But it sometimes happens that a nation is urged to incur expenses to which its ordinary revenue is inadequate. It is called upon to resist an invasion by foreign enemies, or to suppress a serious domestic insurrection. These occurrences at once lessen the resources of the State at the very time that the demands upon them are increased. On such occasions they, like individuals, have recourse to borrowing, to obtain the means of meeting the emergencies of the time. Even the increased expenses attending a war may recommend to the government recourse to a loan for its extraordinary expenses, in preference to new taxes.

There are other modes in which a public debt may originate. In the ordinary transactions of most governments it is often found convenient to give, instead of money to the officers and agents of the government, written evidences of their claims for public services; and where these claims have been suffered to accumulate, in consequence of pressing demands on the public treasury, they have at length become a recognised public debt, and the government has contented itself with the payment of an annual interest, for which it makes a permanent provision. This is what is called funding the debt. In this way the exchequer and navy bills in England have been often funded. A debt may also be contracted by the purchase of territory of a foreign government. In this way the United States contracted a debt for the purchase of Louisiana. So of the money which they contracted to pay to Mexico for the cession of territory by the treaty of 1848.

This expedient enables a modern State, in the stability and good faith of whose government the world has confidence, greatly to extend its power, whether for protection or offence, and the money thus procured may be not only much more than could be obtained by taxes, but it is obtained much more speedily, and is commonly that part of the national capital which yields the least profit. Thus, the British Government, where the ordinary interest is 5 per cent., can commonly borrow millions at an interest of 3 1/2 per cent., or even less; and the United States, where the market rate of interest is from 7 to 10 per cent. in the different States, would find no difficulty in borrowing at 5 per cent.

The way in which the money thus borrowed is expended, may most essentially contribute to the defence of the nation, and even to its interests, but the national capital is not on that account the less impaired. Every public loan must, in lightening the present burdens of the government, add to those of posterity; and when the debt goes on steadily increasing, as it often does, the annual taxes required to pay the interest of the debt, may be sufficient in amount to defray the whole of the other expenses of the government. Every public loan is thus apt to be the parent of new debt, as it adds to the annual public expenditure. Hence there is a strong tendency for public debts, after once begun, to go on increasing; and the United States furnish the only example of a large public debt being fully and honestly discharged.

The public debt of a country is an exponent of what, on considerations of high public policy, may have been wisely and beneficially expended; yet, in an economical view, it must always represent a diminution of the active productive capital of the country.

Let us not, however, overrate the national loss, even when viewed under this aspect. Much which has been spent by armies and navies, would have been as unproductively spent if the same capital had remained in the hands of individuals; and it is the same thing to the wealth of the nation, whether the money has been expended in paying soldiers and sailors, or in feeding a pack of hounds, or maintaining a costly equipage and long retinue of servants. Besides, a portion of the money expended on the naval and military service employs and rewards productive industry in providing food, clothing, arms, and ammunition - all of which make not an insignificant deduction from the amount of the national revenue spent by the government.

But while, after every deduction is made, the destruction of the national capital, indicated by the public debt, is very great, it does not so seriously threaten the safety, or even the resources of the States, as has been often supposed.

Whenever the loan is made by the citizens of the country making it, as is often done, then it being made from the savings of the excess of production over consumption, the money was earned before it was spent, and it is thus drawn from the profits of previous industry. So long as loans are made in this way, from the capitals already accumulated, it is not easy to set limits to their amount - since taxes, both direct and indirect, to pay the increasing interest, may be made to reach the public creditor as well as others. Thus the ruinous consequences which have been often predicted of public debts seem to be altogether fallacious, though their injurious effects are undeniable; and since, in return for the present benefit they may afford, they must always lessen the means of individual comfort or gratification, and impair the sources of public revenue, they ought never to be resorted to except on occasions of great national urgency; and should be paid off as soon as the revenue of the State is sufficiently productive.

Governments have resorted to different expedients to relieve themselves from the burden of debt. Sometimes they have depreciated the coin, sometimes they have, by paying neither principal nor interest, occasioned the evidences of the debt to depreciate, and have then profited by that depreciation, and redeemed the public debt, by paying a small part of its original amount. Sometimes, again, they have committed an open act of bankruptcy or repudiation, and have either disavowed the whole debt, or paid a small portion of it. The United States present the only example of the payment of their entire debt without any deduction.

Besides the debts formally contracted by the Government, it may happen that one country may owe a large debt to another, in the course of their commercial and other dealings. The country which has the least capital is always likely to be in debt to the country which has the most. The money which is then paid for interest is often regarded as an ignominious tribute, and as a serious national loss. Yet it may easily happen that the indebted nation gains more than it loses by the use of the capital it has borrowed. Thus, suppose that it borrows at an interest of five per cent., and that the market rate is eight per cent. This indicates a probable gain of three per cent.

When a merchant or manufacturer has a reasonable expectation of making a profit from the use of borrowed capital, it is of no importance in a national point of view whether he borrow the money at home or abroad. It is better, both for him and the community, that he obtain it where it can be got on the best terms.

If the borrowed money was invested in an unprofitable undertaking, as in an ill-advised and unproductive railroad, then, indeed, it would be a national loss, though not greater than if it had been borrowed at home.