National debt is so universal an institution that it has been described as the first stage of a nation towards civilization. A nation, so far as its finances are concerned, may be regarded as a corporate body or even as an individual. Like the one or the other it may borrow money at rates of interest, and with securities, general or special, proportionate to its resources, credit, and stability. But, while in this respect there are certain points of analogy between a state and an individual, there are important points of difference so far as the question of debt is concerned. A state, for example, may be regarded as imperishable, and its debt as a permanent institution which it is not bound to liquidate at any definite period, the interest, unless specially stipulated, being thus of the nature of transferrible permanent annuities. While an individual who borrows engages to pay interest to the lender personally, and to reimburse the entire debt within a certain date, a state may have an entirely different set of creditors every six months, and may make no stipulation whatever with regard to the principal. A state, moreover, is the sole judge of its own solvency, and is not only at liberty either to repudiate its debts or compound with its creditors, but even when perfectly solvent may materially alter the conditions on which it originally borrowed. These distinctions explain many of the peculiarities of national debts as contrasted with those of individuals,—though a nation, like an individual, may by reckless bad faith utterly destroy its credit and exhaust its borrowing powers.

A well-organized state ought to have within itself the means of meeting all its ordinary expenses; where this is not the case, either through insufficiency of resources or maladministration, and where borrowing is resorted to for what maybe regarded as current expenses, a state imperils, not only its credit, but, when any crisis occurs, its very existence; in illustration of this we need only refer to the cases of Turkey in Europe and some of the states of Central and South America. Even for meeting emergencies it is not always inevitable that a state should incur debt; its ordinary resources, from taxation or from state property, may so exceed its ordinary expenses as to enable it to accumulate a fund for extraordinary contingencies. This, it would seem, was a method commonly adopted in ancient states. The Athenians, for example, amassed 10,000 talents in the interval between the Persian and the Peloponnesian wars, and the Lacedaemonians are said to have done the same. At Susa and Ecbatana Alexander found a great treasure which had been accumulated by Cyrus. In the early days of Rome the revenue from certain sources was accumulated as a sacred treasure in the temple of Saturn; and we know that when Pompey left Italy he made the mistake of leaving behind him the public treasury, which fell into the hands of Caesar. In later times, also, the more prudent emperors were in the habit of amassing a hoard. We find that the method of accumulating reserves prevailed among some of the early French kings, even down to the time of Henry IV. This system has long prevailed in Prussia, and even at the present day exists to some extent in reconstituted Germany. Frederick II., when he ascended the throne, found in the treasury a sum of 8,700,000 thalers, and it is estimated that at his death he left behind him a hoard of from 60 to 70 million thalers. And similarly, in our own time, of the five milliards of indemnity paid by France as a result of the Franco-German War, 150 millions were set apart to reconstitute the traditional war-treasury. The German empire, apart from the individual states which comprise it, had in 1882 a debt of about <£24,000,000, while its invested funds amounted to £37,390,000, including a war-treasure of £6,000,000. The majority of economists disapprove of such an accumulation of funds by a state as a bad financial policy, maintaining that the remission of a proportionate amount of taxation would be much more for the real good of the nation. At the same time the possession of a moderate war-fund, it must be admitted, could not but give a state a great advantage in the case of a sudden war. In the case of England, apart from the private hoardings of a few sovereigns, there does not seem to have existed any deliberately accumulated public treasure; before the time of William and Mary English monarchs borrowed money occasionally from Jews and from the city of London, but emergencies were generally met by “benevolences” and increased imposts.

All modern states, it may be said, have been compelled to have recourse to loans, either to meet war expenses, to carry out great public undertakings, or to make up the recurrent deficits of a mismanaged revenue. Resources obtained in this way are what constitute national debt proper. Loans have been divided into forced and voluntary. Forced loans can, of course, only be raised within the bounds of the borrowing country; and, apart from the injustice which is sure to attend such an impost, it is always economically mischievous. The loans which the kings of England were wont to exact from the Jews were really of the character of forced loans, though the method has never been used in England in modern times so extensively as on the Continent. There the sum sought to be obtained in this way has never been anything like realized. In 1793, for example, a loan of this class was imposed in France, on the basis of income; and of the milliard (francs) which it was sought to raise only 100 millions were realized. In Austria and Spain, also, recourse has been had at various times to forced loans, but invariably with unsatisfactory results. Other methods of a more or less compulsory character have been and are made use of in various states for obtaining money, which, as they involve the payment of interest, may be regarded as of the nature of loans; but the debt incurred by such methods is comparatively insignificant, and some of the methods adopted are peculiarly irritating and mischievous. On the other hand, it has occasionally been attempted to raise voluntary loans by appeals to a nation’s patriotism; the method has been confined almost exclusively to France. After the revolutions of 1830 and 1848 appeals were thus made to the patriotism of French capitalists to buy 5 per cents direct from the Government at par, at a time when the French 5 per cents were selling at 80; but the results were quite insignificant. Even if the amount sought for by a Government could be obtained on the voluntary principle, the method itself is vicious, withdrawing as it does from the general working capital of the country a sum of serious dimensions. In short, the only economically sound method of meeting expenses which the ordinary resources of a state cannot meet is by borrowing in the open market on the most advantageous terms obtainable. On this normal method of borrowing, loans are divided into different categories, though there are really only two main classes, which may be designated perpetual and terminable. Borrowing in quasi-perpetuity has hitherto been the mode adopted by most states in the creation of the bulk of their debt. Not that any state ever borrows with the avowed intention of never paying off debts; but either no definite period for reimbursement is fixed, or the limit has been so extended as to be practically perpetual, or in actual practice the debt has been got rid of by the creation of another of equal amount under similar or slightly differing conditions as to interest. Of course a state is not bound to retain any part of its debt as a perpetual burden; it is at liberty to liquidate whenever it suits its convenience. This quasi-perpetuity of debt in the case of a state in a sound financial condition involves no hardship upon its creditors, who may at any moment realize their invested capital by selling their titles as creditors in the open money market, it may be at the price they paid, or it may be a little below or a little above it, according to the state of the market at the time. Loans, again, contracted on the terminable principle are of various classes; the chief of these are (1) life annuities, (2) terminable annuities, (3) loans repayable by instalments at certain intervals, (4) loans repayable entirely at a fixed date.

From the time of William III. life and terminable annuities have been a favourite mode in England either of borrowing money or of commuting, and thus gradually paying off, the existing funded debt. At first, and indeed until comparatively recent times, the system of life annuities resulted in serious loss to the country, owing to the calculation of the rate of annuity on too high a scale, a result arising from imperfect data on which to base estimates of the average duration of life. The system of life annuities was sometimes combined in England with that of perpetual annuities, or interest’on the permanent debt,—the life annuity forming a sort of additional inducement to lenders of limited means to invest their money. At one time the form of life annuities known as tontine was much in vogue both in England and France, the principle of the tontine being that the proceeds of the total amount invested by the contributors should be divided among the survivors, the last survivor receiving the whole interest or annuity. The results of this system were not, however, encouraging to the state. In England, at least, the terminable annuity has been a favourite mode of borrowing from the time of William III.; it has been generally conjoined with a low rate of permanent interest on the sum borrowed. Thus in 1700 the interest on the consolidated debt amounted to only <£260 000, while the terminable annuities payable amounted to £308,407. In 1780 a loan of 12 millions was raised at 4 per cent, at par, with the additional benefit of an annuity of £1, 16s. 3d. per cent, for eighty years. Even so late as the Crimean War in 1855, a loan of 16 millions at 3 per cent, at par was contracted, the contributors receiving in addition an annuity of 14s. 6d. per cent, for thirty years. Latterly, however, this beneficiary system has been abandoned, though the system of terminable annuities has received increased favour, especially as a means of reducing the funded debt. Of the total debt of England in 1882, upwards of 351 millions were in terminable annuities, while in 1883 the sum was only <£29,492,125.

The third method of contracting terminable loans, that of gradual repayment or amortization within a certain limit of years, has been a favourite one among certain nations, and specially commends itself to those whose credit is at a low ebb—as Turkey, Russia, and Egypt. When the final term of repayment is fixed upon, a calculation is easily made as to how much is to be paid half-yearly until the expiry of the term, so that at the end the whole, principal and interest, will have been paid. At first, of course, the amount paid will largely represent interest, but, as at each half-yearly drawing of the numbers of the bonds to be finally paid off the principal will be gradually reduced, there will be more and more money set free from interest for the reduction of the actual debt. This method, as we have said, has its advantages, and when conjoined with stipulations as to liberty of conversion to debt bearing a lower rate of interest than that originally offered, and when the bonds are not issued at a figure much below par, might be the most satisfactory method of raising money for a state under certain emergencies. What is known as the “Morgan loan” of France in 1870 was contracted on such conditions.

The last form of temporary loan, that repayable in bulk at a fixed date, is one which, when the sum is of considerable amount, is apt to be attended with serious disadvantages. The repayment may have to be made at a time when a state may not be in a position to meet it, and so to keep faith with its creditors may have to borrow at a higher rate in order to pay their claims. It has, however, worked well in the United States, most of the debt of which has been contracted on the principle of optional payment at the end of a short period, say five years, and compulsory payment at the end of a longer period, say twenty years. Thus the loan of 515 millions of dollars contracted in 1862 was issued on this principle, at 6 per cent., and so with other loans between that year and 1868. In European states, however, the risks of embarrassment are too great to permit of the application of this method on an ^tensive scale; and for loans of great amount the methods most likely to yield satisfactory results are loans bearing quasi-perpetual interest, or those repayable by instalments on the basis of half-yearly drawings within a certain period.

What are known as lottery loans are greatly favoured on the Continent, either as an independent means of raising money, or as an adjunct to any of the methods referred to above. These must not be confounded with the lottery pure and simple, in which the contributors run the risk of losing the whole of their investment. The lottery loan has been found to work well for small sums, when the interest is but little below what it would have been in an ordinary loan, and when the percentage thus set aside to form prizes of varying amounts forms but a small fraction of the whole interest payable. The principle is that each contributor to such a loan has a greater or less chance of drawing a prize of varying amount, over and above the repayment of his capital with interest.

What are known as exchequer bills and treasury bills may be regarded as loans payable at a fixed period of short duration, from three months upwards, and bearing very insignificant interest, even so low as ⅜ per cent. They are a useful means of raising money for immediate wants and for local loans, and form handy investments for capitalists who are reserving their funds for a special purpose. Exchequer bonds are simply a special form of the funded debt, to be paid off generally within a certain period of years.

There are two principal methods of issuing or effecting a loan. Either the state may appeal directly to capitalists and invite subscriptions, or it may delegate the negotiation to one or more bankers. The former method has been occasionally followed in France and Russia, but in practice it has been found to be attended with so many disadvantages to the borrowing state or city that the best financial authorities consider it unsound. The great banking-houses have such a command over the money-market that it is difficult to keep even a direct loan out of their hands. The majority of loans, therefore, are negotiated by one or more of these houses, and the name of Rothschild is familiar to every one in connexion with such transactions. By this method a borrowing state can assure itself of having the proceeds of the loan with the least possible delay and with the minimum of trouble. A loan may be issued at, above, or below par, though generally it is either at or below par,—“par” being the normal or theoretical price of a single share in the loan, the sum which the borrowing Government undertakes to pay back for each share on reimbursement, without discount or premium. Very generally, as an inducement to investors, a loan is offered at a greater or less discount, according to the credit of the borrowing Government. England, for example, may borrow at any time at par or at a mere fraction below it, while a Central-American state might find difficulty in raising a small loan at 50 per cent, discount. Sometimes a state may offer a loan to the highest bidders; for example, the city of Auckland in 1875 invited subscriptions through the Bank of New Zealand to a loan of £100,000 at 6 per cent.; offers were made of six times the amount, but only those were accepted which were at the rate of 98 per cent, or above. The rate of interest offered generally depends on the credit of the state issuing the loan. England, for example, would have no difficulty in raising any amount at 3 per cent, or even less, while less stable states may have to pay 8 or 9 per cent. The nominal percentage is by no means, however, always an index of the cost of a loan to a state, as the history of the debt of England disastrously shows. During last century various expedients were employed, besides that of terminable annuities already referred to, to raise money for the great wars of the period, at an apparently low percentage. For example, from 3 to 5 per cent, would be offered for a loan, the actual amount of stock per cent, allotted being sometimes 107⅜ or even 111; so that between 1776 and 1785, for the £91,763,842 actually borrowed by the Government, £115,267,993 was to be paid back. In 1797 a loan of £1,620,000 was contracted, for every £100 of which actually subscribed, at 3 per cent., the sum of £219 was allotted to the lender. In 1793 a 3 per cent, loan of 4⅜ millions was offered at the price of £72 per cent., the Government thus making itself liable for £6,250,000. Greatly owing to this reckless method the debt of •Great Britain in 1815 amounted to over 900 millions. France in this respect has been quite as extravagant as England; many of her loans during the present century have been issued at from 52⅜ to 34 per cent., one indeed (1848) so low as 45 per cent.,—as a rule with 5 per cent, interest. The enormous and embarrassing increase of the French debt during the present century is doubtless greatly due to this disastrous system. Nearly every European state and most •of the Central and South American states have aggravated their debts by this method of borrowing, and got themselves into difficulty with their creditors. Both Turkey and Egypt are notable examples, while states such as Austria and Italy have been compelled to resort to various expedients to reduce their enormous liabilities. Financiers almost unanimously maintain that in the long run it is much better for a state to borrow at high interest at or near par, than at an apparently low interest much below par. A state of even the highest rank may find itself in the midst of a crisis that will for a time shake its credit; but when the crisis is past and its credit revives it will be in a much more sound position with a high interest for a debt contracted at par than with a comparatively low interest on a debt much in excess of what it really received. If a state, for example, borrows at par at 6 per cent, when its credit is low, it may easily when again in a flourishing condition reduce the interest on its debt to 4 or even 3 per cent. The United States Government has actually done so with the debt it had to contract at the time of the civil war. This method of reducing the burden of a debt is evidently no injustice to the creditors of a Government, when used in a legitimate way. A state is at liberty at any time to pay off its debts, and, if it can borrow at 3 per cent, to pay off a 6 per cent, debt, it may with perfect justice offer its creditors the option of payment of the principal or of holding it at a reduced interest. Government debts are, however, sometimes reduced after a fashion by no means so legitimate as this; we need only refer to Turkey, where both principal and interest have been enormously reduced on a debt on which little or no interest was ever paid. Other states have...