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Methods of State Borrowing:


Methods of State Borrowing and Its Limitations:


State can raise loans or borrowing in different forms. It may obtain loans from (i) people within the country, (ii) from other states and specialized international credit institutions, (iii) by issue of inconvertible paper currency.


Whichever method is adopted by the state, there is limit of borrowing in each case. If that limit is crossed, the country is bound to suffer. We discuss below the various forms of state borrowing and also the limit to which the state can borrow.


(i) Internal Borrowing:


When a state finds that it is not possible to obtain further money by taxation, it resorts to borrowing from citizens and financial institutions within the country. The state may accumulate funds by raising short term loans or long term loans or by both. How much loans the state will obtain depends upon the total physical saving of the nation and the socio economic conditions prevailing at that time. If the state is passing through a very critical period, then it can borrow all the money which the nation saves. In that case, trade and industry will suffer because no money is left to finance them. In the normal period, however, the state can borrow only surplus funds which are left with the businessmen after meeting all the needs of the business.


(ii) Loans From the Central Bank:


A government can raise loans from the Central Bank of the country. The Central Bank purchases the government securities, bonds and debentures from the government and advances loans against them. Almost every modem state is obtaining funds by this method. Like other methods of borrowing, there is no limit to which a state can raise funds by this method. The limit is reached when money begins to .expand in excess of needs of the trade. This is because of the fact that when currency is issued in excess of the amount justified by the state of trade, then it inflicts incalculable loss to the community by disturbing trade and industry. It paralyses the whole of economic system.


We conclude, therefore, that every state should borrow from central bank within reasonable limits. It should not cross ordinarily the limits of safety. When a loan is raised, it has to be repaid. So why to burden ourselves too much? If, however, the existence of the state is in danger, then loan can be raised to any limit.


(iii) External Loans:


External loan is that which is raised from international money markets, foreign government and from international agencies like International Monetary Fund. When a state is in need of money, it tries to get as much loan as it can from other states. The foreign governments do not advance loans without a limit. They minutely study the budgetary position of the borrowing country, the tax-bearing capacity of the nation, the per capita income of the people and the purpose for which the loan is desired. If the position of the budget is sound and the taxable capacity of the nation is high, then a foreign government may advance sizable loan to the borrowing country.

Relevant Articles:

What is Federal Budget
What is National Debt
Classification/Types/Categories of National Debt
Short Term Loans
Long Term Loans
Methods of State Borrowing
Methods of Paying Public Debt
Burden of National Debt
National Debt and Economic Stability

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money

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