Pledged revenue as security for government bonds

The practice of pledging revenue in support of government bonds has neither protected investors nor operated to the advantage of the issuing sovereignties. Investors have relied on this phantom security only to find, in times of adversity, that they were accorded no preference in compromise settlements over bondholders owning unsecured issues. The experience of the issuing governments has been equally discouraging. The significance accorded pledged revenue by the investors and the bankers and the ease of marketing bonds with this financial device has led nations to burden themselves with obligations they have been incapable of assuming. Furthermore, the hypothecation of the revenues of an economically undeveloped country may render its entire fiscal system inflexible. This practice tends to congeal the tax system into the pattern it had at the time the loan was issued.