FINANCE

may cover either ‘puble finance’ or ‘commercial finance.’ By public finance is meant the measures taken by Governments, whether national or local, for the purpose of raising money to pay for the national or local services run by governmental agencies. Public finance is, therefore, an e ential part of the functions of any Government. Its sphere varies in accordance with the activities of the Government in question. During a time of peace, and under an individualist régime, a national Government may have to find money only for the services of justice and order, for limited activities in the interests of public health and of national commerce and industry, and for a small army and navy. In such circumstances public finance will not play a large part in the life of the State. Such conditions, however, are now rare, and most Governments spend large sums on public education and health, and on works of publie development, while the demands of national defence entail heavy expenditure. Such was the state of things in most civilized countries prior to 1914, when the problem of raising sufficient revenue to meet State expenditure was growing increasingly diiticult, and was giving rise to vexed discu ions as to the proportion of revenue which should be contributed by owners of wealth paying ‘ direct taxes,’ levied on them in proportion to their capital wealth or money income, or by consumers paying ‘indirect taxes’ levied 438 FINANCE 43 on commodities, in the form of internal excise or of import duties. In the United Kingdom 45 per cent of the national revenue was raised by direct taxation, and 43 per cent by indirect taxation in 1913, the proportion in 1920 being 48 per cent and 25 per cent respectively, in 1926 47 per cent and 36 per cent, and in 1927 budgeted at 46 per cent and 37 per cent. In 1930-31 direct taxation amounted to £462,781,000 and indirect taxation to £240,907,000. The gigantic expenditure caused by the war increased the size of the debt enormousiy. In 1914 the gro total of the debt amounted to £661,473,765; in 1920 £7,878,607,166; in “1927 652,687, 904; in1928£7, 630, 972, Hike in’ 1929 ie 501, 000, 000; in 1932 ,647,950, 000 The cost of the debt itself increased from £24,500,000 in 1914-15 to £349,598,616 in 1920-21, and to £378,816,287 in 1927-28. In 1931-32 it amounted to £289,492,213. The Budget. In this country national finance is regulated by the ‘Budget,’ a balance sheet of estimated revenue and expenditure presented to the House of Commons annually in April by the Chancel i or of the Hxcheguer, and covering the financial year, which ends in March. The Budget contains estimates of the national! expenditure and national revenue under various heads, and its introduction is made the opportunity of introducing changes in taxation. The Budget introduced in 1913 estimated an expenditure of £199,011,000 and a revenue of £194,825, 000 in the financial year 1913-14. The 1921-2 Budget estimates were for an expenditure of £1,039,728,000 and a revenue of “1, 216, 650, 7000. In 1932-3 the correspi onding figures were £766,004,000 pa 87 66, 800,000. Taxation per head of population in the United Kingdom amounted in 1914 to under £4, in 1930 to £14 15s. 10d., and in 1931, to £16 6s. 5d. The amount of money raised by local taxation is not included in this figure. Local authorities raised £84,500,000 in 1919; in 1932 the amount raised in England and Wales was 148,000,000 and in Scotland £16,915, 000, local taxation taking the form of a tax on the annual value of real property within the area concerned. Finance in the other sense covers all dealings in ‘wealth’ in the form of money and in credit instruments. In a sense all production is based on ‘credit,’ for things must be produced before they can be consumed, and their value during production is basod on their anticipated value as finished articles. This theoretical conception corresponds with reality—for in many cases the actual expenses of production are borne during the period of production, not by the producer, but by other persons or institutions from which he borrows money, against the credit afforded by his personal reputation, the prospect of succe of the production in question, and perhaps also the deposit of securities which can be realized in the event of his default. The busine of ‘finance’ then consists mainly in the collection from persons or busine es which are saving money, or holding it in reserve,of funds for which they have no immediate use, and the lending of the money thus obtained to persons or busine es engaging in enterprises which are sufficiently safe for them to be able to obtain loans, but for which they have not themselves sufficient money available. In internal trade this financing of busine es is largely done by banks, which collect money from the publie on ‘current account,’ ie. repayable on demand, and on ‘deposit,’ i.e. repayable only after a given period or after certain notice, and lend to busine es in the form of ‘loans’ or ‘overdrafts’ so much as they deem safe in view of their obligations. Bills. of Exchange. In foreign trade the most frequent method of financing is through the medium of ‘bills of exchange,’ ordering payments for goods at a future date, perhaps two, three, or six months ahead. A bill of exchange, if the names of the parties to it or some of them are satisfactory, will be discounted by a bank, or by a discounting house for the present value of the sum of money accruing when the bill falis due. The result ot this operation is that the concern selling the goods can secure immediate payment, while the concern buying the goods, against which the bill is ‘drawn,’ does not require to make any payment until the maturity of the bill, the venture being financed in the intervening period by a bank or discounting house, which will frequently hold the bills of lading for the consignment, or other similar documents, as security. The bill of exchange has become the chief means of settling all forms of indebtedne between different countries, and the determination of the value of a bill drawn in the currency of one country in terms of another currency is dealt with under the heading FOREIGN HxCHANGES (q.v.). Stocks and Shares. Yet anothor form of finance is the raising of capital for joint stock undertakings by public subscriptions, in return for which ‘shares’ or ‘stocks’ in the undertaking are given, which give a right to a certain proportion of the profits of the undertaking, together, in most cases, with a voice in its management. 439 FIN-BACK Various types of shares and stocks are offered to the public, e.g. debentures, Edward and a istants he produced several extensive series of engravings preference, and ordinary. Debentures; of great merit; the first and most sucea) practically no risk, preference ais or stock a limited risk, ordinary shares most of the risk of the undertaking. Holders of debentures receive a fixed rate of interest, and have priority over preference or ordinary shareholders, as well as having a charge on the a ets of the company in case of default. re Preference shares rank for dividend before ordinary shares, and are also entitled to a fixed annual rate of interest. If the company is unable to pay the preference shareholders this fixed rate of interest in any year, the latter have the right to demand in succeeding years payment of arrears before anything is paid to holders of ordinary shares (except in the rare cases where the articles of a ociation of the company otherwise specify). The surplus profits remaining after payment of interest on debentures and preference shares, if any, may then be divided amongst the ordinary shareholders to such an extent as the directors of the company deem advisable. Debentures and preference shares appeal to those investors who desire to have an a ured income and a certain measure of security. Investors in ordinary shares are prepared to take more risk in the hope of obtaining a higher rate of interest on their holding. When shares or stocks are being offered to the public for subseription, arrangements are frequently made for ‘underwriting’ the i ue. In this way the company i uing the shares or stocks is guaranteed that the cash shall be forthcoming; for the ‘ underwriters,’ in return for a small commi ion, agree to take up themselves any portion of the i ue not subscribed for by the public. Should the underwriters have to take up some part of the i ue, they await an opportunity of disposing of it in the ordinary market.