been thrown on the prophecy because the great Napoleonic War debt did not ruin England.

Although the sentence is an introductory obiter dictum, it seems as if in our time the length of run has been sufficient to bring the prophecy very near fulfilment. Economic ruin admits of varied interpretations, but most of them apply at present to the greater part of Europe, and most of the ruin is to be ascribed. to the piling up of debt. But for the debt the nations could not have carried on so long in war. It is the burden of the debt that makes it so difficult to carry on in peace.

The "pretty uniform" progress of the debts of Europe has been marked by two methods. "Nations, like private men, have generally begun to borrow upon what may be called personal credit, without assigning or mortgaging any particular fund for the payment of the debt; and when this resource has failed them, they have gone on to borrow upon assignments or mortgages of particular funds." When the mortgaging method is resorted to it may be in one of two ways. Sometimes the assignment of the mortgaged revenue is for a short time—a year or a few years; sometimes for perpetuity. In the first case, the fund was supposed to pay within a limited time both principal and interest. In the second case, the fund was sufficient only to pay the interest -or a perpetual annuity equivalent to the interest-the Government being at liberty to redeem the annuity at any time by paying back the principal. When money was raised in the first way it was said to be raised by "the method of anticipation"; when in the other by "perpetual funding or, more shortly, funding."

There follows a very graphic history of the progress in England of the method of anticipation-written in the grand realistic antiquarian manner, with just the odour of irony in quoting the official accounts down to 1d., d. and 3d.

The particular mortgages were succeeded by the first general mortgage of several different taxes. The first general mortgage was succeeded by the second, and so on up to the sixth. "The sum borrowed on the sixth was £1,296,552 98. 113d." More and more taxes were rendered perpetual, and accumulated into another common fund, called the general fund, for the payment of certain annuities, the whole sum, about three-quarters of a million, being quoted down to 10 d.

"In consequence of these Acts, the greater part of the taxes, which before had been anticipated only for a short term of years, were rendered perpetual as a fund for paying not the capital, but

the interest only, of the money which had been borrowed upon them by different anticipations."

Had the method of anticipation been followed strictly, the debts borrowed to meet extraordinary expenses would have been extinguished in short periods and the corresponding revenues liberated-if only the Governments had paid attention to not overloading and not anticipating new debt before the old was repaid. "But the greater part of European nations have been incapable of those attentions." They have overloaded even on the first anticipation and have anticipated a second and a third time before the expiration of first anticipation.

The fund derived from the anticipation of taxation became in time no more than sufficient to pay the interest, leaving nothing for the extinction of the principal. "Such improvident anticipations necessarily gave birth to the ruinous system of perpetual funding."

When people have once become accustomed to this ruinous practice, it has been universally preferred to the simple and safe method of definite anticipation. "To relieve the present exigency is always the object which principally interests those immediately concerned in the administration of public affairs. The future liberation of the revenue they leave to posterity."

The outstanding merit of this application of the historical method is that it shows the intimate connection of public debt and taxation. Every increase of public debt means, some time or other, an increase of taxation or a lessening of the revenue available for other services.

II. SINKING FUNDS.

Next follows the examination of the sinking-fund policy. Again the historical method is applied.

A sinking fund has two origins. On the return of peace the continuance of the war taxes, or of some of them, will yield a surplus revenue after meeting the ordinary expenses of the State. It may be observed in passing that Adam Smith, although showing that debt is always preferred to taxation, is not an "all-debt " man. He knew very well historically that war also increases taxes. Anticipation of old taxes is not enough. New taxes must be put on and also anticipated. There will always be some pretence, even after the ruinous system is in full swing, of making the tax system pay at least the interest.

If, then, the new taxes (with the old) yield a surplus of revenue, “it may perhaps be converted into a sinking fund for

paying off the debt." Perhaps. But even if there is a surplus, it will probably be altogether inadequate for paying off the debt "within any period during which it is likely that peace may continue." Adam Smith had not anticipated the discovery by Mr. Wilson that war could be abolished by a League of Nations.

The other real source of a sinking fund is a fall in the rate of interest. Here, also, the yield is meagre. "Hence the usual insufficiency of such funds."

Not only are sinking funds in general too small for the purpose, but in general, also, such as they are, they are liable to be raided. During the most profound peace various events occur which demand an extraordinary revenue. Every new tax is felt more or less. There is always some murmuring at new taxation, especially if the old taxation is already high. A momentary suspension of the payment of the debt occasions no murmurs or complaints. To borrow of the sinking fund is always an obvious and easy expedient for getting out of the present difficulty. The greater the debt, and the greater the need for a sinking fund, so much the more likely-so much the more certain-is it to be misapplied for extraordinary expenses in peace. "Nothing but the necessities of a new war.. .. can induce the people to submit to a new tax. Hence the usual misapplication of the sinking fund." There follows a detailed account of the history of the reduction of the public debt of Britain "since we had recourse to the ruinous system of perpetual funding," with the general result that the reduction has never borne any considerable proportion to the accumulation in time of war. Hence the meticulous irony of antiquarian is carried into the quotation of sums down to one-twelfth of a penny. "During the profound peace of eleven years little more than ten millions of debt was paid; during a war of seven years more than one hundred millions was contracted."

According to these figures, debt was paid off at the rate of less than a million a year in peace and accumulated at more than fourteen millions a year in war time. The corresponding proportion of our last years of peace to the years of war just concluded gives about one to four hundred.

"The new debt," he says, "which will probably be contracted before the end of the next campaign may perhaps be equal to all the old debt that has been paid off." Accordingly, he concludes that "it would be altogether chimerical to expect that the public debt should ever be completely discharged by any savings that are likely to be made from the ordinary revenue as it stands at present."

III. PUBLIC DEBT AS CAPITAL.

Adam Smith next examines the idea that the public funds of the different indebted nations of Europe, particularly those of England, are equivalent to an addition to the other capital of the country by means of which its trade is extended, its manufactures are multiplied, and its lands cultivated and improved much beyond what they could have been by that other capital only. He allows that the people who advanced their capital to the State get in return an annuity on the public funds, in most cases of more than equal value. The lenders to the State themselves suffer no loss. They can sell their war bonds or they can borrow on them. But the new capital which they acquire in this way must already have been in the country, and, being capital, must have been employed productively. This capital, from maintaining productive labour, has been turned into maintaining unproductive labour-from the productions of industry to the destructions of war.

The foundation of the argument is that in any country at any time there is only a limited amount of actual capital, and that if a large part is turned from peace industries to war industries a good deal must be destroyed. The capital used in peace reproduces itself-normally with some profit. The capital used in war does not reproduce itself-it must be maintained from other funds. If the war continues long enough and the expenses are met by borrowing, in time the greater part of the capital of the country will be wasted.

If, on the other hand, the expenses of the war are met out of taxes, a certain portion of the revenue of private people is only turned from maintaining one species of unproductive labour to maintaining another. Some part of what they pay in taxes, it is true, might have been used in providing new capital. Thus the public expense of war when defrayed from taxes no doubt hinders more or less the further accumulation of new capital, but it does not necessarily occasion the destruction of any actually existing capital.

The argument as thus develoned may be quoted to support the contention that Adam Smith was an "all-tax" man. But, as already shown, on his view the all-tax method is impossible, and, besides, he takes account of the fact that funding makes the

1 Compare the argument in Wealth of Nations, Bk. IV. Ch. I.: "In the midst of a most destructive foreign war the greater part of manufactures may flourish greatly; and on the contrary they may decline on the return of peace. They may flourish amidst the ruin of their country, and begin to decay on the return of its prosperity."

present taxation so much the lighter, and private revenues being so much less burdened, accumulation is so much less hindered. "Under the system of funding the frugality and industry of private people can more easily repair the breaches which the waste and extravagances of Government may occasionally make in the general capital of the society. Funding destroys more old capital, but gives less check to new accumulations."

It is, however, only during war that the funding system has these compensating advantages. If the people had been taxed more during the war, they would have saved so much less, no doubt; but after the war their revenues would have been liberated, and the rate of making new capital could have been increased.

If, indeed, war could have been met altogether out of taxes, it would not of necessity have meant the destruction of any old capitals, and peace would have occasioned the accumulation of many more new.

There is one further advantage of paying for war by taxes, namely, that wars would in general be more speedily concluded and less wantonly undertaken. On this text much might be written arising out of our latest war, and on the possibilities of avoiding or lessening the chances of war in the future. The application made by Adam Smith himself at first sight seems overstrained even for his own times. He says that the peace revenue of Great Britain amounts to ten millions a year. "If free and unmortgaged, it might be sufficient with proper management and without contracting a shilling of new debt to carry on the most vigorous war." Taken in connection with the general argument, apparently this means that the tax revenue, if freed from the burden of former funding, could pay the current expenses of war. It is remarkable that this apparently absurd estimate was confirmed during the latter period of the great Napoleonic War. Actually, but for the payment of interest on the debt during the last ten years the expenses of that great war were more than met out of the revenue.1

IV. THE RIGHT HAND PAYING THE LEFT IN THE INTEREST ON

THE PUBLIC DEBT.

"In the payment of the interest of the public debt, it has been said it is the right hand which pays the left. The money does

1 Gladstone showed that from 1806-1815 the annual tax revenue apart from the interest on the debt (including the pre-war debt) actually exceeded all the government expenditure (including the charge of the gigantic war) by £7,000,000. Financial Statements, p. 17.