A government can finance its activities in four ways. It can tax. It can borrow. It can create money. And it can generate revenue through its operation of enterprises. These days, taxation is widely regarded as the primary source of state revenue, and this primacy is generally accepted as proper.

It is quite common for contemporary authors to cite Adam Smiths four canons of taxation, which he articulated in 1776 in the Wealth of Nations. These canons held that taxes should be levied in proportion to property, should be certain and not arbitrary, should be convenient to pay, and should be economical to administer for both the taxpayer and the state. Furthermore, Smith thought that taxation ideally should be the sole source of state revenue. He preceded his discussion of tax canons with an argument that the state should abolish its holdings of property, thereby relinquishing any revenue it derives from those holdings. Modern states, of course, have not followed Smiths advice in this respect, and have proven ready to accept revenue from nearly any source.

While Smiths vision of a state creative financing predominately by taxation is second nature to contemporary fiscal scholars, it has not always been this way, either in theory or in practice. In 1760, Johann Heinrich Gottlob von Justi articulated a quite different vision of state finance in Natur und Wesen der Staaten.

Taxation was a last resort instrument of public finance. For Justi and the Cameralist authors generally,

states were to be financed in the first instance through revenues generated from state enterprises and lands. Justi argued that ideally states would not tax at all, and would derive all of their revenue from their enterprises and lands. Taxation was a secondary option only, and one, moreover, that was more strictly limited in Justis canons than in Smiths. Justis canons covered all the territory covered by Smiths canons, and more.

Justi also held that a tax should never deprive a taxpayer of necessaries or cause him to reduce his capital to pay the tax, nor should a tax ever harm the welfare of taxpayers or violate their civil liberties. This Cameralist principle of public creative financing, moreover, received practical implementation throughout the central European lands where the cameralists were influential, as illustrated by the much greater fiscal significance of enterprise revenues in the cameralist lands, where those revenues generally provided the majority of state revenues.

This difference between Justi and Smith reflects one of the important orienting principles of the cameralists, namely, that the state acts as a participant within the society and its economic order. The cameralist advice on the use of state budgets and other policy instruments to promote the well being of the state and its subjects took place within a presumption that the state itself was located inside the economic order and not outside it. The state is but another participant within the economic order of a society. Civil society and the state are no separable and co-emergent. This treatment of the state in relation to civil society contrasts sharply with various contemporary constructions where state and society are treated as autonomous and independent from each other. In this alternative construction, the state intervenes into civil society and its processes.

This distinction between the state as participating within the economic order and the state as intervening into the economic order, has numerous implications and ramifications, one of which concerns the generation of state revenues. The cameralist ideal, recognizing that practice rarely if ever conforms fully to ideals, was the state as a peaceful and productive participant within the economic order.

The Smithian ideal was the state as a violent force for intervention into the economic order. It is perhaps no wonder that Joseph Schumpeter (1954, p. 172) described Justi as A. Smith . . . with the nonsense left out.Geoffrey Brennan and James Buchanan (1980) construe the state as a revenue-maximizing beast, a leviathan. While the leviathan of the Bible lived in the sea, it is easy enough to imagine it as living on the land. Smiths maxims for taxation are a recipe for living with the leviathan by doing such things as clipping the beasts nails and filing down its teeth. A beast it will always be, and the objective of tax maxims should be to limit the damage the beast causes. Just is maxims for taxation, in conjunction with his preference for enterprise revenues over taxation, represent a contrary intellectual orientation that would seek to domesticate the beast. To be sure, some would argue that genuine domestication is impossible.

Regardless of the relative standing of taxes and enterprises as sources of state revenue, fiscal scholars have generally regarded borrowing and money creation as secondary forms of public creative financing. Indeed, borrowing and creating money have often been characterized as instruments of extraordinary public finance, in contrast to taxes (and, once upon a time, enterprise revenues) as being instruments of ordinary public finance.

Borrowing and creating money are not options different from taxation, but are different forms of taxation. A state that borrows is reducing current tax extractions in exchange for making a commitment to impose higher tax extractions in the future to service and amortize the debt. Borrowing is simply deferred taxation. Money creation is also a form of taxation, though one that is collected currently creative financing and not in the future. A state could impose a tax directly on money. Such a tax, however, would be costly to implement and enforce. It is cheaper for a state to tax money indirectly by debasing its real value through inflating the supply of money.

This essay explores various issues and controversies regarding borrowing and money creation as instruments of public finance. It starts by reviewing a controversy about public debt that that started shortly after the end of World War II. This controversy centered on the ability of public debt to transfer the burden of current state spending from current taxpayers to future taxpayers. A review of this controversy will help to set up the subsequent examination of debt and money as instruments of public finance. This analysis will pay particular attention to the institutional framework within which governments are constituted and borrowing occurs. It matters a great deal analytically whether governments are autocratic or democratic, as well as whether there is freely competitive banking or state-imposed central banking.