunded debt 
 was in excess of $1,000,000,000. Unfunded debts in the 
 past have often been incurred by American cities where 
 the city oflficials without legal warrant have purchased 
 goods and given the seller an acknowledgment of the
 
 THE TECHNIQUE OF PUBLIC BORROJVING. 303 
 
 debt. It is needless to say that sound finance discoun- 
 tenances such a lawless policy. 
 
 But public debts may be classified not only on the basis 
 of the absence or presence of formal provisions for the 
 regular payment of the interest thereupon, but also with 
 reference to the time they have to run before the state's 
 obligation to pay the principal of the debt becomes due. 
 The bonds of the United States, of the commonwealths, 
 and of the smaller civil divisions generally mature at 
 certain definite dates. The federal government has the 
 option of repaying at will the principal of a small part of 
 its debt ; upon the greater part it may repay the princi- 
 pal after a certain specified term. The greater part of 
 the funded public debt of other nations is in the form of 
 what is known as " perpetual debt." This does not im- 
 ply that the debt is to exist for all time, but simply that 
 foreign governments guarantee their creditors only an 
 annual income, called an annuity, or rente, without any 
 definite promise ever to repay the principal. These foreign 
 governments, however, generally reserve the right to re- 
 pay the principal whenever they see fit, provided always 
 they have the money requisite for the purpose. In addi- 
 tion to the typical American form of public debts ma- 
 turing at some future time, there are other forms 
 employed by continental states. In return for the capi- 
 tal they borrow they sometimes guarantee annuities 
 which terminate with the death of the annuitant, or at 
 the end of a given term of years. Sometimes, moreover, 
 they issue bonds whose repayment is determined by pe- 
 riodical drawings, the bonds being put into classes, and 
 a certain number being selected by lot from time to time 
 for repayment.^ 
 
 Lastly, public debts are often classified as interest 
 
 * I^eroy-Beaulieu, Science des Finances, Vol. II., p. 2^^,
 
 304 GOVERNMENT BORROWING, OR PUBLIC CREDIT. 
 
 bearing and those bearing no interest. This distinction is 
 of service, not in contrasting the funded with the floating 
 debt, but in dividing off the funded debt from such gov- 
 ernment promises which circulate as money ^ and are 
 often endowed with the prerogative of serving as a legal 
 tender in payment of debts between individuals. Sucn 
 government promises to pay coin to the bearer do not 
 ordinarily bear interest. They purport to be redeemable 
 in coin on presentation, and are often so redeemed. 
 This form of public debt is unique in a number of ways, 
 owing mainly to the fact that such evidences of the 
 public debt pass ordinarily from hand to hand and serve 
 as a common medium of exchange. When a govern- 
 ment pays out such promises in the purchase of supplies 
 or in the payment of official salaries, such promises will 
 be accepted in ordinary domestic commercial dealings so 
 long as there is no distrust of the government's ability 
 and willingness to redeem them in coin at their face 
 value on presentation. By increasing the amount of the 
 currency these notes tend to raise the general price level 
 and to drive out of circulation an approximately equiva- 
 lent amount of coin which is melted down, exported, 
 or hoarded away. When all the standard coin has been 
 displaced, or even before, if discredit attaches to these 
 notes, they will depreciate in purchasing power, and 
 their value thenceforward will depend partly on their 
 quantity and partly on the estimate the commercial 
 world makes of the remoteness of their redemption in 
 coin. The apparent gain which is derived from saving 
 the interest on the public debt bearing no interest 
 is generally ofifset by the depression of public credit 
 
 * Besides bonds and annuities, some governments borrow 
 money for short time periods, usually not longer than a year, 
 by emitting interest bearing treasury notes or exchequer bills. 
 These do not circulate as currency, however. See p. 371, note.
 
 THE TECHNIQUE OF PUBLIC BORROIVING. 305 
 
 thus caused, the higher rate of interest exacted 
 in consequence by the purchasers of government 
 bonds, and more than all else by the element of 
 uncertainty introduced into commercial dealings by 
 a disordered paper currency. They have proved the 
 most costly as they are unquestionably the most in- 
 sidious form of public debts. Even after the exigency 
 which called them forth has passed away, they often re- 
 main for years to vex and harass industry and commerce, 
 and their restored parity with the coin they ostensibly 
 represent can be secured only when there occurs a for- 
 tuitous conjunction of such events as budgetary equilib- 
 rium, a favorable current of foreign trade, and a return 
 of legislative sanity. Their discussion, however, belongs 
 more properly to the subject of money and banking than 
 to finance proper. 
 
 {h) Negotiation of Public Debts. — Various ques- 
 tions of detail arise when once it is determined that 
 a government is to borrow money by the sale of 
 its securities. The placing of such loans has been 
 undertaken at times by banks or brokers who have acted 
 as the government's agents. More recent experience 
 seems to demonstrate the ability of the federal govern- 
 ment to serve itself in this matter. Prudence, tact, and 
 business methods generally enable the Treasury to adver- 
 tise and place its loans with less expense than would be 
 involved by employing banks or brokers to act as inter- 
 mediaries between the public and the Treasury. 
 
 Much more momentous than the question of hiring a 
 broker to place a government loan are such problems 
 as these : what rate of interest shall be ofifered ; shall 
 the securities issued be sold at par, below par, or above ; 
 shall the securities be uniform in tenor or is variety de- 
 sirable ; shall the repayment of the principal be guaran-
 
 3o6 GOyERNMENT BORROIVING, OR PUBLIC CREDIT. 
 
 teed at all, and if so, when ; and lastly, is it advisable to 
 tax such public securities or the income which springs 
 from them ? 
 
 So far as the rate of interest is concerned, it must be 
 remembered that the government has not the power ar- 
 bitrarily to determine the rate which it will pay upon 
 the capital it borrows, and this for the simple reason 
 that it takes two to make a bar.c^ain. The private capi- 
 talist will not lend unless he gets what seems to him 
 fair remuneration. Public credit, Hke private credit, is 
 gauged by the money-market, and the finance minister 
 must pay the price asked, or go without the accommoda- 
 tion he desires. He may perhaps conceal the real rate 
 of interest he pays by fixing a nominal rate of interest 
 upon the securities to be marketed, and then selling them 
 below par. But he cannot simply dictate the rate of in- 
 terest. The solvency of the government cannot be ma- 
 terially altered by his fiat. He does his duty when he 
 intelligently ascertains the market estimate of the public 
 credit, and this he may learn by making explicit the 
 terms of the proposed loan, and inviting competitive 
 bids from would-be purchasers of the public securities. 
 
 Several considerations emerge when the question is 
 mooted of selling bonds at par or below. There is, first 
 of all, a sentimental consideration which always weighs 
 somewhat in the matter, to wit, the official and also the 
 public pride in seeing the public debt sell at par or, if 
 possible, above. But it may happen that the nominal 
 rate of interest offered is so low that the loan must be 
 contracted below par or not at all. Or it may chance 
 that the rate of interest which would have to be guaran- 
 teed to market the securities at par would exceed the 
 rate commonly allowed by law, and would be usurious 
 if exacted on a private loan. Of still greater moment is
 
 THE TECHNIQUE OF PUBLIC BORkOlVING. %0>J 
 
 the fact that on public securities sold below par a lower 
 rate of interest will be accepted by the public creditor 
 than that which he would demand if the loan were placed 
 at par or above. If, for example, a bond bearing five per 
 cent, interest could be sold at par, it is not improbable 
 that a four per cent, loan would bring, not eighty cents 
 on the dollar of scrip, but eighty-five cents or thereabouts. 
 The reason is this. In order to redeem a bond sold at 
 par the state must return a dollar for each dollar origi- 
 nally received. Where the bond has been sold below par, 
 say at 85, the state must pay a dollar for each eighty- 
 five cents originally received. In other words, a bond 
 sold below par offers two chances of gain, the annual 
 interest and a bonus at redemption, the bonus being the 
 difference between the actual price paid and the nominal 
 face value of the bond. Should the state be in a posi- 
 tion to redeem a part of its debt, or to compel its credit- 
 ors to accept a low-interest bond for a high-interest 
 bond, it will be more likely to redeem or convert the 
 debt which was sold at par or above. Thus a longer 
 duration will ordinarily attach to the bond sold below 
 par. For these reasons, where the need for the greatest 
 possible yield from the sale of public securities outweighs 
 the estimated utility of future reductions in interest, or 
 redemption of debt, financiers have sold government ob- 
 ligations below par. Obviously, there can be laid down 
 no rule, in the placing of bonds at par or below, except 
 this, that where the policy of ultimate debt payment is 
 in vogue, the realization of such an end must not be sac- 
 rificed to an inconsiderable present gain. For the policy 
 but recently (1898) adopted by the United States of sell- 
 ing bonds at par to small purchasers of public securities, 
 when other larger bidders would offer a premium, there 
 can be no financial justification. Political reasons, such.
 
 3o8 GOVERNMENT BORROkVING, OR PUBLIC CREDIT. 
 
 as making the loan ostensibly a " popular loan," may 
 dictate such a course, but sound finance never. 
 
 This weighing of present against future must also de- 
 termine to a very large extent the related question of 
 uniformity or variety in the public debt. If administra- 
 tive convenience alone were consulted, the former would 
 prevail. If the whims of bond buyers were catered to, 
 we should emit public securities in endless variety. It 
 is probable that the latter plan, like that of placing bonds 
 below par, would net the Treasury the greater amount in 
 immediate cash. If rates of interest, periods of payment, 
 and duration of loans were all adjusted to the tastes of 
 purchasers, they would be willing to pay a trifle extra 
 for this accommodation. Here again practical exigen- 
 cies must determine. It is hardly probable, however, 
 that the immediate need of money will be so imperative 
 as to necessitate an endless variety in public securities. 
 Indeed there are some advantages in having at most a 
 very few varieties. Small blocks of stock, each cum- 
 bered by its own peculiar characteristics or eccentricities, 
 are less readily listed and less generally understood than 
 a few standard varieties judiciously chosen. Indeed the 
 time has almost passed when governments are under the 
 necessity of catering to public creditors by offering them 
 such adventitious inducements as were in vogue formerly 
 when lotteries and prizes of all descriptions were at- 
 tached to public loans in order to invite general invest- 
 ment in government securities. 
 
 Whether the bond owner should be taxed upon his 
 bonds and their income is again a question largely to 
 be decided upon the present need of capital as compared 
 with the future need of revenue. Guaranteeing the 
 bonds against future taxation undoubtedly gives them a 
 higher value on the market than if their ownership car-
 
 THE TECHNIQUE OF PUBLIC BORROIVING. 309 
 
 ried with it the liability of tax contribution. Here, how- 
 ever, administrative reasons seem to favor the exemption 
 of public securities from taxation. So far as the public 
 debt is registered upon the books of the Treasury, the 
 taxation of such debt is simplicity itself. The tax may 
 even be deducted before the interest on the debt is re- 
 mitted to the owner of the bond. But where the govern- 
 ment debt is not registered, but exists in the coupon 
 form, the collection of taxes imposed thereupon, unless 
 by means of a stamp tax, would not be so easy. The 
 important thing is that the question of the bond-holder's 
 liability to taxation be definitely settled when the bonds 
 are sold, and that the government strictly adhere to the 
 bargain it makes. Taxation of a bond sold as exempt 
 from taxation amounts to partial confiscation of the 
 bond-holder's property. 
 
 (c) Conversion of Public Debts. — Not infrequently it 
 happens that when the necessity which required the gov- 
 ernment to borrow is a thing of the past, the government 
 can obtain money at a lower rate of interest than it had 
 to pay in its hour of need. If, therefore, the government 
 has the right to repay the principal of its debt or any part 
 thereof, it will naturally avail itself of the opportunity 
 in order to lessen the annual interest charge which is 
 paid out of current taxation. Often this process of con- 
 version or refunding takes the form of offering new se- 
 curities bearing the new (and lower) rate of interest, and 
 using the proceeds of the new loan to pay ofif the holders 
 of the old loan. This refunding operation, as it is 
 termed, sometimes is simplified by allowing the holders 
 of the old bonds to exchange the old bonds for the new 
 at some rate of exchange mutually agreed upon by the 
 Treasury and the public creditor. Where the public 
 debt is largely in the shape of perpetual debt, conversion
 
 3IO GOyERNMENT BORROIVING, OR PUBLIC CREDIT. 
 
 is sometimes effected by inducing the holder of a per- 
 petual annuity to exchang-c it for a terminable annuity. 
 The terminable annuity gives the annuitant a larger an- 
 nual income, but at the end of a specified period lapses 
 altogether. A similar process is employed to convert 
 Ions: time annuities into short time annuities.^ As re- 
 marked above, bonds sold at or near par offer fewer 
 obstacles to conversion than those sold below par. 
 
 (c/) The Extinction of Public Debts. — In explaining 
 the process of convertingperpetual annuities into termina- 
 ble annuities we have come upon one method by which 
 public debts are sometimes expunged. The question of 
 the policy of paying off public debts remains for our 
 consideration. 
 
 It seems highly probable that much of the feeling in 
 favor of the ultimate redemption of the public debt will 
 be found to rest upon what is really an illegitimate anal- 
 ogy between public and private indebtedness. A judi- 
 cious horror of debt is doubtless a very commendable 
 sentiment for a thrifty individual to cherish. But to 
 conclude without further reflection that a public debt 
 affects a nation in precisely the same way as private debt 
 affects an individual would be altogether premature. In 
 saying this we would not countenance for a minute the 
 fallacious idea that, except where interest is paid to 
 foreigners, the income received by bond-holders is only 
 a transfer from one set of citizens to another set, ' from 
 the right hand to the left,' and can never imply a na- 
 tional sacrifice. The same argument would apply to 
 justify what one citizen stole from another. On the 
 other hand, the sentiment formerly expressed in the 
 United States in favor of perpetuating the public debt 
 
 ^The term conversion is sometimes employed to designate 
 the legally authorized exchange of evidences of funded debt for 
 floating debts tliat have been duly audited.
 
 THE TECHNIQUE OF PUBLIC BORROfVING. 31 1 
 
 in order to provide forever a bond security for the note- 
 circulation of the national banks, or to afiford all classes 
 an opportunity to invest their savings, will be found 
 equally fallacious. The real effect of a public debt, it 
 cannot be too often repeated, is the exaction it makes 
 upon the taxpayer for the benefit of the bond owner. 
 Whether this sacrifice is excessive depends altogether, 
 if we view the matter retrospectively, on what good the 
 community realized or is realizing from the proceeds of 
 the loan ; and putting aside repudiation as unthinkable, 
 the whole question of repaying the principal of a public 
 debt must rest upon a comparison of the sacrifice to be 
 entailed by heavier taxation in the present against the 
 gain to be anticipated from lighter taxation in the future. 
 The arguments for and against the policy of debt pay- 
 ment are partly economic and partly political. We have 
 already had occasion to review the economic argument 
 that the repayment of the bond-holder will convert him 
 into an active man of business. Indeed a very plausible 
 argument might be made to show the industrial danger 
 of just such a policy. If the bond-holders as a class are 
 assumed to be retired gentlemen long unacquainted with 
 actual business, a policy which would put into their 
 hands a large amount of actual capital which they had 
 personally to invest in productive enterprises, on pain of 
 losing their incomes altogether, might result in the loss 
 of that capital both to the capitalists and to the nation. 
 Suppose, for example, that the bond-holders of a railway 
 system were given in final satisfaction of their claims 
 several branch lines in fee simple and were thenceforth 
 under the necessity of operating the branch lines them- 
 selves. Is there reason to suppose that either they or 
 the community would benefit by such a payment of the 
 railway's bonded indebtedness ? Where the proceeds of
 
 312 GOyERhlMENT BORROIVING, OR PUBLIC CREDIT. 
 
 a public loan have been invested in tangible material 
 property yielding income in the shape of actual money 
 revenue, or in the form of general utility, and where 
 either out of the earnings of the first or out of the ap- 
 preciating value of the second all danger or expense on 
 the score of depreciation, replacement, repairs, and the 
 like is removed, there is no sound economic reason which 
 inevitably dictates the repayment of the principal of the 
 debt, any more than there is a reason why the tenant 
 of a rented house, if the rent be moderate and the house 
 commodious, should inevitably purchase the house out- 
 right. The economic argument for the repayment of 
 the principal of public debts applies, however, to most 
 cases of local indebtedness where the loan has been em- 
 bodied in public property of some kind, such as sewers, 
 streets, parks, and public buildings, where the public 
 property in question is subject to depreciation, wear and 
 tear, and will require ultimate replacement. To neglect 
 in such cases to repay the principal of the debt would be 
 to confront a situation in future where the utility of the 
 property had vanished, and the debt charge had become 
 a burden holding the community in mortmain. Here 
 unquestionably the economic life of the property as es- 
 timated by competent engineers must determine the pe- 
 riod at the end of which the debt incurred for such 
 property ought to have been extinguished.^ 
 
 * Dietzel (System der Staatsanleihen) has developed an 
 ingenious but dangerous theory which minimizes the neces- 
 sity of repaying the principal of certain public debts where, 
 though there remain no tangible public assets, there is assumed 
 to exist a certain amount of " immaterial capital " capable of 
 giving ofT income sufhcicnt to meet the permanent interest 
 charge. If, for example, the state should sell bonds to equip 
 a system of industrial schools, the trained ability of the pupils 
 would constitute in his view " immaterial capital " sufficient to 
 pay the interest on the loan even after the school buildings had 
 become useless. Such " immaterial capital " is not measurable,
 
 THE TECHNIQUE OF PUBLIC BORROIVING. 313 
 
 The chief reason for the redemption of debts created 
 by our state and local governments, then, is an economic 
 reason, and the rapidity of such repayment can be 
 gauged generahy on concrete grounds. On the other 
 hand, the great reason for the expungement of national 
 obligations is political rather than economic. Nothing 
 is of such essential assistance to a nation in war time ai 
 unimpaired credit, and nothing impairs the national credit 
 so much as a heavy and permanent debt charge. If the 
 adage, " In time of peace prepare for war," be sound, 
 the payment of a national debt with as great rapidity as 
 is compatible with reasonable commercial and industrial 
 prosperity is sound policy. The rate at which repay- 
 ment is made must depend on the extent to which it is 
 wise to extend taxation beyond the current ordinary ex- 
 penses of the government. Taxes that especially hamper 
 industry may be taken ofif in the hope that the freeing 
 of enterprise will be felt in a heavier yield of the taxes 
 still left in force. Still it is conceivable that the national 
 debt payment may be carried on with too great rapidity. 
 The disinclination nations show to carry war-taxes after 
 peace has been concluded shows that they prefer present 
 relief to a future exemption from meeting debt charges. 
 Nor is there any special utility in national finance of set- 
 ting, aside a fixed amount or sinking fund, each year, ir- 
 respective of current income and current expenses. The 
 only effective sinking fund for purposes of our federal 
 government is such due economy in time of peace that 
 a clear surplus shall be left over from year to year which 
 may be applied to the extinction of a part of the public 
 debt, either through the ordinary methods of redemption 
 
 and such public property, though it involve what is extraor- 
 dinary expense for a year, involves what is ordinary expense, 
 if we take a generation for our time period. It ought therefore 
 to be paid for within the generation.
 
 314 GOyERNMENT BORROIVING, OR PUBLIC CREDIT. 
 
 of the debt at maturity, or by purchasing it before ma- 
 turity in the open market. On the other hand, local 
 debts ought to be repaid within a calculable period. The 
 expenses of the smaller units of government are not 
 likely to be suddenly increased by unforeseen exigen- 
 cies such as war. A sinking fund provision which re- 
 quires a certain amount to be raised yearly and applied 
 to the redemption of the local debt is a safe and com- 
 Tuendable financial device.
 
 CHAPTER II. 
 
 RELATION OF THE FEDERAL TREASURY TO OUR 
 MONETARY SYSTEM. 
 
 Administrative Detail. — Outlined in the preceding 
 chapter stands a brief description of the abstract 
 process of borrowing on the public credit which 
 financiers commonly avail themselves of in order 
 to meet a current deficit. To complete the subject 
 of Treasury Management a synopsis of the actual 
 processes of fiscal administration ough! perhaps to be 
 added. That is to say, some account of the typical kinds 
 of work performed by the various departments of the 
 ordinary state or city treasury would naturally be next 
 in order. We should have to eliminate, of course, a 
 thousand and one peculiarities of detail which have be- 
 come engrafted on the fiscal regimes of the different 
 commonwealths. But allowing for these differences, we 
 should find very general employment of some system of 
 anticipating the yield of taxes by a sale of speedily ma- 
 turing bonds whose proceeds become immediately avail- 
 able for public needs, and whose repayment is made out 
 of the taxes as they are finally paid in. We should find 
 numerous examples of a curious and rather cumbrous 
 system 1 of public book-keeping where the public moneys, 
 instead of being lumped together in one general balance, 
 
 ^ See Seligman, Finance Statistics of American Common- 
 wealths; also E. L. Bogart, Die Finansverhdltnisse der Einzel- 
 staaten der nordamerikanischen Union. 
 
 31S
 
 3l6 POSITION OF THE TREASURY. 
 
 are apportioned and credited to numerous " funds," as 
 they are termed, each fund appropriated to some specific 
 object, such as education, and each having not infre- 
 quently a sort of lien upon a j:^iven fraction of the com- 
 monwealth's receipts. We should be under the necessity 
 of recounting the various steps by which the revenues are 
 covered into the treasury, of the methods by which such 
 revenues are safeguarded, and disbursed only in accord- 
 ance with law by means of warrants drawn by the proper 
 official upon the custodian of the public moneys. The 
 whole process of securing vouchers for the sums so paid 
 out, and the details of accounting and audit, both by the 
 administrative departments and also by investigating 
 committees of the legislature, would have to be re- 
 hearsed. There are naturally countless minor differences 
 in the fiscal administration of the commonwealths, rang- 
 ing all the way from no system to the excessive red tape 
 of a veritable Circumlocution Office. But a delineation 
 of such administrative processes would be aside from 
 our present purpose. Nor would the most general ac- 
 count suffice equally for the federal and the state treasury 
 departments.^ 
 
 It is not merely because of the greater size and 
 importance of the former that there is need of a special 
 study of the federal Treasury, but because that bureau, 
 in addition to its ordinary fiscal functions, has been 
 charged with doing an immense banking business. 
 There is no more natural or necessary connection be- 
 tween collecting public money and banking than be- 
 tween running a grocery store and banking. But 
 
 *A full description of the various departments of the Treas- 
 ury and their duties may be found in Senate Report 507, Part 3, 
 SOth Congress, ist session (1888). See also the Political Science 
 Quarterly for 1891 and i8q2.— The Control of National Expendi- 
 tures, by E. I. Renick and N. H. Thompson.
 
 THE STATUS OF THE TREASURY. 31 7 
 
 Congress in its wisdom has joined together these things 
 which the ordinary laws of trade would have put asunder, 
 and the infelicities of the ill-assorted match demand 
 attention. 
 
 Every other public treasury in the United States re- 
 ceives the currency it finds in circulation and pays it 
 out again, and has no further concern with the circu- 
 lating medium. The Treasury of the United States, on 
 the other hand, is concerned not only with the collection 
 and disbursement of money, but much of this very 
 money which it collects and pays out is the child and 
 creature of the Treasury itself. Naturally, complica- 
 tions must arise under a system where the Treasury in 
 the capacity of national publican at the receipt of custom 
 receives back again its own promissory notes, and where 
 the Treasury as public paymaster issues these same notes 
 to its creditors, and undertakes at all times to redeem 
 them on demand in coin. 
 
 The Status of the Treasury. — The haphazard character 
 of our American method of administration is well illus- 
 trated in the present constitution and work of the Treas- 
 ury Department. The tendency we betray of delegating 
 to a governmental bureau additional duties as need arises 
 from time to time is exemplified in the curious farrago 
 of minor interests with which, in despite of any appear- 
 ance of logical allotment, the Treasury is now charged. 
 Apart from the more or less divergent claims of banking 
 and tax collection, the Treasury is obliged to look after 
 the steamboat inspection service, the lighthouse service, 
 the life-saving service, the marine hospital service, and 
 the national quarantine. There seems to be no end to 
 the accretion of adventitious duties growing out of the 
 Treasur}''s use of the revenue marine to collect the cus- 
 toms. Thus Oregon salmon and Alaskan seals figure
 
 3iS POSmOht OF THE TREASURY. 
 
 among the latest proteges of that ubiquitous depart- 
 ment. 
 
 The history of the development of the Treasury makes 
 a curious story. It ilkistrates the early triumph of the 
 advocates of an entire divorce between bank and state. 
 It exemplifies as well the gradual disintegration of this 
 once accepted principle, and the well-nigh universal 
 dominance of the exact opposite — the union of bank 
 and state.i The people of the United States, through 
 Congress, chartered the first bank of the United States 
 early in Washington's administration. The federal gov- 
 ernment itself was a large stockholder in the bank, which 
 kept the public moneys on deposit and furnished a uni- 
 form and acceptable paper currency for twenty years. 
 Then the Bank's charter expired, and the attempt to 
 extend it proved unavailing. After the war of 1812 
 Congress was again induced to charter for twenty years 
 the second Bank of the United States, and again the 
 federal government became a large stockholder in the 
 Bank and appointed a part of the board of directors. As 
 before, the Bank acted as the financial agent and deposi- 
 tory of the national government, and furnished the com- 
 monly employed paper currency of the land. It would 
 take us too far out of our narrow course to go into the 
 details of the " Bank War " which was waged against 
 the Bank with unrelenting virulence by Andrew Jackson 
 while President, and which resulted in the complete dis- 
 comfiture of the Bank and its final extinction. The 
 business of supplying a paper currency thereafter was 
 taken up with avidity by the banks chartered by the vari- 
 ous states. The federal Treasury for a while availed it- 
 
 ' See David Kinley, The Independent Treasury of the United 
 States; also A. C. Gordon, Congressional Currency; also the 
 articles on the Independent Treasury in Lalor's Encyclopedia,
 
 THE STATUS OF THE TREASURY. 3^9 
 
 self of some of these state banks — " pet banks," as they 
 were termed in the pohtical slang of the day — and de- 
 posited funds therein. The crisis of 1837 proved that 
 the Treasury had made a rueful bargain, and the loss 
 of public money through bank failures and the suspen- 
 sion of specie payments brought the federal government 
 into the lowest financial straits. Thereafter it was re- 
 solved that the government should be the custodian of 
 its own funds, and after several abortive attempts the 
 Independent Treasury was created by Act of Congress — 
 a real entity, as opposed to the legal shadow it had pre- 
 viously been. The name — Independent Treasury — 
 was itself meant to be a public renunciation of any future 
 union of bank and state. The Act of August 6, 1846, 
 provided quarters for the Independent Treasury, pro- 
 hibited it from depositing any of its funds with the state 
 banks, and forbade it to accept in payment of taxes or 
 otherwise, the circulating notes issued by the state banks. 
 The Treasury could receive and disburse only coin or 
 its own obligations, and the divorce of bank and state 
 was seemingly made complete and effectual. This policy 
 of isolation lasted until the Civil War. Since that time 
 the history of the Treasury is the story of successive 
 reversions to a radically different type of fiscal organ- 
 ism. Between 1846 and 1861 the Treasury pursued 
 with success its plan of keeping its own funds, of re- 
 ceiving specie and of paying it out again. Its transactions 
 were on a comparatively modest scale, for extravagant 
 expenditures were then neither necessary nor popular, 
 and no untoward effect was produced upon the general 
 monetary circulation by the relatively insignificant 
 amount of coin the Treasury at one time held or at 
 another time disbursed. The Treasury was reproached 
 by its critics for refusing to recognize the system of
 
 3ao POSITION OF THE TREASURY. \ 
 
 I 
 
 bank credit which tlie people availed themselves of in | 
 their ordinary commercial transactions. But the " hard \ 
 money" policy of the Treasury was amply justified on ; 
 more than one occasion. In the crisis of 1857 the Treas- \ 
 ury experienced no embarrassment whatever, in marked j 
 contrast to the agonized strugg-les of the banks, and in ] 
 contrast to the plight of the Treasury itself twenty years j 
 before, when the funds had been placed in the keeping of j 
 the state banks. Moreover, while the rigid requirement j 
 of payments in specie occasioned what many chose to j 
 represent as unnecessary hardship in the light of the 
 developed state of credit transactions, still the Treasury's 
 insistence upon a coin basis was of inestimable advan- j 
 tage in an era when people were not only willing to use i 
 credit, but altogether too prone to abuse it. The Treas- 
 ury more than once stood forth as a beacon of light in 
 the darkness when the country was in the throes of 
 financial disaster. It is true that there were issucl from 
 the Treasury during the period 1846-61 its own promis- 1 
 sory notes which circulated to some extent as currency, 
 and were receivable for taxes. But the amount of these 
 notes was never great. They were never made by law 
 a legal tender in payment of private debts, and their 
 volume never necessitated any special specie reserve to 
 provide for their redemption. 
 
 All this was speedily changed, beginning in 1861. 
 The necessity for speedily obtaining capital induced 
 Secretary Chase first to break down the barriers that 
 had been erected between the Treasury and the h.anks 
 by approaching the banks to obtain loans from them ! 
 on several occasions. Next, the cautious traditional ! 
 policy of strictly limiting the amount of circulating 
 notes issued by the Treasury was fiung aside, and issue 
 jlfter issue of promissory notes was made at Secretary ]
 
 THE STATUS OF THE TREASURY. Z^l 
 
 Chase's suggestion and with the approval of Congress. 
 These notes were clothed with the prerogative of being 
 a legal tender, and were forced into circulation. Finally, 
 in 1863 and 1864, the National Bank system was insti- 
 tuted ; and, the better to afford a market for United 
 States bonds, the national banks were allowed to issue 
 upon the deposit of such United States bonds as they 
 had purchased, a national currency, acceptable by the 
 Treasury except for certain specified dues, and to be used 
 by the Treasury along with its own obligations in or- 
 dinary payments to its creditors. The Treasury under- 
 took, moreover, to serve as the central redemption 
 agency for the national banks, and Congress finally 
 drove into the national banking system most of the still 
 recalcitrant state banks by imposing a prohibitory tax 
 upon their circulating notes. Finally, the last landmark 
 which hemmed oflf the Treasury from the banks was 
 swept away when the national banks were made by law 
 authorized depositories for the public moneys. Within 
 twenty years after the legal creation of the Independent 
 Treasury, the Treasury was independent in name only ; 
 and the absolute divorce between bank and state which 
 Jackson and his party had striven for and attained was 
 set aside, and the closest union between these two finan- 
 cial orphans has existed ever since. 
 
 Of all the executive departments of the general gov- 
 ernment the Treasury is most complex and inclusive. 
 Besides the central treasury office at Washington, there 
 are nine sub-treasuries in as many large cities, several 
 mints, assay-offices, and numerous other offices and 
 agencies, including a varying number of National Bank 
 depositories, scattered throughout the land. The head of 
 the bureau, the Secretary of the Treasury, is a cabinet 
 piijiister and ari adviser of the Presi(ient. Under the
 
 32 2 POSITION OF THE TREASURY. 
 
 Secretary stand the Treasurer, the Assistant Treasurers, 
 the Comptroller of the Currency (the head of the Na- 
 tional Bank system), the Register of the Treasury, the 
 Director of the Mint, three Assistant Secretaries, and a 
 host of under-ofhcials, clerks, and employes in the vari- 
 ous ramifications of the several sub-departments of the 
 Treasury system. Of all the executive departments t! e 
 Treasury and the Post-office most frequently and ex- 
 tensively come in contact with the people and afifect 
 them for good or for evil. 
 
 Fiscal Functions of the Treasury. — Had the Treasury 
 permanently conformed to the design of the founders 
 of the Independent Treasury, there would be little to say 
 about its fiscal operations — of its collecting and spend- 
 ing the public money — which would not be equally true 
 of the treasuries of the various commonwealths. In 
 magnitude of operations alone the federal treasury 
 might be found to differ from the analogous fiscal en- 
 gines in the states. It would, of course, be necessary to 
 point out that the federal revenue is derived from sources 
 different from the revenue sources of the states and 
 smaller civil divisions. The federal government, more- 
 over, has been charged from the beginning with the 
 dutv of striking coins, and to-day at its mints converts 
 without charge into standard coin all gold deposited for 
 tlic purpose by its citizens. This is a duty which the 
 treasury departments of the states are absolved from. 
 Theirs is the simpler task to collect, safeguard, disburse, 
 and account for their revenues. So long as we do not 
 trench upon administrative detail we may say as much, 
 or rather as little, of the United States Treasury. Into its 
 charge fall the federal taxes from customs and the inter- 
 nal revenue, and from postal and miscellaneous receipts. 
 The proceeds of bond sales are also in the first instance
 
 FlSC/iL FUNCTIONS OF ThF TREASURY. 323 
 
 covered into the Treasury. The distribution of its cash 
 assets among the sub-treasuries, as well as the placement 
 of its funds in designated depositories, requires careful 
 attention and sound judgment. The same may be said 
 of protecting against loss the cash assets in the Treasury, 
 and rigidly accounting for all funds from the time of 
 their receipt to the day of their disbursement. In one 
 way alone is the Treasury in the performance of its 
 strictly fiscal duties liable to create serious difificulty — a 
 difficulty, moreover, which can hardly arise from the op- 
 eration of other public treasuries in the United States. 
 We refer to the contraction of the currency by Treasury 
 absorptions in excess of disbursements. The receipts of 
 the Treasury are regular, and, excepting the proceeds 
 of bond sales, do not vary greatly from day to day, or 
 from week to week. Its disbursements, on the other 
 hand, are largely periodic. Thus the interest on the 
 public debt is paid normally at quarterly intervals. 
 Pension payments figure largely in the Treasury pay- 
 ments for one month, and may not recur the month fol- 
 lowing. If these payments were relatively inconsider- 
 able, the contraction and expansion of the currency 
 which they now occasion would be scarcely felt. But 
 they are not inconsiderable, and when the currency is 
 steadily contracted by growing Treasury holdings, and 
 then of a sudden the accumulation of cash is poured out 
 into the bank reserves of New York and other large 
 cities, the disturbance in the money-market is often 
 keenly felt. Exchanges are hampered, and current rates 
 of discount are increased, by the stringency which the 
 Treasury's absorptions unwittingly cause. This is es- 
 pecially likely to occur in the case of a bond sale, when 
 the Treasury within a short period of time absorbs a 
 vast amount of currency paid over to it by the pur-
 
 324 POSITION OF THE TREASURY. \ 
 
 i 
 chasers of the bonds. Here it is the irregularity in re- ' 
 
 ceipts rather than in payments which creates trouble, ; 
 
 unless the previous plethora of currency is such that j 
 
 what the Treasury takes simply relieves the congestion. ; 
 
 These arbitrary variations in the amount of money in ; 
 
 circulation are bound to arise whenever "the govern- , 
 
 ment's income and outgo (provided they are relatively 
 large enough to affect appreciably the total circulation) 
 do not approximately go hand in hand. The difficulty I 
 
 may be largely abated by timing disbursements, even 
 by anticipating certain payments before they fall due, 
 in order to prevent any undue disturbance of the money- 
 market. In the case of bond sales, much of the money 
 received by the Treasury may be immediately rede- i 
 
 posited with the national bank depositories, provided | 
 
 always that they can furnish the bond security neces- 
 sary for receiving federal money on deposit. The actual 
 cash in this way will not leave the bank vaults nor be ' 
 
 subtracted from the banking reserve, and the credit \ 
 
 created in favor of the Treasury will be successively 
 drawn upon until it is quite expunged. When Treasury j 
 
 disbursements exceed its receipts, the effect is to lessen ] 
 
 the Treasury's cash and to force back into the channels J 
 
 of general circulation not only every dollar taken in by j 
 
 way of taxes, but the additional sums paid out of the ! 
 
 Treasury's original cash balance. In this case the con- 
 gestion of the money-market is made worse, and can 
 be relieved normally only by the export of coin, or by 
 the sale of bonds for cash. 
 
 The Banking Operations of the Treasury. — When it I 
 
 is said that the Treasury in addition to gathering the 
 federal revenues and paying them out undertakes the 
 business of banking also, the statement must be guarded 
 to prevent possible misapprehension. The cardinal du-
 
 THE BANKING OPERATIONS OF THE TREASURY. Z^S 
 
 ties expected of a banker are to lend or advance upon 
 business paper or securities, to engage to pay upon the 
 order of depositors, and to furnish a paper currencv 
 for the use of the community. These are the well- 
 known functions of discount, deposit, and issue.^ It is 
 only the last function which the Treasury undertakes 
 on a great scale. 
 
 (a) Certificates of Deposit. — It is true that the Treas- 
 ury issues certain certificates of deposit which circulate 
 as currency, amounting to five hundred million dollars, 
 or more, in the aggregate, but these certificates are an- 
 alogous to warehouse receipts rather than to ordinary 
 bank deposits. The holders of standard silver dollars 
 may deposit them in the Treasury, and receive in lieu 
 thereof notes certifying that such or such a number of 
 silver dollars have been deposited, and are to be had 
 at any time upon presentation of and in redemption of 
 the certificates. The holder of the certificate is the 
 owner of the coins which are held at the government's 
 expense in the Treasury vaults. ^ In like manner the 
 holder of gold coin may deposit it in the Treasury,^ 
 and receive similar certificates of deposit analogous to 
 those just described. Both the gold certificates and 
 silver certificates bear no interest and pass like ordi- 
 nary currency from hand to hand. But such deposits 
 are manifestly very different from ordinary bank de- 
 posits, where the bank obligates itself to pay certain 
 sums to the order of its depositors, and holds to meet 
 these liabilities a cash reserve amounting to but a frac- 
 
 ^ See C. F. Dunbar, The Theory and History of Banking. 
 
 'The outstanding amount of silver certificates (Feb. 25, 1899) 
 is $401,589,504. 
 
 'Except when the gold reserve falls below $100,000,000. The 
 outstanding amount ot gold certificates (Feb. 25, 1899) 's $34,609,- 
 729. Neither the gold certificates nor the silver certificates are a 
 legal tender, although the coin they command is a legal tender.
 
 326 POSITION OF THE TREASURY. 
 
 tion of its total liabilities. The Treasury, on the other 
 hand, holds the coins deposited as an inviolable reserve 
 available only for redeeming the certificates issued. The 
 Treasury, therefore, is asked to issue these certificates 
 of deposit rather because it acts as a monetary ware- 
 house which makes no charge for storage than because 
 it is engaged in deposit banking. Indeed it would be 
 more correct to say that the Treasury gratuitously main- 
 tains a safety deposit warehouse for standard coins than 
 to afifirm that the Treasury undertakes the business of 
 deposit banking proper. Through the national bank 
 depositories the Treasury provides credit balances 
 against which the federal disbursing officers draw ; and 
 it engages, as the redemption agency of the national 
 banks, to redeem in the first instance national bank notes 
 presented for redemption, but these tasks are relatively 
 unimportant in scope, and cannot be said to alter essen- 
 tially the contention that the deposit operations of the 
 Treasury are mainly because of the Treasury's posses- 
 sion of a Strong vault and not because of the Treasury's 
 undertaking the risks of ordinary deposit banking. 
 
 {b) The Issue and Redemption of Circulating Notes. — 
 The real magnitude of the Treasury's banking opera- 
 tions will first appear when we regard the vast amount 
 of demand notes it issues bearing no interest. These 
 notes circulate as currency, and for their redemption the 
 Treasury exerts itself to provide the requisite amount 
 of gold coin. The exact nature of this part of the 
 Treasury's work can be understood only by examining 
 closely into the character of the notes in question. 
 
 First in order comes the " greenback," — or the United 
 States note, as tiie federal statutes more decorously term 
 it. Historically, these notes originated in the pressing 
 needs of the government during the Civil War. Not
 
 THE BANKING OPERATIONS OF THE TREASURY. 32? 
 
 having" the coin to pay for the supplies it required, the 
 government issued its promises to pay coin, and en- 
 dowed these promises with the quahty of serving as a 
 legal tender in payment of debt. They went readily 
 into circulation, though their purchasing power was 
 much less than that of the coin the government pledged 
 to pay to the bearer of the note. When the notes were 
 first issued, and indeed for many years thereafter, the 
 Treasury made no pretence of redeeming the notes in 
 coin. The value of the greenbacks therefore constantly 
 fluctuated, depending on the estimate the market put 
 upon the nearness or remoteness of their equivalence to 
 coin. This in turn was seen to depend upon the number 
 of greenbacks in circulation, the success of the federal 
 arms, and various other circumstances. Originally, 
 therefore, the greenbacks came into being as the 
 I O U's of an impecunious debtor. They circulated 
 the more readily because the government took away the 
 protection of law from creditors who refused to accept 
 in satisfaction of private debts owing them, the tender 
 of the government's discredited promises. The total 
 amount authorized was in excess of four hundred million 
 dollars, and practically this amount was outstanding 
 when peace ensued, and the government faced the dis- 
 agreeable necessity of paying its debts. The design of 
 the originators of the greenback currency was to provide 
 only a temporary expedient for staving ofif the day of 
 actual payment. The notes were not intended to consti- 
 tute a permanent currency, and, very shortly after the 
 establishment of peace, Congress, in one of its occasional 
 spasms of rhetorical virtue, declared for the early retire- 
 ment of the greenbacks and their speedy redemption in 
 coin. The Treasury actually began to cancel and de- 
 stroy certain greenbacks paid in on account of taxes.
 
 328 POSITION OF THE TREASURY. 
 
 But no sooner had the process begun than the shoe 
 began to i)iiich. The witlidrawal of a part of the cur- 
 rency througli tliis destruction of greenbacks produced 
 a feehng of stringency in the money-market. The 
 Treasury, in consequence was prohibited from pursuing 
 the pohcy of destroying these evidences of the govern- 
 ment's indebtedness, and at a subsequent period ^ even 
 threw back needlessly into circulation many millions of 
 the greenbacks that stood uncancelled in the Treasury 
 vaults. The currency that we had at first endured as a 
 military necessity we began to embrace as permanent 
 currency ; and these evidences of national insolvency 
 were invested with the halo of patriotism, as the " blood- 
 stained greenbacks" became the battle-cry of those whose 
 interests led them to deprecate the contraction of the cur- 
 rency and to oppose an immediate return to specie pay- 
 ments. The Resumption Act, which was finally passed 
 January 14, 1875, authorized the Secretary of the Treasury 
 to sell bonds in order to accumulate coin "to prepare and 
 provide for the redemption " of the greenbacks. This 
 policy of redemption in gold coin upon the holder's de- 
 mand was successfully inaugurated January i, 1879, and 
 ever since has been continued. But most curiously, and 
 as if to illustrate the tenacity of an inconvertible cur- 
 rency's power for evil. Congress by Act of May 31, 
 1878, prohibited the Treasury thereafter from cancelling 
 or destroying 2 any of the then outstanding greenbacks, 
 even though redeemed in gold, and required that such 
 notes as were paid into or redeemed by the Treasury 
 
 ' For the history of these transactions consult Noyes, Thirty 
 Years of American Finance; Bollcs, The Financial History of 
 the^ United States, Vol. III. 
 
 " Worn or torn notes may be cancelled and destroyed, but 
 must be replaced by new notes to the same amount. The exact 
 greenback circulation is $346,681,016.
 
 THE BANKING OPERATIONS OF THE TREASURY. 329 
 
 should be reissued. The amount of greenbacks existing 
 at the time of the passage of this act was about 
 $346,000,000, and has remained at that figure ever since. 
 Here, then, is the first part of the Treasury's gigantic 
 task as a bank of issue, to keep in existence at all times 
 and under all circumstances its promissory notes to an 
 amount of $346,000,000, and to redeem any or all of 
 such notes in coin (practically gold coin) at the demand 
 of the note holder. The expedients for obtaining the 
 coin required for redemption purposes may be discussed 
 more advantageously after we have described the next 
 class of Treasury obligations. 
 
 As though the responsibilities resting upon the Treas- 
 ury were not already heavy enough. Congress by Act 
 of July 14, 1890, required the Treasury to purchase 
 4,500,000 ounces of silver monthly, and for the bullion 
 so purchased to turn over to the sellers of silver bullion 
 what were termed Treasury Notes or Coin Notes. 
 The measure in question was a compromise between 
 the advocates and opponents of a more extended 
 use of silver money, and the law was commonly 
 known as the Sherman Law, inasmuch as Senator Sher- 
 man was the chairman of the Senate committee which 
 evolved the measure. '^ These monthly purchases of 
 silver bullion continued until the fall of 1893, when the 
 purchase clause of the act was repealed (November i, 
 1893). The notes which the Treasury issued to acquire 
 the bullion purport to be redeemable upon demand in 
 " coin," and the law ostensibly confers upon the Secre- 
 tary of the Treasury the option of redeeming the notes 
 in gold or silver coin as he may elect. The notes are 
 also made a legal tender in payment of debt. If re- 
 
 'The notes issued by virtue of the act are often termed 
 Sherman notes as well as Coin or Treasury notes.
 
 33<5 POSITION OF THE TREASURY. 
 
 deemed in gold, they must be reissued. If redeemed 
 in silver, they must be cancelled.^ In ])ractice the op- 
 tion conferred upon the Secretary of the Treasury to 
 redeem them in either gold or silver has proved nuga- 
 tory. Their holders ordinarily ask for gold, and tlie 
 Treasury accedes, fearful that a refusal would destroy 
 the equal purchasing power of gold and silver currency. 
 Substantially, then, the Sherman law has compelled the 
 Treasury to assume an enormous liability for about a 
 hundred million dollars additional in the shape of cir- 
 culating demand notes, redeemable dc facto in gold, and 
 only slightly contractile in volume. 
 
 Notwithstanding the different historical origin o( the 
 greenback and the Treasury note, and certain unessen- 
 tial variations in their legal attributes, they arc best re- 
 garded for many purposes as a practically homogeneous 
 block of government obligations, amounting in all to 
 nearly five hundred millions of dollars. Both are 
 promissory notes of the government. Both circulate as 
 currency. Both are a legal tender. Both are redeem- 
 able on demand, and practically in gold coin. When S3 
 redeemed neither can be retired, but both must be re- 
 issued. To all intents and purposes the greenbacks and 
 the Treasury notes constitute a practically irreducible 
 quantum of government obligations payable 0:1 demand 
 in gold. We must next inquire into the methods by 
 which the Treasury obtains the gold for redeeming the 
 legal tender notes.^ 
 
 ' The silver coin with which they are redeemed may be 
 deposited in the Treasury, and silver certificates obtained in 
 exchange. In this way some millions of Treasury notes have 
 been transformed circuitously into silver certificates. But gen- 
 erally the Coin notes are redeemed in gold and reissued. The 
 amount of Coin notes Feb. 25, 1899, was $95. 577. "80. 
 
 ■^ Legal tender notes is a convenient caption for designating 
 both the greeniiacks and the Coin notes, as they alone of all our 
 paper currency possess full legal tender attributes.
 
 THE BANKING OPERATIONS OF THE TREASURY. 33 1 
 
 When the government in 1879 began again the re- 
 demption of its demand notes in specie, the stock of 
 gold held for that purpose had been accumulated by the 
 sale of bonds authorized in the Resumption Act of 1875. 
 Secretary Sherman in 1878 obtained about $100,000,000 
 in gold coin with which to redeem on presentation any 
 of the outstanding $346,000,000 of greenbacks. The 
 Resumption Act did not designate any specific amount 
 of gold to constitute " the gold reserve." The only 
 statutory mention of what has become known as " the 
 gold reserve " is found in an act passed in 1882 which 
 forbade the issue of additional gold certificates ^ when 
 the free or net gold in the Treasury should be 
 below $100,000,000. The traditional gold reserve of 
 $100,000,000, fixed upon by commercial consent as a 
 sort of ' apprehension minimum,' and only incidentally 
 mentioned by a later statute, had its origin, therefore, 
 in custom pure and simple, and became a substantive 
 entity merely by the long-continued practice of the 
 Treasury to carry at least that amount of gold coin as a 
 reserve held against the legal tender notes.^ 
 
 The Resumption Act of 1875, which in many respects 
 is entitled to be regarded as one of the pillars of our 
 entire financial system, does not limit the amount of 
 bonds which the Secretary of the Treasury may issue to 
 obtain the coin necessary for redemption purposes, nor 
 apparently does it limit the time dviring which the Sec- 
 retary may exercise this power. Under the authority 
 which the act confers, the Secretary of the Treasury on 
 four occasions within the last few years has sold bonds 
 to replenish his stock of gold coin. Besides building 
 
 * See p. 325. 
 
 'The gold coin in tL- United States amounts to about 
 $825,000,000. Manifestly, the Treasury holds only a part of the 
 whole.
 
 332 POSITION OF THE TREASURY. 
 
 up the gold reserve by the sale of bonds, the Treasury in 
 normal times acquires gold through several less costly 
 processes. Customs duties are by law payable in gold, 
 and though it would be futile for the customs officials 
 to refuse to accept legal tender notes in payment 
 of customs duties (inasmuch as legal tender notes are 
 convertible on demand into gold), a certain percentage 
 of the customs receipts is normally paid in gold when- 
 ever the amount of circulating notes afloat is not so great 
 as to flood the channels of exchange and displace gold 
 in payments to the government. ]\Ioreover, on more 
 than one occasion the Treasury has increased its gold 
 holdings by offering to pay out at distant sub-treasuries 
 paper currency, in exchange for gold voluntarily turned 
 over to the Sub-Treasury in New York City. This has 
 amounted practically to a voluntary exchange by the 
 Treasury of its paper currency for the gold of private 
 citizens. The latter have agreed to the exchange, be- 
 cause it saved them the trouble and expense of shipping 
 currency to distant points to which they desired to make 
 remittances. The Treasury, moreover, is generally will- 
 ing to make a voluntary exchange of any of the paper 
 currency or silver dollars in its own cash for equivalent 
 amounts of gold coin.^ 
 
 Before the total liabilities of the Treasury can be justly 
 
 * Besides the redemption of gold and silver certificates and 
 of legal tender notes, the Treasury undertakes various other 
 minor exchanges of certain kinds of currency for O'ther kinds. 
 Thus small change may be had in exchange for bills, and. con- 
 versely, bills may be had for small change. Torn. worn, or 
 soiled notes are exchanged at the Treasury for new notes of the 
 same denomination. Bankers often deposit legal tender notes 
 in blocks of $5000 or multiples thereof and receive in exchange, 
 currency certificates for equivalent amounts. The small notes 
 so deposited in the Treasury are kept as a special deposit and 
 are given back upon the surrender of the currency certificates. 
 There is no law which compels the Treasury to give gold coin 
 in exchange for silver dollars.
 
 THE BANKING OPERATIONS OF THE TREASURY. 333 
 
 estimated, reference must be made to still another kind 
 of paper currency, to wit, the circulating notes issued by 
 the national banks. Before issuing their notes, the 
 national banking associations are required to deposit 
 in the Treasury, United States bonds as security to in- 
 demnify the note-holder should the bank fail. These 
 bonds remain the property of the banks, which receive 
 the interest thereon as it accrues. Upon the deposit of 
 bonds, notes in blank are issued to the national banks 
 amounting to ninety per cent, of the par value of the 
 bonds deposited. These notes when countersigned by 
 the president and cashier of the issuing bank, are paid 
 out over the bank's counter and become a constituent 
 element in our heterogeneous currency. They are re- 
 deemable " in lawful money " at the issuing bank, 
 though it is safe to say that few, if any, national bank 
 notes are thus presented for redemption. They are also 
 redeemable at the Treasury at Washington, which serves 
 as a central redemption agency for the notes in question. 
 Each bank must keep on deposit with the Treasury five 
 per cent, in lawful money of its note circulation. The 
 banks may increase their note circulation by the deposit 
 of additional bonds as security. They may reduce their 
 circulation in whole or part by depositing with the 
 Treasury an amount in lawful money equal to the out- 
 standing note issue they desire to withdraw. The ex- 
 pansion and contraction of the national bank-note cir- 
 culation is hampered by provisions limiting the aggre- 
 gate amount that maybe retired to $3,000,000 per month ; 
 also by provisions forbidding any bank reducing its cir- 
 culation to increase its circulation again within a period 
 of six months. The Treasury as a central redemption 
 bureau manages, though somewhat slowly, to withdraw 
 notes of banks reducing their circulation, and serves to
 
 334 POSITION OF THE TREASURY. 
 
 replace worn and soiled notes with fresh ones ; but 
 inasmuch as national bank-notes on the average are not 
 presented for redemption in lawful money more than 
 once in three years, their instant convertibility into coin 
 at any and all times has never been very cogently 
 demonstrated. The national bank-note circulation is 
 in truth a rather torpid and immobile part of our com- 
 posite currency. Its increase depends on a calculation 
 of the possible profit to be obtained by the banks in 
 lending additional amounts of their own notes. Such a 
 possibility of profit by the national banks in a particular 
 section of the country is no conclusive evidence that the 
 country as a whole stands in any need of an increase 
 in its circulating media. Similarly, national banks may 
 retire their circulation, for instance, to obtain possession 
 of the bonds deposited as note security, when an actual 
 need of increased currency is felt. Certainly the re- 
 sponsiveness of the national bank circulation to varia- 
 tions in the need felt for currency is slow, and only 
 evident when the need is widespread and unmistakable. 
 The Treasury, then, in addition to the other manifold 
 obligations resting upon it, stands as a sort of sponsor 
 for the circulating notes of the national banks. Al- 
 though unable to exert any direct control over their 
 volume, the Treasury undertakes to redeem such notes; 
 and although the banks are required to keep a five per 
 cent, redemption fund with the Treasury for this pur- 
 pose, and are required to make good all of their notes 
 which the Treasury has first redeemed, the fact remains 
 that the national bank circulation constitutes a huge 
 bulk of obligations, all of which are redeemable in 
 lawful money which, in turn, so far as it consists of legal 
 tender notes, is ultimately a lien upon the Treasury's 
 gold reserve.' 
 
 'The national baiik-noLcs are noL a legal lender, though
 
 THE BANKING OPERATIONS OF THE TREASURY. 335 
 
 The liabilities of the Treasury on account of our papei 
 currency can now be estimated with some degree of ac- 
 curacy. First, come about $450,000,000 in legal tender 
 notes, practically irreducible in volume, redeemable ac- 
 cording to Treasury practice on demand in gold coin 
 and resting wholly on the gold reserve. Next, come 
 about $250,000,000 in national bank-notes whose vol- 
 ume, though not rigid, cannot be reduced by the Treas- 
 ury, and which are capable of being used in a roundabout 
 fashion so as to be a second claim upon the govern- 
 ment's gold reserve. Lastly, come the gold and silver 
 certificates amounting to $440,000,000 approximately, of 
 which the first can occasion no trouble, as there stands 
 behind it a reserve of dollar for dollar in gold.^ But the 
 silver certificates, though backed by an equal reserve 
 in silver dollars, are likely to prove troublesome, 
 inasmuch as the standard silver dollars have only about 
 half of the bullion value of the gold dollar, so that but 
 few of the silver certificates are presented for redemption 
 in silver; and though there is no express statute com- 
 pelling the Treasury to redeem silver certificates in gold, 
 the Treasury has intimated its determination to do so, 
 in case the refusal to redeem the silver certificates in 
 gold would imperil the equivalence of the purchasing 
 
 they are received by the Treasury for all dues except customs, 
 and are used by the Treasury in all payments except interest 
 on the public debt. The amount outstanding Jan. i, 1899, was 
 $243,735,105, of which amount $214,016,088 are secured by bonds 
 deposited, while the remainder is in process of extinction, the 
 banks having withdrawn their bonds and substituted lawful 
 currency to the amount of the notes. Such notes are not 
 actually retired and cancelled until paid into the Treasury through 
 the ordinary tax channels, though the bank's obligations, so far 
 as the notes go, cease With the deposit of lawful money in the 
 Treasury. 
 
 ^ The gold reserved to cash gold certificates is not a part 
 of the gold reserve. It amounted (Feb. 25, 1899) to $34,609,729. 
 The silver certificates amounted (Feb. 25, 1899) to $40i,589,§04.
 
 336 POSITION OF THE TREASURY. 
 
 or debt-paying power of gold and silver dollars.* The 
 silver dollars upon which the silver certificates were is- 
 sued, stand therefore as a sort of unavailable banking 
 asset, whose chief influence is to prevent the silver cer- 
 tificate in any case from dropping in value below the 
 bullion value of the coin on which it was originally 
 based. In the last analysis, then, the matter comes to 
 this : there are outstanding demand notes amounting to 
 over a thousand million dollars which the Treasury in 
 practice holds itself ready directly or mediately to re- 
 deem on demand in gold. The gold available for this 
 purpose can readily be obtained in times of industrial 
 activity and brisk monetary circulation from customs 
 receipts and through exchanges made by individuals 
 who voluntarily part with their gold for various kinds 
 of paper currency. But this easy and economical main- 
 tenance of the gold reserve ceases whenever the Treas- 
 ury for any considerable period and to any considerable 
 extent pays out more money than it concurrently takes 
 in. The Treasury's gold reserve in this case is poured 
 out to meet current expenses, and is reduced accordingly. 
 If the channels of circulation are filled with paper cur- 
 rency, the gold receipts from customs dwindle or dis- 
 appear. Instead of individuals seeking voluntarily to 
 exchange their gold for paper currency, legal tender 
 notes arc presented for redemption in gold, either be- 
 cause the gold is wanted for export to pay foreign credit- 
 ors, or because the continued solvency of the Treasury 
 is questioned, and gold, in consequence, is hoarded. In 
 
 * " Even further than this, it [(i-e., the Treasury)] has declared 
 itself ready, whenever necessary to the maintenance of this 
 parity, to exchanfj;e on even terms, at the pleasure of the holder, 
 either form of the metallic money for the other," — Report or 
 the Secretary of the Treasury, /S97, p. Ixxii,
 
 THE BANKING OPERATIONS OF THE TREASURY. 337 
 
 this exigency there is no alternative but to issue bonds 
 to obtain additional gold. 
 
 The peculiar feature of the constitution of the Treas- 
 ury does not consist merely in the vast bulk of demand 
 obligations it continuously floats, nor in the Treasury's 
 inability to lessen materially the bulk of these obliga- 
 tions, even when they are once redeemed, nor yet in the 
 precarious and clumsy method of obtaining gold for re- 
 demption purposes in time of stress ; ^ but the singular 
 the unique, part of the Treasury's task is the requirement 
 laid upon it of conducting at the same time an enormous 
 fiscal bureau and an enormous bank of issue, and using 
 the assets of the tivo concerns as interchangeable. Gold 
 received in customs payment is frequently used to re- 
 deem legal tender notes. Gold received from bond sales 
 (made ostensibly for acquiring gold to redeem legal 
 tenders) is used for paying current expenses. Thus a 
 deficit in ordinary revenue, if considerable, may deplete 
 the gold reserve and necessitate an increase in the funded 
 debt ; while surplus revenues, by temporarily locking up 
 money in the Treasury, increase the percentage of the 
 Treasury's gold receipts, and automatically enlarge the 
 gold holdings available for its banking reserve. 
 
 A deficit in revenue undermines the banking reserve, 
 shakes confidence in the Treasury's solvency, and neces- 
 sitates an increase in future taxation to meet the in- 
 terest on the increased funded debt. An ample banking 
 reserve, on the other hand, can, under present circum- 
 stances, be assured only by a wasteful system of taxa- 
 tion that takes out of the pockets of the people more 
 than the needs of the government require. Such a sur- 
 plus of revenue, moreover, not infrequently produces a 
 
 'The bonds that may be issued under the Resumption Act 
 of 1875 """" ^°'' ^^^r fifteen, or thirty year§,
 
 33^ POSITION OF THE TREASURY. 
 
 dearth in the money-market just when booming trade 
 stands in need of a plentiful currency to effect its ex- 
 changes.^ 
 
 It would not lie within the scope of this work to sketch 
 any project for reconstituting the Treasury and the na- 
 tional banking system. Most unbiassed critics admit 
 the necessity of separating the fiscal from the banking 
 operations of the Treasury. This at least would let u^ 
 know approximately the cost of each, — a fact now lope- 
 lessly beclouded. It would also prevent political tyros 
 from ascribing all our financial ills cither to a revenue 
 deficit exclusively or to note redemption exclusively. 
 This in itself would be no small gain. Beyond this 
 separation of the two generic operations of the Treasury, 
 some method of reducing the Treasury's demand obli- 
 gations, either by funding some of the existing demand 
 notes, or by converting them into what practically would 
 be gold certificates, seems highly advisable. The latter 
 plan would provide that greenbacks, for instance, once 
 redeemed in gold, should be corralled in the Treasury, 
 and thereafter issued only in exchange for an equal de- 
 posit of gold coin, the coin to be held as an inviolable 
 deposit for the future redemption of these notes. To 
 prevent a contraction of the currency from arising 
 
 * Incidental to the Treasury's position as a great bank of issue 
 are the special functions it is expected to perform in times of 
 monetary stringency. Clamor arises for unusual disbursements, 
 for anticipating interest payments on the public debt, or for the 
 purchase of the debt outright in the open market in order to 
 relieve the stress. Even in ordinary times when government 
 receipts are unusually large, as in July 1898, — from recent bond 
 sales, — the Treasury exerted itself to keep its accruing cash largely 
 in national bank depositories lest a " currency famine " should 
 prevail. Those who disbelieve in government banking find ad- 
 ditional reason for their position in the inability of the Treasury 
 to perform this additional work of keeping the money market 
 properly provided with currency. When trade is slack and the 
 Treasury pays out all it receives and even trenches on its gold 
 reserve to make ordinary payments, the Treasury is reviled for 
 " demoralizing " the money market.
 
 CONCLUDING REMARKS ON THE MONETARY SYSTEM. 339 
 
 through such reforms, and to introduce greater elas- 
 ticity into the note circulation, various projects for al- 
 lowing banks to issue notes in part, at least, unsecured 
 by any specific deposit of bonds, and redeemable in prac- 
 tice as well as theory at the bank of issue, have been 
 mooted.^ 
 
 Concluding Remarks on the Monetary System. — The 
 real character of our monetary system as it exists to-day 
 is often, indeed usually, beclouded by dragging into its 
 discussion some phase of the free silver issue or i:s. 
 more reputable but distant and possibly defunct relative, 
 international bimetallism. If free silver coinage ever 
 prevails, its advent will undoubtedly revolutionize the 
 present system, but until that time arrives we may find 
 it worth our while in the domain of finance to see things 
 as they really are. Whatever we may think about whaL 
 might, could, would, or should exist, the fundamental 
 monetary fact of most far-reaching importance is that 
 23.2 grains of pure gold is the basis at the present time 
 of all our commercial obligations. This is not meant, 
 of course, to imply that a " gold clause " 2 is embodied 
 in the usual business contract, but that, for one cause or 
 another, all dollars are alike in having practically the 
 same purchasing and debt-paying power. In other 
 words, the most striking feature in our monetary system 
 is the gold basis of commercial obligations and the 
 parity of all dollars with each other. This fact, so univer- 
 sally patent, apparently so simple, and to industrial in- 
 
 ^ For a summary of such projects see article, The Objects 
 and Methods of Currency Reform, by F. M. Taylor, Quarterly 
 Journal of Economics, April 1898. 
 
 ^ When the continuance of gold payments by the Treasury 
 was in doubt, commercial contracts frequently embodied a 
 " gold clause " whereby the debtor bound himself not merely to 
 pay " dollars," but specifically agreed to pay gold dollars of the 
 standard weight and fineness.
 
 340 POSITION OF THE TREASURY. 
 
 terests so gratifying, we are apt to assume must rest upon 
 some equally simple foundation. It will be found upon 
 inquiry, however, to rest, not on a single substructure, 
 but on several. These ought to be clearly distinguished 
 in our apprehension of the matter, if we are to under- 
 stand thoroughly all the conditions upon which the per- 
 manence of a universal gold basis of commercial obliga- 
 tions depends. 
 
 There are but two generic reasons why dollars of less 
 intrinsic value than gold dollars obtain equal purchasing 
 power with the latter. If the dollars of less intrinsic 
 value are speedily convertible into gold on d-mar.d, dol- 
 lar for dollar, their equivalence to gold in purchasin:;- 
 power is readily understood. It makes no difference 
 whether or not there be gold enough to redeem the other 
 dollars, if they were all presented at one time. So long as 
 there is maintained sufficient gold for all exchanges 
 likely to be asked for, the parity of the gold dollars and 
 the other dollars will continue. But the parity of gold 
 dollars and other dollars may be maintained in one set 
 of circumstances even without concrete exchanges of 
 the one for the other. If there be a general creditor 
 of the dollar-using community who will receive gold dol- 
 lars and other dollars as precisely equivalent in paymeits 
 made to him, and if these payments be large in amount 
 and regularly recurring from day to day, and if the 
 amount outstanding of the less intrinsically valuable dol- 
 lars be no greater than to necessitate their payment fre- 
 quently to the general creditor, there is no mystery about 
 the readiness of the community to regard all dollars as 
 equivalent. The Treasury is such a general creditor. 
 The payments due it are the hundreds of millions of 
 taxes it regularly exacts. Its direct redemption in gold 
 of legal tender notes, coupled with its ready acceptance
 
 CONCLUDING REMARKS ON THE MONETARY SYSTEM. 341 
 
 of silver currency (whose volume is virtually fixed ^), 
 and back of all, its pledge 2 to exchange one kind of cur- 
 rency for another if necessary, suffice to maintain the 
 parity of all kinds of currency at the present time. So 
 far, then, as the gold standard and the parity of all kinds 
 of currency depend on legislation, it is manifest that they 
 rest on the Resumption Act of 1875, which provides for 
 bond sales when the necessity arises of obtaining addi- 
 tional gold to redeem the legal tender notes. But the 
 gold standard and the parity of all kinds of currency 
 rest not only on the positive provisions of this statute, 
 but equally upon the absence of statutory enactments 
 which would countenance a dangerous increase of the 
 currency which either directly or indirectly would have 
 to be maintained by the Treasury's gold reserve. In 
 short, the power to issue and sell bonds granted by the 
 Resumption Act is a clumsy but more or less effective 
 way not only of providing the Treasury with the needed 
 gold for actual redemption purposes, but of contracting 
 temporarily the outstanding demand obligations of the 
 Treasury. These demand liabilities, for a time at least, 
 are held out of circulation, inasmuch as not all of the 
 notes which have been redeemed are at once required 
 for meeting immediate expenditures. Manifestly, the 
 effectiveness of this expedient would be lessened and 
 even destroyed if the Treasury's liabilities were in- 
 creased indefinitely. 
 
 No less important than the Resumption Act itself is 
 
 ^ Silver is no longer purchased by the Treasury except in 
 limited amounts for the coinage of fractional silver. Section 
 34 of the War Revenue Tax of 1898 directs that at least one 
 and one-half millions of the uncoined bullion purchased under 
 the Act of July 14. 1890. be coined monthly, and that " said 
 dollars, when so coined, shall be used and applied in the manner 
 and for the purposes named in said Act." 
 
 ' See p. 336, note.
 
 342 POSITION OF THE TREASURY. 
 
 the administrative practice of the Treasury in construing 
 " coin " to mean gold in case the government's creditor 
 asks for gold. The point is well illustrated in the mat- 
 ter of the Coin notes. Here the Secretary of the Treas- 
 ury is explicitly given the option of redeeming such 
 notes in gold or silver. As a matter of fact, the holders 
 of the Coin notes have obtained gold in exchange for 
 them whenever they have demanded it. It is true that 
 the Act of July 14, 1890, after providing that the Secre- 
 tary of the Treasury shall " redeem such notes in gold 
 and silver coin at his discretion," adds the phrase, " it 
 being the established policy of the United States to 
 maintain the two metals on a parity with each other 
 upon the present legal ratio, or such ratio as may be 
 provided by law." But it can hardly be asserted that 
 the concluding clause would prevent a Secretary of the 
 Treasury who was so disposed from redeeming Coin 
 notes in silver. The clause quoted above which has so 
 often been invoked as the warrant for redeeming Coin 
 notes on demand in gold might easily be regarded as 
 hriitum fidnien by a Secretary who wanted to "do some- 
 thing for silver." That such redemptions in silver might 
 destroy the parity of different kinds of currency is not un- 
 likely. That such a result would be disastrous is highly 
 probable. That the Treasury is to be commended for 
 resigning its legal option in the matter is granted. But 
 the point made is that the continued parity of all kinds 
 of currency with each other may under certain circum- 
 stances be destroyed without color of illegality by a 
 change in Treasury practice, without adding or altering 
 a line in the statute-book. 
 
 The gold standard and the parity of all forms of cur- 
 rency are maintained by virtue of the Resumption Act 
 and by an administrative practice of understanding
 
 CONCLUDING REMARKS ON THE MONETARY $YSTEM.2iAi 
 
 " coin " to mean gold coin rather than silver. If either 
 the law or the practice were radically changed, our 
 money system might be revolutionized. But there is 
 ttill a third set of conditions which may be powerful 
 enough to counteract both statute law and the canons of 
 Treasury interpretation. These are those general indus- 
 trial conditions which determine the general price level. 
 Let the general price level in the United States rise 
 markedly and steadily, and bring with it the necessity 
 for more currency to transact exchanges, to such an ex- 
 tent that gold is imported from abroad, and the gold 
 standard and the parity of all forms of currency would 
 persist even though the Resumption Act were non- 
 existent and Coin notes were cashed only in silver dol- 
 lars. Let the general price level fall, exchanges dwindle, 
 and the currency become redundant, and both the exer- 
 cise of the power conferred by the Resumption Act as 
 well as the Treasury's promise of exchanging gold for 
 any and all other kinds of currency will be necessary 
 to maintain the gold basis of commercial obligations 
 and the parity of all kinds of money. Our monetary 
 system, therefore, in its essence — the single gold stan- 
 dard and the equal purchasing power of all our standard 
 coins and our paper currency — depends on three sets of 
 conditions, statutory, administrative, and commercial. 
 These conditions may operate in the same or in opposite 
 directions. The last, the most powerful of the three — 
 the general price level — is least under governmental 
 control. Its coming cannot be predicted, nor its perma- 
 nence calculated, nor its capriciousness gauged. Foolish 
 legislation may often hasten its departure, or retard its 
 beneficent advent. But with wisdom the financial house 
 may be put in order, whether the preparation prove the 
 prelude to prosperity or the signal of the storm.
 
 CHAPTER III. 
 BUDGETARY LEGISLATION. 
 
 The Budget. — Any description of a system of finance 
 must stand incomplete, suspended as it were in the air, 
 unless that description shows how finance is related to 
 the political orp^anism of which finance is after all but 
 an ofifshoot. It is not enough merely to articulate the 
 methods of raising and expending revenue, and to 
 explain the effects of such administrative activity. We 
 must venture into the theatre of legislation, where at 
 present the financial drama begins, if we are to under- 
 stand tlic often stereotyped roles which the Treasury 
 officials are compelled to play. 
 
 This province of financial legislation lies at the border- 
 land of several contiguous fields of political science. 
 Constitutional history, especially in modern times, 
 handles no more important theme than the gradual 
 growth of popular control over the public purse. The 
 study of political activity in modern democracies cen- 
 tres largely in the array of opposing parties in matters 
 of taxation. The science of administration touches no 
 problem comparable to that of the economic regulation 
 of the public household ; and nowhere can comparative 
 legislation be so advantageously studied as in the re- 
 spective arrangements observed by modern senates in 
 disposing of the budget, the most important item upon 
 their legislative dockets. In this ' welter of competing 
 
 344
 
 THE BUDGET. 345 
 
 jurisdictions ' the jurist, the historian, the administrator, 
 and the student of poHtics are almost equally interested. 
 
 Financial legislation, if the scope of the term be not 
 limited, suggests too broad a field of inquiry even for 
 professedly financial treatises. In one sense of the term 
 any law which entails governmental expenditure, as well 
 as any measure which affects banking, the currency, 
 the public debt, tax-administration, or any of a hundred 
 other similar projects is a financial measure. But 
 financial legislation par excellence, to wit, the yearly sup- 
 plies accorded to the public service, or what is com- 
 monly dubbed budgetary legislation, is what most con- 
 cerns us at this stage of our inquiry. 
 
 About the middle of the eighteenth century, when the* 
 Chancellor of the Exchequer rose to make his great annual 
 financial speech in Parliament, he drew from his bougcttc, 
 or bag, the various accounts which he laid before the 
 assembly. From that time his speech was called, per- 
 haps by way of nickname and in apprehension of the 
 tiresome contents of the bag, the budget, and since 
 1760 the term has been in general use. In England it 
 still means the Chancellor's statement of the nation's 
 finances. On the Continent, however, the term budget 
 has broadened into a wider meaning, and refers rather 
 to the forecast of the government's next annual income 
 and outlay, as well as to the legislative authorization of 
 both.i Broadly speaking, budgetary legislation em- 
 braces the annual legislative appropriations as well as 
 the statutory provisions for raising public revenue, 
 whether such provisions be permanent or annual. 
 
 To trace the historical emergence of the budget in 
 
 *Stourm, Le Budget, p. 4, defines the term thus: " Le budget 
 de I'etat est un acte contenant I'approbation prealable des re- 
 cettes et des depenses publiquea."
 
 346 BUDGET A R.Y LEGISLATION. 
 
 various lands would take us too far out of the channel 
 of our present quest. ^ Hut in general, the tale is largely 
 the story of the triumph of constitutional government ; 
 and as that goal has been successively neared by varic:)us 
 peoples, certain financial usages have been established, 
 common to them all. Such are the popular control over 
 taxation through representative legislatures, the ' ear- 
 marking ' of the sums accorded to the government, 
 specifying the particular purpose for which alone these 
 sums may be lawfully expended, the audit of the govern- 
 ment's accounts so as to eliminate fraud or illegality in 
 expenditure, and an increasing degree of publicity in the 
 public book-keeping. It goes without saying that this 
 progress has been more rapid in some countries than 
 in others. Since 1688 budgetary constitutionalism may 
 be regarded as matured in England. The American 
 colonists carried with them to the New World this part 
 of the British constitution. They vindicated it against 
 aggression in the Revolutionary War, and embedded it 
 in their fundamental law.^ 
 
 France was the next nation to establish the modern 
 budgetary system. Richelieu had typified the financial 
 regime of absolutism in his mot that the public finances 
 should be kept from profane eyes, as finances were the 
 nerves of the state. To publish them were an indecent ex- 
 
 ' See p. 2i. 
 
 "Article I, Section VII, i. All bills for raising: revenue 
 shall originate in the House of Representatives; but the Senate 
 may propose or concur with anKMulinents, as on otlier bills. 
 
 Sec. VIII, I. The Congress shall have power to lay and col- 
 lect taxes, duties, imposts, and excises, to pay the debts and 
 provide for the common defence and general welfare of the 
 United States. 
 
 Sec. IX, 7. No money shall be drawn from the Treasury 
 but in consequence of appropriations made by law; and a 
 -egular statement and account of the receipts and expendi- 
 tures of all public money shall be published from time to time. 
 — U. S. Constitution.
 
 THE FEDERAL BUDGET IN THE UNITED STATES. 347 
 
 posure. In accordance with this idea the parUament of the 
 realm was summoned so infrequently that their right to 
 grant taxes to the crown was almost forgotten. The last of 
 the " reunions intermittcntcs," as Stourm ^ calls them, ot 
 the Estates General had taken place one hundred and sev- 
 enty-five years before, when in 1789 parliament was again 
 summoned, and instituted the Revolution. Out of that con- 
 vulsion the new financial order arose, and though dormant 
 during the sway of Napoleon, revived under tl-.e succes- 
 sive governments that have since existed in France. 
 The ferment of the French upheaval penetrated central 
 Europe, and gave rise to the revolutionary struggles of 
 the middle of this century, and though Bismarck 2 from 
 1862 to 1866 dared to set at naught constitutional gov- 
 ernment in Prussia, the nominal adherence to that 
 regime and its proximate realization since 1848 have 
 prevailed everywhere in Europe outside of Russia and 
 Turkey. We are concerned, however, not with the his- 
 toric process, but rather with the extant forms of budget- 
 ary legislation under advanced democracies, and may 
 begin with the description of our own system. 
 
 The Federal Budget in the United States. — Almost 
 all comparisons of our political institutions with their 
 analogues abroad require some reference to our peculiar 
 allocation of powers to the federal government and to 
 the commonwealths respectively. Our independent 
 state governments, sovereign within the bounds pre- 
 scribed by the federal Constitution, give rise to a double 
 financial network as well as to a double legal network 
 covering the same territory. Our commonwealths are 
 at liberty to raise what money they will and to spend it 
 
 ^ Le Budget, p. 25. 
 
 ' Bismarck raised taxes for military purposes in defiance of 
 the Landtag, but, after his victory over Austria, secured legis- 
 lative amnesty.
 
 348 BUDGETARY LEGISLATION. 
 
 practically as they choose, without let or hindrance from 
 Washing-ton. Their revenue and expenditure hang in 
 no way upon the federal authorities. Each common- 
 wealth, with the local units of government it founds 
 and fosters, has its own budget. A fundamental sever- 
 ance of our federal budget and our state budgets is thus 
 decreed. In Great Britain the relation between the cen- 
 tral and local governments is, in legal theory, the very 
 reverse of ours. The local governments in England 
 depend for their very being on Parliament. Practically, 
 as we know, a vigorous system of local self-government, 
 unhampered save when obvious abuse of power is at- 
 tempted, exists in England, but local expenditure and 
 taxation are warranted annually by parliamentary act, 
 and the divorce between the imperial and local budgets 
 is by no means absolute as with us. While, therefore, 
 local revenues and taxation in England are tacked to 
 the imperial budget in its final form, the coalescence of 
 the two is rather forced than organic, and. we might 
 almost say, serves no particular end except that of statis- 
 tical completeness. Our American budgetary system 
 must be studied, therefore, first in the budget of the 
 central government, and afterwards in those of the com- 
 monwealths and the local units of government. 
 
 First in order comes the federal budget. The start- 
 ing-point in the description of our federal budgetary 
 legislation must be made in scrutinizing the annual esti- 
 mates of probable expenditure for the coming year. 
 Congress upon assembling early each year in December 
 receives from the Secretary of the Treasury an estimate 
 of appropriations required for the fiscal year which is to 
 begin on the first day of July next following. This 
 rather formidable collection of figures is entitled a " Let- 
 ter from the Secretary of the Treasury," and is addressed
 
 THE FEDERAL BUDGET IN THE UNITED STATES. 349 
 
 to the Speaker of the House of Representatives. In 
 this voluminous document the various departments of 
 the government are taken up in order, and the particu- 
 larized objects of expenditure under each department 
 are set forth in minutest detail. Opposite each subject 
 of outlay are placed in parallel columns the statutes 
 which authorize expenditure for such purposes, the 
 amounts estimated as necessary for such objects during 
 the financial year next to ensue, and a statement of the 
 amounts aetually appropriated thereto for the current 
 year. A comparison of the last two columns renders 
 easy at a glance any change, whether of increase or de- 
 crease, which the Secretary ventures to propose. The 
 figures are summed up under each main head, and 
 the final summation gives the total amount which, on 
 the face of the matter, must be spent to keep in running 
 order the federal machine for the next financial year.* 
 However, it would be a mistake to take the Estimates 
 too seriously, or to imagine that they embody the sum of 
 the financial wisdom of the Secretary of the Treasury even 
 in the matter of needed expenditure, or to suppose that, 
 even if they did, they would thereby commend them- 
 selves to Congress. In the first place, it appears that 
 these imposing tables of figures are prepared by the 
 various departments beginning their several tasks shortly 
 after July ist of each year. The bureaus proceed upon 
 the basis of their current needs to guess at their probable 
 needs for a financial year not to begin for twelve 
 months to come, and not to end until almost two calen- 
 
 * It often happens that, later on in the session of Congress, 
 supplemental estimates, called Deficiency Estimates, will be sent 
 in by the Secretary, specifying various objects for which the 
 authorized appropriations for the current year are not adequate. 
 The financial year of the United States government, it must be 
 borne in mind, runs from July i to July i.
 
 35 o BUDGETARY LEGISLATION. 
 
 dar years after the time when work on the Estimates is 
 first set on foot. Manifestly, the chances for error are 
 not small. By October ist each department must have 
 handed in to the Treasury its lists of figures. There- 
 upon the Secretary proceeds to digest and combine the 
 partial reports, but even here his discretion is bound by 
 hard and fast rules of procedure laid down for his ob- 
 servance. He may not say to the War Department, 
 " Your estimates for needed expenditure upon rivers and 
 harbors are extreme ; cut them down." But embodied 
 they must be in the Estimates. Not only expenditures 
 already authorized by law must be included in the Esti- 
 mates, but certain probable expenditures for public works 
 for wiiich the public surveys have been legally provided 
 must be included. Equally wooden is the rule requiring 
 an arbitrary sum to be placed in the Estimates for re- 
 deeming a part of the principal of the government debt, 
 irrespective of whether there is likely to be any sum 
 available for the Sinking Fund after current expenses 
 have been met.^ The extreme artificiality of the Esti- 
 mates is shown in the Secretary's annual Report on 
 the State of the Finances rendered each December, 
 where with free hand he sets forth the probable govern- 
 mental income and outgo for the coming financial year 
 without concerning himself about harmonizing these 
 figures with the totals of the Estimates. In this latter 
 report, which appears in the public prints about the 
 
 * Section 3689 of the Revised Statutes provides annually an 
 appropriation " of one per centum of the entire debt of the 
 United States, to be set apart as a sinking fund for the purchase 
 or payment of the public debt," but specifies that this appro- 
 priation must come " out of any moneys in the Treasury not 
 otherwise appropriated.'' Manifestly when current expenses 
 absorb the current Treasury income, tlie source of the sinking 
 fund appropriation is dried up. Notwithstanding the pros- 
 pect of a deficit, the sinking fund appropriation figures in 
 the Estimates year in and year out.
 
 THE FEDERAL BUDGET IN THE UNITED STATES. 35- 
 
 same time as the President's Message, the Secretary not 
 infrequently takes occasion to discourse of financial re- 
 forms and a far-reaching financial policy. The report 
 perhaps gains the ear of the public, while the Estimates, 
 soon buried in the committee rooms of Congress, serve 
 as a sort of actuarial basis, of no binding force, however, 
 for the first rough draft of the various appropriation bills. 
 Before following the Estimates to their last resting-- 
 place, the congressional committee rooms, it will be 
 needful to say a word about the committees themselves.' 
 The vast amount of work devolving upon Congress lei 
 to the early introduction of a committee system for which 
 the colonial legislatures offered models ready to hand. 
 The House of Representatives almost from the begin- 
 ning, and the Senate as early as 1816, designated small 
 subdivisions of their members as standing committees, 
 charged with the special investigation of particular ques- 
 tions. Upon these special topics the committees drew 
 up various bills which they reported in turn to their 
 respective houses for discussion and eventual enactment. 
 In its essence the system of committees was a labor- 
 saving device. They were designed originally only to 
 inform the larger body, and suggest an intelligent basis 
 of departure in the matter of legislation. But in various 
 ways the functions of the committees were enlarged, and 
 their early duty of enlightening the houses became 
 speedily the power of dominating legislation. Each 
 within its particular province, instead of confining itself 
 to the modest role of suggestion, began more and more 
 to assume the tyrannical role of dictation. This change 
 came about, owing mainly to the increasing pressure 
 
 ^ For the committee system and the role it plays in actual 
 legislation see Woodrow Wilson's Congressional Government; 
 , Bryce's American Commonwealth, chapters XV, XVI, and 
 XVII; and McConachie's Congressional Committees,
 
 352 BUDGETARY LEGISLATION. 
 
 put upon Congress by our rapidly growing population. 
 Interests multiplied with such amazing rapidity that to 
 keep pace with them Congress was obliged to create a 
 constantly increasing number of committees, each 
 charged with the oversight of a new legislative province. 
 Tlie growth of the two houses themselves, as additional 
 senators and representatives were admitted from the 
 newly erected states, cut down the time that each com- 
 mittee on the average had hitherto been able to com- 
 mand of the attention of the whole body. Thereafter 
 Congress was forced to pass many bills with little gen- 
 eral debate, or to decline to pass them at all. This pres- 
 sure upon their time was much more severely felt by 
 the House of Representatives than by the Senate. The 
 latter body was smaller numerically, and could await 
 bills for raising revenue which must originate in the 
 House. The committees, therefore, never attained the 
 easy and almost undisputed sway in the Senate which 
 they exercise in the lower body. Whereas the House 
 cannot take the time to elect the members of its fifty- 
 seven standing committees, but has deputed this virtual 
 power of shaping legislation to the Speaker, the slower 
 method of selecting committees by party caucus still 
 prevails in the Senate. The House, moreover, had 
 speedily to devise means for cutting off general discus- 
 sion, whereas the Senate still adheres to its more leisurely 
 system of unlimited general debate. In short, the proc- 
 ess took such a trend that measures of secondary im- 
 portance could frequently not obtain a careful ex- 
 amination in the full House, and therefore, if passed at 
 all, were likely to be passed in the shape into which 
 they had been thrown by the committee reporting them. 
 The creature had become the virtual creator. 
 
 It would, however, be a mistake to imagine that th^
 
 THE FEDERAL BUDGET IN THE UNITED STATES. 353 
 
 various committees of the House are on a plane of 
 equality. Manifestly, the eminent gentlemen charged 
 with the matter of properly ventilating the capitol could 
 hardly magnify their office, even if so disposed, to a 
 parity with the Committee on Appropriations. The 
 greater or less importance of the matters intrusted to 
 the committees clearly distinguishes the committees as of 
 superior and inferior grades. This difference is, as it 
 were, an intrinsic difference. But the more powerful 
 committees were not slow in arrogating to themselves 
 a seemingly artificial grant of power by acquiring a 
 preferred claim on the time and attention of the House. 
 Certain privileged committees under the Rules of the 
 House were allowed the right of reporting their meas- 
 ures at any time. The lesser committees could be 
 rudely pushed aside, much as a poor purchaser in a 
 shop might be left to wait with his bargain half com- 
 pleted, while an obsequious clerk rushes up to serve a 
 moneyed customer. If the House had plenty of time at 
 its disposal, this right of way possessed by the more in- 
 fluential committees would serve only to delay the busi- 
 ness of the minor committees so summarily displaced. 
 But the enormous demands on the very limited time of 
 the House mean not only vexatious delay, but more 
 often obscurity and defeat for the measures fathered by 
 the inferior committees or introduced by members in 
 their private capacity. 
 
 The privilege of reporting at any time, once the 
 precious monopoly of some four or five committees, was 
 long viewed with jealous eyes, and was finally seized 
 and shared by numerous other committees.^ Still the 
 committees so privileged are but sixteen in number. 
 
 * Section 57 of Rule , XI of the House of Representative.' 
 gives a list of committees having leave to report at any time-
 
 354 BUDGETARY LEGISLATION. 
 
 The value of the privileg-e declined as the privilege be- 
 came more common, but upon the plane of equality which 
 the more powerful committees had asserted for them- 
 selves that ' dignified oligarch}- ' called the Committee 
 on Rules has latterly erected its throne. With a mem- 
 bership of Init five, and with the Speaker as chairman, 
 this dominant committee may map out, as it will, the 
 time of the House, and determine the subject-matter for 
 legislative consideration. Furthermore, where the 
 Speaker associates with himself upon the Committee on 
 Rules the chairmen of the Appropriations Committee 
 and the Committee on Ways and Means, he has formed 
 a small but efficient " steering committee " whose large 
 power is the signal feature of the House as now organ- 
 ized. ^ 
 
 It hardly needs to be said that the committees on 
 finance have always been regarded as the most important 
 committees in Congress. Temporary issues, such as 
 war, may elevate for a time upon the same high level 
 other standing committees, such as those on Foreign 
 Affairs, but their little day is soon over, and while in the 
 committee hierarchy the Foreign Affairs, especially in 
 the Senate, stands high, its importance is potential rather 
 than actual. Treaties and conventions are of prime im- 
 portance, but they are nut negotiated every year. But 
 no month passes without the necessity for raising and 
 spending revenue, and the committees whose fingers 
 first fumble the public purse-strings have a substantial 
 primacy among their fellows which cannot be ques- 
 tioned. 
 
 The history of the financial committees of Congress 
 is in the main a history of how overburdened commit- 
 
 • See Follett, The Speaker of the House of Representatives, 
 pp. 274-269,
 
 THE FEDERAL BUDGET IN THE UNITED STATES. 355 
 
 tees have surrendered, often unwillingly, tasks of ever- 
 growing complexity. In the House of Representatives 
 the Committee on Ways and Means from its creation in 
 1802 until March 1865 had control not only of measures 
 afifecting the public debt, but of bills for raising as well as 
 for expending money. Up to 1828 appropriation bills 
 were only three in number each session/ and not until 
 1844 were the appropriation bills multiplied beyond 
 that number. In 1865 the Committee on .Ways and 
 Means, staggering under the enormous mass of legis- 
 lation resulting from the Civil War, was relieved of 
 the work of preparing and reporting appropriation 
 bills. Thereafter the work of raising the government's 
 income was intrusted to one set of men. and the work 
 of spending that income to another set. The character 
 of the Ways and Means Committee since 1865 has 
 changed radically. Shorn of exclusive control over the 
 domain of finance, it no longer attempted to essay its 
 earlier role. During the first four decades of the Con- 
 stitution it had reported thirty-eight measures for rais- 
 ing revenue and thirty-eight appropriation bills. But 
 virtue had gone out of it. It began after 1865 to repel 
 changes in the tarifif system, and was put, as it were, on 
 the defensive. In recent years it has remained the en- 
 gine whereby changes in the federal tax system have 
 been at intervals attempted by the two great parties. Its 
 preponderating importance is due perhaps not so much 
 to its annual legislative activity, as to its being the work- 
 house in which the great tarifif measures have been 
 forged which first in the congressional arena and after- 
 wards before the people have been fought out in suc- 
 cessive political campaigns. 
 
 'Congressional Record, Dec. 15, 1885, p. 199. McConachie 
 (p. 176, op. cit.) asserts that in 1837 the Rules enumerated four
 
 35^ BUDGETARY LEGISLATION. 
 
 But while revenue laws may be framed capable of en- 
 during for a number of years, appropriation laws must be 
 passed each session. While the Ways and Means was 
 left to enjoy a nominal though often an empty pre- 
 eminence, the Committee on Appropriations became 
 possessed not merely of the shadow of power, but of its 
 substance. Inheriting from its predecessor the pre- 
 rogative, then rare, of reporting at any time, the Appro- 
 priations Committee at one ])eri(Kl almost monopolized 
 the time of the House, and controlled with a high hand 
 the expenditures of the government. But its humiliation 
 was not long in coming. The sweets of dispensing 
 money from the federal treasury proved too great a boon 
 for the other committees quietly to forego, and they 
 openly revolted against the tyranny of " the white-but- 
 ton mandarins of the Appropriations Ci)nnnittee." 
 First the power of reporting the River and Harbor bill 
 was wrested from that committee in 1879. Then the 
 Agricultural Appropriation bill was extorted from their 
 grasp. Other aspiring committees demanded and ob- 
 tained equal privileges of reporting to the House at any 
 time. By 1887 eight dififcrcnt committees h.ad secured 
 the power to draft and report appropriation bills for vnri- 
 ous objects, and to-day only six of the thirteen annual 
 appropriation bills are under the control of the once 
 dominant Committee on Appropriations.^ 
 
 general appropriation bills; but (p. 175) that "for the first forty 
 years of the nation's history appropriations were in the main 
 confined to one regular annual law." 
 
 'The Committee on Appropriations prepares bills for (i) 
 legislative, executive, and judicial expenses; (2) for sundry 
 civil expenses; (3) for fortifications and coast defences; (4) for 
 the District of Columbia; (5) for pensions; (6) for all defi- 
 ciencies. See Rule XI, section 3, Rules of the House of Repre- 
 sentatives. The other appropriation bills are the Army and the 
 Military Academy bills; the appropriations for Agriculture;
 
 THE FEDERy4L BUDGET IN THE UNITED STATES. 357 
 
 The work of the financial committees of the House of 
 Representatives may be summed up as follows : Bills 
 for the raising of revenue are drafted by the Committee 
 on Ways and Means, not annually as a general rule, but 
 once every three or four years, unless some exigency 
 like war requires more frequent action. The spending 
 of money is initiated by appropriation bills drafted by 
 eight independent committees and passed annually. Be- 
 sides the annual appropriations there are certain per- 
 manent appropriations made in virtue of statutes that 
 run without date or until they are repealed. The per- 
 manent appropriations ^ provide for the interest on the 
 public debt and for various other objects of lesser im- 
 portance, including the Sinking Fund.^ In the aggre- 
 gate the authorized permanent appropriations amount 
 to about one fourth of the total expenditures. The sev- 
 eral appropriation bills are reported to the House in 
 committee of the whole. The time for their discussion 
 is limited, not infrequently by a special rule made pro 
 hac vice. Amendments may be ofifered, but only such 
 as are ofifered by the chairman of the committee report- 
 ing stand much chance of being accepted. Other 
 amendments are swept ruthlessly aside, and are gen- 
 erally voted down after the briefest debate. At the close 
 of the few hours allotted for the discussion of the meas- 
 ure the vote is taken ; and after a perfunctory ratifica- 
 tion by the House of the decision of the committee of 
 the whole House on the state of the Union, the measure 
 is passed on to the Senate for acquiescence, rejection, 
 or amendment. 
 
 Financial legislation in the Senate runs much the 
 
 for the Diplomatic and Consular service; for the Indians; for 
 the Navy; for the Post-office; and for Rivers and Harbors. 
 
 * See sec. 3689 Revised Statutes. 
 
 * See page 350.
 
 358 BUDGETARY LEGISLATION. 
 
 same course as m the House, except that the smaller 
 size of the Senate allows a more extended debate, if 
 senators choose to exercise their prerogative of un- 
 limited talk. The constitutional right of the House to 
 originate bills for the raising of revenue does not prevent 
 the Senate from exercising an almost unlimited power 
 of amending financial measures. Before 1867 the Sen- 
 ate Committee on Finance had powers similar to those 
 of the primitive Ways and Means of the House, and con- 
 trolled measures affecting both the raising and the spend- 
 ing of money except money devoted to the Rivers and 
 Harbors bill, which had become the prey of the Commit- 
 tee on Commerce. In 1867, however, the Senate Commit- 
 tee on Appropriations was created, and dispossessed the 
 Committee on Finance of its work of considering appro- 
 priation bills. Even the disintegration of the Senate 
 Committee on Appropriations is now mooted, but at 
 present the three committees named above have initia- 
 tory control of such financial measures as reach the 
 Senate. The Senate not only amends with great free- 
 dom such measures as come up from the House, but 
 commonly increases the amounts appropriated to vari- 
 ous objects. This necessitates a compromise between 
 House and Senate. The former generally votes to non- 
 concur /;/ toto with the Senate amendments. A commit- 
 tee of conference is appointed consisting of an equal 
 number of senators and representatives. An agreement 
 is generally devised by the conference committee, based 
 on no very logical plan except the substitution of a 
 rough average for the divergent amounts named in the 
 original and in the amended measure. The conference 
 report is quickly railroaded through the House as a mat- 
 ter of the highest privilege under the Rules, and is gen- 
 erally accepted by the Senate as the best it can get under
 
 THE IMPERIAL BUDGET OF GREAT BRITAIN. 359 
 
 the circumstances. It then runs the gauntlet of the 
 executive veto, and escaping that, becomes the law of 
 the land. 
 
 Appropriation bills, however deficient they may be in 
 other respects, are not lacking in this, — that they specify 
 with great minuteness the objects for which particular- 
 ized amounts may be expended by the departments of 
 the government. Alexander Hamilton was probably 
 the only Secretary of the Treasury who ever received 
 free hand to spend the moneys appropriated by 
 Congress, provided only he did not exceed the total 
 amount authorized in the single paragraph tl:at consti- 
 tuted the first congressional appropriation law. Amounts 
 appropriated to any purpose which in whole or part re- 
 main unexpended after two years become no longer 
 available for such purpose, and are covered into the 
 Treasury's cash. The Treasury is provided with elab- 
 orate auditing machinery to see that no money leaves 
 the Treasury except under due sanction of law. The 
 same machinery examines the vouchers and receipts of 
 the various departments to see that the government's 
 cash has actually been received by those who are men- 
 tioned in the departmental reports. And Congress 
 finally has numerous committees charged " with th ^ 
 examination of the accounts and expenditures of t' 
 several departments," though, it is to be feared, t'.cs^ 
 committeemen generally regard their duties as little mor: 
 than sinecures, — a view which the mean status of thes: 
 committees probably reflects. 
 
 The Imperial Budget of Great Britain. — Partly with a 
 view to assessing its intrinsic value, and partly to afford 
 a basis of comparison with our own financial system, an 
 account, though brief, of the budgetary legislation of the 
 British Parliament may here be given. There as here,
 
 360 BUDGETARY LEGISLATION. 
 
 the process may best be approached by first glancing at 
 the Estimates of expenditure. The financial year hi 
 England runs from April ist to April ist. In November 
 of each year the various departments of the govern- 
 ment make up their preliminary estimates of ex- 
 penditure required for the year beginning on the first 
 of the following April. These tables are presented to 
 the Treasury, whose head is the Chancellor of the Ex- 
 chequer. That functionary, if report may be believed, 
 is allowed in digesting and combining the partial esti- 
 mates a latitude which our rigid statutes do not permit 
 the Secretary of the Treasury to exercise. The Chancellor 
 may question the calculations made by the heads of the 
 other departments. He may challenge the necessity of 
 the expenditure for which they vouch. He may even 
 make a colleague's refusal to acquiesce in the Treasury's 
 pointed suggestions the occasion of a family row in the 
 cabinet until the matter is adjusted to that select body's 
 satisfaction. When, finally, the Estimates are whipped 
 into such a shape that they meet the approval of the 
 Chancellor and the cabinet, the figures are presented to 
 the House of Commons, upon the collective responsi- 
 bility of the cabinet and with its official approval. The 
 Estimates are submitted all at one time in three grand 
 divisions, called respectively the army, the navy, and the 
 civil-service estimates. Each grand division is broken 
 into sections, technically called " votes," of which there 
 are from ten to twenty each in the army and navy esti- 
 mates, and about eighty in those for the civil service. 
 No member of Parliament other than a cabinet minister 
 may propose any " motion which in any way creates a 
 charge upon the public revenue." ^ The matter is now 
 
 'Cf. May, Parliamentary Practice (edition of 1893), p. 527 
 sq.
 
 THE IMPERIAL BUDGET OF GREAT BRITAIN. 361 
 
 ready for legislative consideration. For purposes of in- 
 formal discussion the House of Commons resolves itself 
 into a committee of the whole, and before the whole 
 House, sitting in the capacity of Committee of Supply, 
 the Estimates are presented, explained, and defended by 
 the Chancellor of the Exchequer. He is subjected to 
 a running fire of questions and criticisms. The wisdom 
 of his proposed expenditures may be denied by the Op- 
 position. They may propose to cut them down, or may 
 even refuse to grant them outright. But no one but a 
 cabinet minister may propose their augmentation, and a 
 serious rejection of proposed expenditures would pre- 
 cipitate the resignation of the cabinet, perhaps the dis- 
 solution of the House. Item by item, the proposed 
 expenditures are sanctioned from time to time by the 
 Commons sitting as Committee of Supply. 
 
 But these votes of approval do not suffice to unlock 
 the doors of the public chest. They are but a prelimi- 
 nary assent to expenditure for various objects named in 
 the Estimates. To secure the money wherewith to de- 
 fray the expenditures warranted, a second round of par- 
 liamentary approval must be secured. For this purpose, 
 to wit, of providing ways and means to meet the ex- 
 penditures already sanctioned, the House resolves itself 
 into a Committee of Ways and Means. This in Parlia- 
 ment is not a small committee as with us, but simply 
 the whole House sitting informally as a large committee 
 for the business in hand. Step by step, it is moved to 
 make grants out of the Consolidated Fund * to provide 
 for the services previously voted in the Committee of 
 Supply. No motion can be made in the Committee of 
 Ways and Means to impose a tax for the purpose of 
 
 *The Consolidated Fund is a technical expression for the 
 sum total of the public revenues.
 
 362 BUDGETARY LEGISLATION. 
 
 raising revenue, " save by a minister of the Crown, un- 
 less such tax be in substitution, by way of equivalent, 
 for taxation at that moment submitted to the considera- 
 tion of Parhament." ^ After some progress has been 
 made in providing revenue to meet the various expen- 
 ditures already allowed, the Chancellor of the Ex- 
 chequer, generally a few days after the beginning of 
 April, makes his budget speech, ordinarily in the Com- 
 mittee of Ways and Means. In the budget he reviews 
 the nation's finances for the year just closed, and con- 
 cludes by proposing certain measures of taxation for the 
 current year. Ordinarily these embrace the proposed 
 rate of the income tax and the duty on tea, as these two 
 taxes alone are fixed annually instead of once for all. 
 As the Committee of Ways and Means agrees from time 
 to time to the various resolutions there presented, such 
 resolutions are shaped in the form of bills and sent up 
 to the House of Lords for their approval, which gen- 
 erallv follows as a matter of course. These bills, there- 
 fore, when the Crown has formally assented to them, 
 become laws which authorize the government to expend 
 money for its inniiediate needs. When finally all the 
 grants necessary for the year have been made, and the 
 Committee of Supply has ceased to sit, the various par- 
 tial grants are recounted and summed up in the so-called 
 Appropriation Act, which provides for the entire year 
 and is passed in the Committee of Ways and Means gen- 
 erally just before the prorogation, or temporary adjourn- 
 ment, of Parliament. In short, the process of financial 
 legislation in England consists first in sanctioning 
 seriatim certain proposed expenditures for certain defi- 
 nite objects. This process takes place from time to 
 time in the Committee of Supply. Then an analogous 
 
 * May, Parliamentary Practice, p. 532 sq.
 
 THE IMPERIAL BUDGET OF GREAT BRITAIN. Z^Z 
 
 process of granting out of the Consolidated Fund cer- 
 tain amounts or ' credits ' follows. These ' credits ' 
 sanction expenditure only for the time being. Finally, 
 when the Estimates have been adopted, the various 
 temporary grants of money are summed up and com- 
 pleted by being increased so as to cover the expenses 
 for the entire year. 
 
 In England, as in the United States, there are certain 
 permanent appropriations which are not voted annually 
 by Parliament. These permanent appropriations are a 
 first lien or charge upon the Consolidated Fund, and 
 amount to about three eighths of the total amount ex- 
 pended annually. Besides embracing the interest on the 
 public debt, these standing appropriations cover a rat'.er 
 motley collection of items, such as the Crown's salary 
 (called the civil list), as well as the salaries of the judges 
 of the realm, of the Speaker of the House of Commons, 
 " of the porter of Holyrood House, of the perpetual 
 curate of the Isle of Alderney, and of the Regius Pro- 
 fessor of Civil Law in the University of Oxford," ^ and 
 other miscellaneous items. It must be noticed that the 
 House of Lords occupies no such position of impor- 
 tance in matters of finance as our Senate asserts for it- 
 self. Whatever the precise constitutional status of the 
 Lords may be, as a matter of fact they seldom refuse to 
 acquiesce in the financial bills of the Commons, and 
 generally without any substantial attempt to amend or 
 alter the terms of such measures. 
 
 The process of audit and control of expenditures is 
 in the first instance in the hands of the Auditor and 
 Controller-General, an ofhcial whose salary is guaran- 
 teed out of the permanent appropriations, and whose 
 independence both of Parliament and the executive de- 
 
 * Anson, Law and Custom of the Constitution, p. 322.
 
 364 BUDGETARY LEGISLATION. 
 
 partments is assured. He examines the statutes appro- 
 priating money, and unless convinced of the leij^ahty of 
 any proposed departmental expenditure he may preven 
 the departments from touching a penny. The govern- 
 ment's money is on deposit in the Bank of Mnglanl. 
 and can be drawn upon only when the Auditor-General 
 signs the orders upon the Bank. The same official is 
 charged with examining the vouchers and receipts of 
 disbursements, and must report any irregularity he dis- 
 covers to Parliament. Money appropriated by Parlia- 
 ment must be expended within the financial year for 
 whose service the money was voted. Unexpended bal- 
 ances cannot thereafter be used for another obje:t even 
 in the same executive department.^ At the close of the 
 financial year the reports of both the Auditor and the 
 departments are scrutinized by a Public Accounts Com- 
 mittee of the Commons, who have thus a final chance 
 to re-check and verify the correctness of the govern- 
 ment's financial reports. 
 
 Viewed from the standpoint of financial technique, the 
 English system of financial procedure is admirable. 
 The Estimates gauge very closely the actual expendi- 
 tures incurred. Thus from 1889 to 1892 the Estimates 
 coincided within a minute fraction of one per cent, with 
 the actual expenditures.^ They are evidently framed 
 with a view to economy, as the small deficiency appro- 
 priations prove ; and, best of all, the almost despotic con- 
 trol exercised by a single committee, the cabinet, secures 
 
 * An exception of trifling moment exists in the War and 
 Admiralty departments, where sums saved out of temporary 
 grants may be applied in case of necessity to other purposes in 
 the same department, provided the total expenditure authorized 
 be not exceeded, and a report of the transfer be laid before 
 parliament. 
 
 ' Bastable, Public Finance, p. 691, note.
 
 AMERICAN AND ENGLISH BUDGETS. 365 
 
 almost invariably in normal times an equilibrium be- 
 tween income and outgo. 
 
 Comparison of American and English Methods of 
 Budgetary Legislation. — The brief outline which has 
 been given will serve as a basis for tlie comparison of 
 our methods of budgetary legislation with those in 
 vogue in England. Such a comparison must involve 
 much more than a mere contrast of financial technique, 
 for the differences in the two systems spring out of 
 underlying differences in political structure, and a purely 
 didactic treatment of the subject issuing in a verdict 
 of the superiority of either must be highly superficial. 
 Fundamentally, the characteristic feature of the English 
 financial system rests upon the coalescence of executive 
 and legislative powers in the English cabinet. The 
 unique features of our system root themselves in our 
 complete severance of the law-makin':^ and law-adminis- 
 tering powers. Under our Constitution there is no 
 guarantee that the President, the Senate, and the House 
 will all be of the same political complexion. As a 
 m.atter of fact one of the three is commonly at variance 
 politically with the other two. Laws that meet the ap- 
 proval of the three must of necessity partake more or 
 less of a compromise character. The clear-cut policy 
 which naturally results when the heads of departments 
 as in England are themselves the parliamentary framers 
 of the laws they afterwards execute cannot be secured 
 under our system of government. Each plan of govern- 
 ment has its drawbacks as well as its advantages. But 
 it is futile to suppose that either will eventually prevail 
 in both countries. The growing power of the Speaker 
 of our House of Representatives has served to give some 
 coherence to the bills enacted by that body. It has un-
 
 3^6 BUDGETARY LEGlSLATIOM. 
 
 doubtedly chained the elements in the House that made 
 for chaos. But that the Speaker, or a steering com- 
 mittee of both House and Senate will eventually de- 
 velop into something analogous to the English cabinet 
 seems practically impossible. Nor is any very percep- 
 tible progress making in England toward our type of 
 government. Indeed many of the comparisons of the 
 respective merits of the two plans of government are de- 
 fective in this, that they neglect the difference in con- 
 ditions prevailing in the two countries. England is 
 geographically compact, and practically homogeneous. 
 Her political habit is all of one color. Her life, indus- 
 trial and social, is reasonably stable. Unity and cohe- 
 rence of political policy and action put no severe strain 
 upon the English body politic. Our social and political 
 life, on the contrary, is as yet one of growth and move- 
 ment, and the question may with reason be entertained 
 whether a frame of government too loosely hanging to 
 be trim may not after all be best for us, as not impeding 
 the free play of our activities, or putting in duress ele- 
 ments most safe when unconfined. The Fathers, as we 
 fondly term them, were doubtless guarding against a 
 visionary danger when they devised our constitutional 
 system of ' checks and balances ' to avert the tyranny 
 of any part of the government. They could not foresee 
 the growing force of public opinion which, of itself, would 
 be able to-day to shatter the kind of tyranny they most 
 dreaded. But in a way they builded better than they 
 knew. The safeguards which they devised against 
 usurpation have proved the bulwarks of political con- 
 servatism. The impossibility of sudden and far-reach- 
 ing changes which the separation of powers effected has 
 redounded not a little to our political safety. Were 
 sweeping changes of policy possible with us, national
 
 j4MERIC/iN AND ENGLISH BUDGETS. 3^7 
 
 unity and concord might have been endangered. And 
 so in finance as elsewhere, if our system has sacrificed 
 unity and harmony of arrangement, it has at least con- 
 tributed to make our process of national growth, not 
 frictionless, to be sure, but reasonably safe. 
 
 Viewing the matter from a closer and narrower stand- 
 point, the technical excellences of the English system 
 over ours become more manifest, but even the legislative 
 manipulation of finance reflects more than one differ- 
 ence in the phases of our respective political systems. 
 In Parliament the salient fact is leadership ; in Congress, 
 equality. Leadership of some kind there must be under 
 any system, of course. But if in the Commons the cabi- 
 net is thought to be leadership made perfect, in our 
 House of Representatives the same regime would be re- 
 jected as tyranny unbearable. The Speaker of our 
 House exercises the power of a leader, not merely that of 
 a moderator. But his power is not the same in kind as 
 that of the cabinet in the Commons. The Speaker's 
 power is after all a power of reasonableness — not always 
 of ' sweet reasonableness ' it may be, but of reasonable- 
 ness after all. None know better than the eminent gentle- 
 men who occupy our Speaker's chair when they must 
 insist upon and when they must yield their individual 
 preferences. It is our Speaker who brings upon the pro- 
 vincial congressman the pressure of national interests. 
 Doubtless these " counsels of perfection " are often co- 
 gent and unanswerable appeals made privately in the 
 interest of the party which the Speaker and the member 
 from Buncombe serve both day and night, but the glove 
 of velvet is to be found in the arrangement as well as 
 the hand of steel. Moreover, it may be surmised that 
 our Speaker's real power of control chafes the less be- 
 cause it is not exercised in petty matters of detail. Tlxe
 
 368 BUDGETARY LEGISLATION/. 
 
 Committee on Agriculture may be advised to be ' easy 
 on the Treasury/ but the Speaker does not ' blue-pencil ' 
 the bill which the committee frames. And while the 
 Speaker's rewards and punishments consist in the com- 
 mittee berths at his disposal, he may not threaten recalci- 
 trant members, as the English cabinet may, with the speedy 
 risk and expense of a new election. On the other hand, 
 the cabinet stands to the Commons in quite another at- 
 titude. Here are the proposals for raising and for 
 spending money. They must be fully explained to the 
 House, at least as fully as such enormous sums and their 
 details can be explained in the committee sittings. Addi- 
 tional expenditures may not be moved except by a minis- 
 ter of the Crown, nor proposed appropriations increased. 
 If the supplies are refused or seriously cut down, the 
 cabinet — and generally with unnecessary verbiage sa- 
 voring a little of hypocrisy — tells the Commons in effect 
 that another cabinet must be selected, or perhaps that 
 the bore of a general election must be endured. Even 
 if another cabinet be put in power, it is but a change of 
 masters. The new ministers will affect the same horror 
 at having profane hands laid on their sacred Esti- 
 mates. 
 
 Now it is not to be denied that the English system of 
 cabinet government is most admirably contrived for se- 
 curing consistency and unity in financial arrangements. 
 Charging the same set of men with determining the ex- 
 tent of expenditure, and with providing the necessary 
 revenue, is admirably adapted to secure budgetary 
 equilibrium. Income equals outgo. Moreover, if Tom, 
 Dick, and Harry were at liberty to saddle new items of 
 expenditure upon the government, this annual balancing 
 of accounts would be rendered impossible. The English 
 system may also be credited with enforcing economy. 
 Raids on the Exchequer cannot well be made when the
 
 /iMERICAN AND ENGLISH BUDGETS. 369 
 
 " log-rolling " ^ system is shut out by the Standing 
 Orders of the Commons. All this is undeniable. But 
 the point upon which we are now insisting is that the 
 machinery of legislative suppression which permits this in 
 England would be summarily smashed if set up in Con- 
 gress, and that, too, because of the dominant notion 
 of equality which our representatives believe in and 
 maintain. 
 
 Moreover, there are some compensating features about 
 
 our system, extravagant and inharmonious as it often is. 
 If precision in securing equivalence between income and 
 outlay is sacrificed, our system of many committees does 
 allow a very large number of our legislators to be- 
 come personally acquainted at first hand with the real 
 needs of the various governmental departments. The 
 combined membership of our appropriation committees 
 makes up no inconsiderable fraction of the entire House 
 of Representatives. Certainly, more than a quarter of 
 the whole House have the opportunity of learning the 
 financial needs of the various public services. And this 
 is no small gain. Moreover, it must be admitted that 
 our congressional experience of intrusting to a single 
 committee the preparation of all the appropriation bills 
 was far from reassuring. The natural tendency of each 
 committee to be lavish in recommending expenditure 
 for the province which it controls has been counteracted 
 in part by the committee's more intimate knowledge of 
 the real as opposed to the fictitious needs of such subdi- 
 visions of the federal service, and in part by the restraint 
 exercised by the Speaker over all the committees. The 
 Appropriations Committee, before it was shorn of its 
 vast powers, used its prerogative not only to pass its 
 
 * " Log-rolling " is an epithet applied to our congressional 
 practice where congressmen agree to support one another's 
 proposed appropriation bills.
 
 37° BUDGET/! RY LEGISLATION. 
 
 own measures, but to block any otber measure — finan- 
 cial or otherwise — of which it disapproved. Moreover, 
 the hollowness of its plea that a sing^le committee could 
 better oversee expenditure as a whole than could a num- 
 ber of committees was disclosed by the fact that the 
 work of preparing the various appropriation bills was 
 turned over by it to small sub-conmiittees of its own 
 members. 1 Even on the score of economy the English 
 system is perhaps not so complete a preventive of ex- 
 travagance as is sometimes imagined. The meaning 
 utterances of more than one Chancellor of the Ex- 
 chequer indicate that, notwithstanding the cabinet's 
 prerogative of proposing new or increased expenditure, 
 individual members may bring such pressure to bear on 
 members of the cabinet that the Chancellor of the Ex- 
 chequer is forced to accede to such demands, and to 
 foist them upon the ofKcial Estimates. 
 
 Had our federal finances been managed for the last 
 thirty years solely with a view to budgetary equilibrium, 
 it must be granted that the successive series of surpluses 
 and deficits realized would prove its condemnation. But 
 it must be remembered that the federal finances have had 
 to regard, whether wisely or not. the maintenance of our 
 system of protection. The double task of maintaining 
 
 * " How do they [i.e. the Appropriations Committeel audit the 
 accounts of this country ? Why, they appoint sub-committees, 
 each of which has charge of a particular bill. And how many 
 of the g-entlemen, outside the sub-committees, have you seen 
 discussing this audit in the face and eyes of the House of Repre- 
 sentatives ? . . . In other words, these gentlemen of the 
 Appropriations Committee do this very thing which they think 
 the House of Representatives cannot be trusted to do: they 
 parcel out the auditing to small committees of their own. . . . 
 Hence I say there is an immense advantage in having this 
 House thoroughly informed as to the affairs of the country by 
 increasing the number of men who will know something about 
 these subjects." — T. B. Reed, Cong. Record, Dec. 15, 1885, p. 
 199.
 
 AMERICAN AND ENGLISH BUDGETS. 37 I 
 
 that system inviolate and, through the same means, of 
 providing requisite revenue has stood in the way of 
 securing equiUbrium. Moreover, it may prove that, what- 
 ever our future tariff poHcy is to be, we shall be chary 
 about frequent changes in the sources of federal revenue. 
 If this happens to be the case, the establishment of an- 
 nual equilibrium of income and outlay may have to be 
 given up, and plans devised for regularly meeting def- 
 icits with temporary loans,^ and disposing of surpluses 
 by applying them to the reduction of the national debt. 
 At all events we may easily congratulate ourselves 
 upon the superiority of our financial system over the 
 French system. There the Estimates are made as m 
 England by the cabinet ministers. They are then 
 turned over to the tender mercies of the Commission du 
 budget. This body, consisting of thirty-three members 
 of the Chamber of Deputies, does not hesitate to reshape 
 the Estimates as it will, generally by adding large addi- 
 tional appropriations. When the appropriations have 
 been sanctioned by both Senate and the Chamber of 
 Deputies, they betray nothing less than a hodge-podge 
 of ill-digested measures whose only predictable outcome 
 is an annual deficit. Permanent appropriations do not 
 exist in France, so that even the interest on the public 
 debt is provided for only from year to year by legislative 
 act. Credits accorded various departments do not lapse, 
 and the final accounts of any financial year are not ren- 
 dered until several years have passed. In striking con- 
 trast to the French method of voting all appropriations 
 annually is the Septennate in Germany, where military 
 
 *The Act of June 13, 1898, empowers the Treasury to emit 
 certificates of indebtedness, not to exceed $100,000,000 in the 
 aggregate, and maturing not later than one year from their 
 issuance, in order to meet a temporary deficit.
 
 372 BUDGETARY LEGJSLylTION. 
 
 appropriations are voted for a term of seven years at a 
 time. If the French plan is bad policy financially, the 
 German plan betrays an equally weak legislative control 
 over the public purse. 
 
 State and City Budgets. — Obviously, no complete 
 outline of the budgetary legislation of American 
 commonwealths and cities could be attempted which 
 faltered at an infinitude of detail. But of the state 
 legislatures it may be said in general that they 
 shadow forth, though rather dimly, the same financial 
 procedure as is found in Congress.^ The financial 
 powers of the state legislatures have been curbed 
 by repeated constitutional amendments, limiting the 
 duration of their sessions, the use they may make of 
 the state credit, and frequently the rates of taxation 
 they may impose. In the states, the State Auditor 
 or the State Comptroller, occasionally the Secretary 
 of State, prepares what corresponds to the Estimates 
 laid before Congress by the Secretary of the Treasury. 
 These Estimates furnish the framework upon which the 
 financial measures of the various states are based by 
 the several financial committees. Not uncommonly 
 the system of permanent appri^priations exists which de- 
 termines, as it were, automatically, the fraction of the 
 total revenue which must be assigned to each specific 
 object. It is significant, too, of the growing financial 
 powerlessness of the legislatures, that it is in the older 
 states chiefly where this standing allocation of certain 
 fixed portions of the total revenue to particular purposes 
 prevails. Though the various departments may not be able 
 to draw upon the public money until the yearly sanction 
 of the legislature has been accorded, still that sanction is 
 
 * See Annals of the American Academy for i8q6, art. by 
 E. L. Bogart, Financial Procedure in the State Legislatures.
 
 STATE AND CITY BUDGETS. 373 
 
 only the registration of the legitimacy of the public 
 spending, rather than a substantial exercise of an un- 
 hampered legislative right to vote supply. Moreover, 
 when the state legislatures do exercise their residual 
 power to appropriate money for other purposes, these 
 bills or even their objectionable sections may be vetoed 
 by the governor. In American cities the tendency has 
 of late prevailed to take away from councils or boards 
 of aldermen the fixation of expenditure, and to intrust 
 this power to commissions or small bodies of adminis- 
 trative ofhcials. Thus in New York City (even be- 
 fore the adoption of the new charter) the Board of Esti- 
 mate and Apportionment exercised the real power of de- 
 ciding upon appropriations.^ Evidently the whole 
 business of city government in the United States is in 
 such a chaotic state of transition that it is almost im- 
 possible to portray the typical budgetary procedure of 
 the American city. 
 
 * See E. D. Durand, Finances of New York City; Municipal 
 Affairs for June 1898, art. by A. W. Foote, Uniformity in 
 Municipal Finance ; Municipal Affairs, Dec. 1900, art. by M. R. 
 Maltbie, Cost of Government in City and State; also art. by 
 Frederick R. Clow in Publications of the American Economic 
 Association, 1901, City Finances in the United States.
 
 APPENDIX A. 
 
 The war revenue act approved June 13, 1898, intro- 
 duced the following changes in our system of federal 
 finance : 
 
 (a) A duty of ten cents per pound was imposed upon 
 all tea imported into the United States. Prior to this 
 act tea had been admitted free of duty. 
 
 (b) The existing Internal Revenue system was altered ; 
 first, by increasing the rates of taxation upon certain 
 articles, notably tobacco, cigars, and fermented spirits ; 
 second, by charging the Internal Revenue Department 
 with the assessment and collection of a number of en- 
 tirely new taxes. The tax on manufactured tobacco and 
 snuff was raised to twelve cents per pound. The tax on 
 cigars (weighing over three pounds per thousand) was 
 raised from three dollars to three dollars and sixty cents 
 per thousand. Cigarettes weighing over three pounds 
 per thousand were taxed at the higher rate, while 
 both cigars and cigarettes of lesser weight were taxed at 
 a lower rate — one dollar per thousand for cigars, and 
 one dollar and a half per thousand for cigarettes. Be- 
 sides these taxes certain minor taxes were imposed upon 
 dealers in tobacco. 
 
 The tax on fermented spirits — beer, ale, porter, and 
 the like — was doubled and stands at two dollars per 
 barrel (of thirty-one gallons), though a discount of 7^ 
 per cent, is allowed on the purchase of the stamps used 
 to indicate the payment of the tax. 
 
 (c) The distinctly new taxes created by the act may 
 be classed as follows : 
 
 375
 
 376 APPENDIX A. 
 
 1. Taxes on certain commercial transactions or the 
 papers and documents used therein. 
 
 2. Taxes on certain occupations and on specified kinds 
 of business enterprises. 
 
 3. Taxes upon legacies and distributive shares of per- 
 sonal property. 
 
 4. Taxes on miscellaneous products. 
 
 Under the first division fall the taxes imposed upon 
 the issue of certificates of stock or bonded indebtedness 
 by any company or association ; on all sales of stocks, 
 bonds, and other securities ; on bank checks, bills of ex- 
 change, deeds conveying realty, custom-house entries, 
 insurance policies, leases, mortgages, passage tickets by 
 foreign-bound steamers, as v^ell as on telegraph and tele- 
 phone messages, and seats sold in parlor-cars or sleep- 
 ing-cars. 
 
 Under the second division are included the annual 
 taxes imposed on bankers, brokers, the proprietor of any 
 theatre, bowling-alley, billiard-hall, or circus. Here also 
 we must class the taxes imposed upon the refiners of 
 sugar and petroleum. These last-mentioned industries 
 are taxed not an annual sum outright, but each a per- 
 centage {\ of I per cent.) of its gross receipts in excess of 
 $250,000. 
 
 In the third sub-division will fall the tax imposed upon 
 legacies and distributive shares of personal property. 
 Such taxes are in addition to similar taxes imposed by 
 the various commonwealths. Where the total value of the 
 property passing by inheritance is under$io,ooo, or where 
 the property (whatever its amount) passes directly from 
 husband to wife, or from wife to husband, no tax is im- 
 posed ; where the value of the interest involved is of 
 greater amount than $10,000 the tax imposed is progres- 
 sive, rising according as the inheritor is more distantly 
 related to the deceased owner, and rising also as the
 
 APPENDIX A. 377 
 
 hereditary interest involved exceeds the exempted mini- 
 mum of $10,000. The lowest rate of tax is seventy-five 
 cents on each $100, — this, where the estate does not ex- 
 ceed $25,000 and the relationship between inheritor and 
 decedent is closest. The maximum rate of tax is $15 on 
 each $100, — this where the property passing by will or 
 under the intestate laws exceeds $1,000,000, and the tie 
 of blood relationship is most distant, or where the bene- 
 ficiary is a stranger in blood or a body politic or corpora- 
 tion. 
 
 Under the last sub-division must fall the taxes im- 
 posed on a variety of miscellaneous articles, — mixed 
 flour, medicinal and proprietary articles, perfumery and 
 cosmetics, sparkling wines bottled, and chewing gum. 
 
 (d) The relative importance of these various taxes 
 may be judged from the following estimate made by 
 Mr. Dingley of their probable yield during the present 
 fiscal year (1898-9) : 
 
 Fermented liquors $58,906,120 
 
 Tobacco and snuff 43,840,560 
 
 Cigars and cigarettes 17,340,382 
 
 Manufactures and dealers in tobacco 307,102 
 
 Bankers 2,394,600 
 
 Brokers (money and pawn) 1,500,000 
 
 Brokers (commercial) 213,094 
 
 Theatres and the like 1,820,447 
 
 Bowling-alleys and the like 166,967 
 
 Sales of bonds, stocks, and merchandise 10,000,000 
 
 Bank checks 5,000,000 
 
 Bills of exchange (inland) 1,500,000 
 
 Bills of exchange (foreign) 500,000 
 
 Express and freight bills of lading 10,000,000 
 
 Life insurance policies • • 1,226.323 
 
 Mortgages • 2,041,599 
 
 AH other articles in Schedule B (drugs of various 
 
 kinds) 18,000.000 
 
 Proprietary medicines and perfumery 15,000,000 
 
 Chewing gum ■ • 1,000,000 
 
 Legacies and successions 9.275.475 
 
 Duty on tea 10,000,000 
 
 $210,033,069
 
 378 APPENDIX A. 
 
 The net addition to the receipts of the Treasury from 
 the Act of June 13, 1898, was estimated by Mr. Dingley 
 at $148,481,306. 
 
 (r) The Act of June 13, 1898, besides enhancing or 
 creating the taxes aforesaid, empowered the Secretary 
 of the Treasury to borrow $400,000,000 for carr} ing on 
 the war. The bonds issued bear interest at 3 per cent, 
 and are redeemable at the pleasure of the United States 
 ten years after their issue, and are payable twenty years 
 after their issue. Besides issuing these bonds or such 
 part thereof as is necessary, the Secretary of the Treas- 
 ury is empowered by this act to borrow from time to 
 time an amount not in excess of $100,000,000, and to 
 issue therefor three per cent, certificates of indebtedness 
 maturing not later than one year after the date of their 
 issue. This provision confers upon the Treasury the 
 power to meet a current deficit of moderate dimensions. 
 
 ",(/) Lastly, the law in question provides for a minimum 
 monthly coinage of the seigniorage, or gain, arising under 
 the purchases of silver made in accordance with the Act 
 of July 14, 1890. The bullion so transformed into stan- 
 dard silver dollars becomes analogous to the silver dol- 
 lars already existing. They may be paid out to any 
 creditor who will receive them of the government, but 
 inasmuch as the number of such coins in active circula- 
 tion is limited by the commercial uses for such silver 
 coins, it would seem that the greater part of such silver 
 when coined will remain under present conditions in the 
 Treasury vaults.
 
 INDEX. 
 
 AIDAMS. H. C, on commercial con- 
 stitutionalism, II ^ on the po- 
 litica aspect of state railroads, 263= 
 
 Adequacy of revenue. 92= 
 
 American Revolution, financial as- 
 pect of. 23= 
 
 Annuities 303, 
 
 Appropriations, how prepared, 357; 
 when permanent, 357; available 
 iov two years, 359; in Great Brit- 
 ain. 363, 364 ; see also Financial 
 Legislation. 
 
 Assessments, special, 90. 
 
 Audit by Congress, 359' by the 
 Auditor-General. 
 
 |3anks of the United States 318: 
 O the BanK War, 31S. 
 
 Banks, Na':iona!, origin of, 321; de- 
 posits in 324, io*eE of 333. 
 
 Base, of taxation, 56. 
 
 Bastable, C. F. , on pubic lands, 
 209; on public debts 2S9. 
 
 Becket, Thomas, suggests Scutage. 
 
 Belgium, taxes in, 4. 
 
 Berlin, income of, 54. 
 
 Bimetallism, 339 
 
 Bonds, in aid of railroads 222; sale 
 01, 331; deposit of, 333. 
 
 Borrowing, public, in 1812, 133* see 
 Public Credit. 
 
 Bryce, James, on state exptac'.itures, 
 31, 32-; on constitutions 167. 
 
 Budget, definition of, 344; origin of; 
 345; in England, 346; in France, 
 347> 371 > ir> Prus-.ia, 347; in the 
 United States, 347: in Great Brit- 
 am, 361, in the commonwealths, 
 362. 
 
 Buxton. Sydney, on the English in- 
 come tax, 184. 
 
 CABINET government, contrast to 
 congressional, 366, 368, 370. 
 Canard, on the diffusion of taxation, 
 
 ^7- . . 
 Capitalization, its bearing on the 
 
 shifting of taxes, 78. 
 
 Certificates, of deposit, 325; silver 
 certificates, 335. 
 
 Charity, public expenditure upon, 47. 
 
 Charlemagne, his Capitzilaries , 16. 
 
 Clay, Henry, on protection, 165. 
 
 Cleveland, Grover, tariff message of, 
 163. 
 
 Colbert, on ihe distribution of taxa- 
 tion, 80. 
 
 Collectivism, its theory of taxation, 6. 
 
 Committee system, of Congress, see 
 Financial Legislation. 
 
 Congress, cost of, 39. 
 
 Congressional government, its na- 
 ture, 367, 369. 
 
 Constitutionalism, its growth, 23. 
 
 Cooley, T. C, on taxation, 56; on 
 direct taxes, 203. 
 
 Customs duties, 109, 153; origin of, 
 155: colonial customs duties, 156; 
 canons of, 166, 174; incidence of, 
 167. 172, 173; uncertainty in rates, 
 167 : specific and ad valorem, 169, 
 178; on ravvr material, 169, 177; 
 variation in their yield, 17 1 ; in- 
 direct cost of, 173, 174; superior- 
 itv ; a revenue tariff, 175; framing 
 a revenue tariff, 176; on sugar, 
 tea coffee, 177; future tariffs, 
 180; pavable in gold, 332. 
 
 D 
 
 ,iBTS, public, see Public Debts. 
 Deficits from public industrial 
 ventures. 219: of revenue, their 
 effect on the gold reserve, 337. 
 
 379
 
 38o 
 
 INDEX. 
 
 Diffusion, of taxation, see Inci- 
 dence. 
 
 Distilled spirits, yield of taxes on, 
 139; reduction of taxes on, 141; 
 increase of taxes on, 142. 
 
 Distribution of taxation, 79 sq. ; the 
 confiscatory scheme, 80, 81; the 
 progressive scheme, 80 ; the pro- 
 portional scheme, 80. 
 
 Domesday book, 19. 
 
 Duties, see Customs Duties. 
 
 ECONOMICS, relation to public 
 finance, 6. 
 Education, expenditure upon, 45, 
 
 46, 51- 
 
 England, taxes in, 5; expenditure 
 on ;ducation, 51 ; income tax in, 
 183, 185. 
 
 English Revolution, of 1688, n, 
 12. 
 
 Equalization, boards of, 1 1 7. 
 
 Equilibrium, of income and expendi- 
 ture, 370. 
 
 Exchequer, origin of, 19. 
 
 Excises, see Internal Revenue. 
 
 Expenditure, calculation of, 9; theo- 
 ries of, 25, 26; extension of, 27, 
 28; Austrian theory of, 29, note ; 
 its increase, 30; federal and local, 
 34; municipal, 37; analysis of 
 federal, 38; naval, 40; state and 
 local, 43, 45 ; state and municipal, 
 48; comparison of American and 
 European, 49; distribution of, 50; 
 upon defence, 50; on pensions, 
 51 ; on interest charges, 51 ; on 
 education, 51 , comparison of 
 federal, state and local, 52. 
 
 FACTORY system, 8; its introduc- 
 tion into the United States, 
 161. 
 Ferm, 19. 
 
 Field, Mr. Justice, income tax opin- 
 ion, 206. 
 Finance, definition, i ; derivation of 
 the word, 2, ttote; practical bear- 
 ings, 4; theoretical bearings, 5; 
 relation to Law and Economics, 
 6; to Ethics, 7; in feudal times, 
 
 15; early municipal, 16; Nor- 
 man, 18. 
 
 Financial constitutionalism, in Eng- 
 land, 18. 
 
 Financial legislation, in Great Britain, 
 the estimates, 360, 364; their sub- 
 divisions, 360; the Committee of 
 Supply, 361; the Committee of 
 Ways and Means, 361 ; in the 
 House of Lords, 363. 
 
 Financial legislation, in the United 
 States, the estimates, 348, 349, 
 350; sinking fund estimates, 350; 
 Report of the Secretary of the 
 Treasury, 350; financial commit- 
 tees of Congress, 35 1; their in- 
 crease in number, 352; their 
 growth in power, 352; their 
 special privileges, 353 ; the Com- 
 mittee on Rules, 354; the Ways 
 and Means Committee, 355 ; the 
 Appropriations Committee, 356; 
 appropriation bills, 356; in the 
 Senate, 357, 358. 
 
 Financial systems, of Greece, 12, 13; 
 of Rome, 14, 15. 
 
 Fiske, John, on government, 1 ; on 
 taxes, 55. 
 
 France, taxes in, 5 ; expenditure on 
 education, 51. 
 
 French Revolution, 24. 
 
 Fuller, Chief Justice, opinion in the 
 income tax case, 204. 
 
 Franchises, 268, 269; acquisition of, 
 271 ; risk involved in, 280; dura- 
 tion of, 280. 
 
 GAS supply, 221, 227; in Philadel- 
 phia, 277, 279; price of, 283. 
 George, Henry, on taxation, 80, 81, 
 
 82; his proposal, 83, 84. 
 Germany, expenditure on education, 
 
 SI- 
 Gladstone, on direct and indirect 
 
 taxation. loi. 
 Gold standard, its conditions, 340, 
 
 342; parity of currency with, 
 
 340. 
 Granger agitation, see Railroads. 
 Greenbacks, 326, 327, 328; proposed 
 
 conversion of, 338.
 
 INDEX. 
 
 381 
 
 HAMILTON, Alexander, on ex- 
 cises, 131 ; Report on Manu- 
 factures, 158; on protection, 165. 
 Hanseatic league, 17. 
 von Helferich, on the distribution of 
 
 taxation, 90. 
 Hill, Rowland, on postal charges, 
 
 216. 
 Hume, David, on taxation, 62. 
 
 INCIDENCE of taxation, 63; con- 
 centration theories of, 64; dif- 
 fusion theories of, 65, 66, 68; 
 definitive theory of, 69 ; on various 
 incomes, 75; on monopoly in- 
 comes, 77; on wages, 77. 
 
 Income, sources of public, 53 ; con- 
 tractual, 54; net income as source 
 of taxation, 58; relation to pro- 
 gressive taxation, 87; see Public 
 Income. 
 
 Income taxes, 79; definition of in- 
 come, 181, 182; in England, 183, 
 185; general characteristics of, 
 186; equalizing effects, 188; elas- 
 ticity .of, 188; defects of, 189: on 
 different classes of incomes, 190; 
 in the United States, 191 ; income 
 tax of 1894, 192; declared un- 
 constitutional, 195; criticism of, 
 197; the decision of the Supreme 
 Court, 199, sq.\ annual fixation of 
 the rate in Great Britain, 362. 
 
 Independent Treasury, 319. 
 
 Interest, payment of, 41, 47; on 
 public debts, 51. 
 
 Internal improvements, 37« 
 
 JACKSON, Andrew, opposes the 
 Bank, 318. 
 
 LAW, relation to public finance, 6. 
 Leroy-Beaulieu, on taxation in 
 Europe, 4. 
 Liquor, taxes on, 136, 143, sq. 
 Liturgies, 13. 
 Locke, John, on the incidence of 
 
 taxation, 65. 
 Luce, Robert, on taxation in the 
 United States, 4. 
 
 MADISON, James, on direct taxes, 
 204. 
 
 Magna Chart a, 21. 
 
 Maysville-Road Bill, 235. 
 
 Mill, J. S., on direct and indirect 
 taxes, 99, 107. 
 
 Monopolies, natural, 265, 267; ar- 
 gument for public ownership of, 
 270; argument against public 
 ownership, 271, 272; political 
 aspect of, 273; prices under both 
 systems, 275-278; cost of opera- 
 tion, 279; experimentation in, 
 281 ; when to be undertaken by 
 governments, 282; prices charged 
 by, 282, 283. 
 
 Mortgages, taxation of, 121, 124. 
 
 Municipal ownership, see Monop- 
 olies. 
 
 
 
 EJECT, of taxation, 56. 
 
 Olney, Richard, on the income 
 tax, 203. 
 
 PALEY, on the distribution of tax- 
 ation, 87. 
 Paris, public income of, 54. 
 Pensions, 41, 42, 43, 51. 
 Personalty, 116, 118; escape from 
 taxation, 1 20, 121 ; value of, in 
 the United States, 122; local 
 taxes on, 125. 
 Physiocrats, their theory of taxation, 
 
 95, 98. 
 
 Post - office, 214, 215 ; postal 
 charges, 215 ; classes of mail 
 matter, 217 ; the postal deficit, 
 217, 218 ; Adam Smith on, 217 ; 
 lower rates, 219. 
 
 Public credit, II ; restrictions on, 
 48 ; see Public Debts. 
 
 Public Debts, repudiation of, I08 ; 
 why contracted, 286 ; peculiarities 
 of, 288, 289, 290 ; when a burden 
 on taxpayers, 291, 292 ; low in- 
 terest on, 293 ; an alternative to 
 taxes, 293 ; undue resort to, 293, 
 294 ; effects of, 295 ; industry af- 
 fected by, 298 ; political and 
 social influences of, 299, 300, 301 ; 
 technical handling of, 301 ; classi-
 
 382 
 
 INDEX. 
 
 fication of, 302 ; funded and un- 
 funded, 302 ; iierpetual, 303 ; 
 non-interest bearing, 304 ; nego- 
 tiation of, 305 ; interest offered, 
 306 ; when sold at par, 306 ; 
 popular loans, 308 ; taxation of, 
 309 ; conversion of, 309 ; refund- 
 ing of, 309; extinction of, 310 ; 
 arguments for, 312, 313; sinking 
 funds, 313. 
 
 Public Income, sources of, 207, 209 ; 
 quasi-economic, 207 ; from uublic 
 lands, 211; from public industries, 
 212. 
 
 Puljlic Lands, 207, 209. 
 
 Public Works, 47. 
 
 ProL'ression, a norm of taxation, 80, 
 86 si/., 88. 
 
 Proportion, a norm of taxation, 80, 
 89, 90. 
 
 RAILROADS, built by federal aid, 
 222, 236 ; their problems, 
 224 ; early notions about, 226 ; 
 their development, 227 ; tend to 
 consolidate, 22S ; monopoly rates, 
 229 ; rates based on lolls, 230, 
 231 ; rates based on what the 
 traffic will bear, 232 ; freight 
 classifications, 232 ; fixing of 
 rates, 233 ; in France, 234 ; in 
 Australia, 234 ; in Prussia, 234 ; 
 state regulation of, 2j5 ; construc- 
 tion by the state, 236 ; corporate 
 construction, 236 ; the Granger 
 agitation, 237 ; court decisions 
 affecting, 238 ; commissions, 238 ; 
 discrimination practised, 238, 
 243 ; the Cullom Committee on, 
 239 ; the Interstate Commerce 
 Commission, 239, 241 ; long and 
 short haul clause, 240 ; anti-pool- 
 ing clause, 241 : federal acquisi- 
 tion of, 242 ; competitive waste 
 by, 245 ; extortion, 247 ; com- 
 parison of American and conti- 
 nental rates, 248 ; limitation of 
 rates and dividends, 250 ; pool- 
 ing' 253, 256 ; competitive dis- 
 location of rates, 254 ; fluctua- 
 tions in rates, 255 ; political 
 
 aspects of, 258, 259 ; financial 
 aspect of state railroads, 262. 
 
 Real estate, valuation of for taxa- 
 tion, 116; where taxable, liS; 
 value of, in the United Stales, 122 ; 
 taxation of, I24. 
 
 Refunding, see Public Debts. 
 
 Rent, taxation of, 81. 
 
 Repudiation oi public debts, 290, 
 291. 
 
 Resumption Act, 328, 331, 341. 
 
 Ricardo, on the incidence of taxes, 
 66. 
 
 Ritchie, D.G., on the test of pro- 
 posed legislation, 27. 
 
 Roscher, on the shifting of taxation 
 69. 
 
 ^ALARIKS, public, 39. 
 
 O Sent age, 20, 21. 
 
 Seigniorage, 221. 
 
 Seiigman, E. R. A., on personal 
 property, 127. 
 
 Shaw, Albert, on public ownership 
 of monopolies, 273. 
 
 Shearman, T. G., on the taxation of 
 jiersonal ])roperty, 122 ; on the 
 tariff duty en sugar, 174. 
 
 Sherman, John, on income taxes, 
 I9S. 
 
 Shifting of taxation, 64 ; under mo- 
 nopoly conditions, 68-72 ; under 
 competitive conditions, 69 ; de- 
 pendent on restriction of supply 
 
 74- 
 Ship Writs, 22. 
 Sidgwick, II., on land ownership, 
 
 82. 
 Sinking Funds, 350 ; see Public 
 
 Debts. 
 Single tax, theory of, 79, 81, 82, 
 
 S3. 93, 97. 
 
 Socialism, theory of taxation, 6. 
 
 Smith, Adam, on the incidence of 
 taxation, 66 ; on customs duties, 
 179 ; on public lands, 211 ; on the 
 post-office, 217; on public high- 
 ways, 235 ; n public debts, 289. 
 
 Smith, Sydney, on taxation, 94. 
 
 S])caker, of the 1 louse of Rejiresen- 
 tatives, his position, 365-370.
 
 INDEX. 
 
 3^3 
 
 Stephen, J, F., on the tests of pro- 
 posed legislation, 28. 
 
 Stoppage at the source, 186, 189, 
 198. 
 
 Stubbs, William, on feudal taxation, 
 
 19 ; on taxation in relation to 
 self-government, 21. 
 
 Subject, of taxation, 56. 
 
 Supreme Court, decisions of, 238, 
 
 239. 
 
 '^Pariff, 155, 157. 161 ; for rev- 
 1 enue, 161, 17S ; reduction of, 
 163; contest over, 164; the 
 McKinley, 164, 165 ; the Wil- 
 son, 166 ; the Dingley, 166 ; 
 future tariffs, 180 ; see also Cus- l 
 toms Duties. 
 
 Taussig, F. W., on revenue and 
 protective tariffs, 1 76. 
 
 Taxation, 10 ; popular control over, 
 
 20 ; extension of control over, 22 ; 
 source of public income, 53 ; sub- 
 ject, object, and base of, 56 ; limits 
 of, 57 ; fallacies concerning, 59 ; 
 incidence of, 63, 69 ; equitable dis- 
 tribution of, 79 ; progressive, 80, 
 86 ; proportional, 80, 89, 90 ; 
 politico-social theory of, 86 ; de- 
 gressive, 89 ; practical efhciency 
 of, 92 ; inequality of, under single 
 tax system, 95; colonial, 114; 
 valuation of real estate for, I16, 
 117 ; assessment for, 1 18 ; of per- 
 sonal property, 1 18, 120, 12 1 ; of 
 general property, 1 19 ; of chattels, 
 J28 ; ^3Xians_aL-14=^ ; canons of 
 customs taxation, 166, sq. ; of in- 
 comes, see Income Taxes. 
 
 - axes, early English, lo ; early 
 municipal, 18 ; nature of, 55, 57 ; 
 when paid out of capital, 58 ; a 
 constituent of the expenses of 
 production, 7 1 ; when paid by the 
 consumer, 72 ; by the producer, 
 74; on rent, 81, 82; on spec- 
 ulative gains, 85 ; on polls, 89 ; 
 indirect, 97, 98, 99. 1°° ! single 
 
 tax system, 97 ; direct, 97-100 ; 
 constitution of a tax system, 98, 
 108 ; increase of indirect, 102 ; 
 cost of collecting, 103 ; effects on 
 industry, 104, 148 ; distribution 
 of, 105 ; on luxuries^ 106, I47 ; 
 political effects .of, 107 ;. on gen- 
 eral property, 109, III, 113, 115 ; 
 
 on corporations, 109, 126, 127 ; 
 on inheritances, 109, 128, 129 ; 
 on land, 113 ; in Ohio, 114, 123 ; 
 on distilled spirits, 132, sq.; on 
 manufactures, 134 ", on tobacco, 
 144 ; effect of, on public morality, 
 150 ; see also Inco?ne Taxes. 
 Telegraphs, state system in England, 
 
 264. 
 Thiers, on the diffusion of taxation, 
 
 66. 
 Tobacco, tax on, 114; taxation of, 
 
 in different countries, I45. 
 Treasury, administration of, 315, 
 316; the federal, 316, 317 ; its 
 history, 318, 319; specie payments 
 to and by, 320 ; relation to the na- 
 tional banks, 321 ; officers of, 321, 
 322 ; fiscal functions of, 322, 323 ; 
 effect of its disbursements, 323 ; 
 ' banking functions of, 324, 325 ; 
 issue of notes, 327, 329 ; gold 
 reserve of, 331, 332 ; redemption 
 of notes by, 333 ; demand liabil- 
 ities of, 335, 336 ; combination of 
 bank assets and fiscal assets, 337 ; 
 interpretation of " coin," 342. 
 Treasury notes, 329 ; their similarity 
 to the greenbacks, 330. 
 
 WELLS, D. A., on the diffusion 
 of taxation, 66. 
 Wagner, Adolph, on railroad rates, 
 
 251. 
 Water, supply of, 214, 220, 221, 267, 
 
 277 ; prices of, 283. 
 War-chests, 285 ; objections to, 287. 
 \\Tiiskey Insurrection, 132. 
 White, Mr. Justice, opinion in the 
 
 income tax case.
 
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