CHAPTER IX 
FINANCING THE CAPITAL REQUIREMENTS OF 
THE STATE 
NHE capital requirements of state and local governments 
A are ordinarily financed by means of current revenue, 
through funds obtained by borrowing, or by a combina- 
tion of the two methods. On the other hand, it is a recog- 
nized principle in public finance that current expenses for 
operation and maintenance purposes should not be met by 
borrowing, although the financing of a certain amount of 
expenditures through the sale of warrants issued in anticipa- 
tion of tax receipts is not regarded unfavorably. In instances 
in which funds obtained from the sale of bonds have been 
used in meeting current expenses for operation and mainte- 
nance, the practice has received the condemnation of all those 
seriously interested in the proper administration of fiscal 
affairs. 
There is a sharp division of opinion in respect to the 
manner in which capital requirements should be financed. 
The pay-as-you-go school holds that it is always best to 
finance capital additions out of current revenues, and that it 
is only by following this policy without deviation that the 
highest degree of success in fiscal administration can be 
obtained. The other school sanctions a combination of bor- 
rowing and current revenues in the financing of capital ad- 
ditions. The advocates of the pay-as-you-go policy have 
at times been in the great majority in the United States. 
This was especially true of the administrators of state finances 
in the United States during the period following the Civil 
War. 
State borrowing in the United States was not of much 
importance prior to 1820, but in the succeeding period many 
eastern states borrowed considerable sums for internal im- 
provements. In the development of the Middle West the 
same policy was followed. During this period credit was not 
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