Sir James Steuart (1767)
The principles which influence the doctrine of public credit ar so few, and so plain, that it is surprising to see how circumstances should possibly involve them in the obscurity into which we find them plunged on many occasions.
For the better clearing the way towards the main object, I shall shew from experience, and from the progress of public credit in some nations, that the true principles have been overlooked, and so confounded with extraneous objects, as to be entirely lost.
The true method of decyphering, as it were, the complicated operations of statesmen with respect to this branch of politics, is to bring back to their native simplicity such plans of administration, as, from the infinite perplexity of them, make people believe, that the principles which influence this district of the science lie so involved, as to require a peculiar force of genius even to comprehend them.
By proceeding in this plain track, and by keeping principles constantly in view, the most perplexed systems of borrowing, funding, stock-jobbing, coining and re-coining of money, changing the weight, fineness, and denominations of specie, circulating paper in conjunction with it, imposing upon mankind with bubbles and bankruptcies, and calling them operations of public credit, may be rendered intelligible to the most slender capacity.
Many of these topics have been already explained, and dismissed. This will enable us to contract the plan of what remains in proportion to the objects it is to comprehend.
Public credit we have defined to be, the confidence reposed in a state, or body politic, borrowing money, on condition that the capital shall not be demandable, but that a certain proportional part of the sum shall be annually paid, either in lieu of interest, or in extinction of part of the capital; for the security of which payment, a permanent annual fund is appropriated, with a liberty, however, to the state to free itself, by repaying the whole, when nothing to the contrary is stipulated.
In this definition I have put in an alternative, of paying a perpetual interest for the money borrowed, or of paying annually a sum exceeding the interest; which excess is intended to extinguish the capital in a certain number of years. In both cases, the annual payment is called an annuity. When it is exactly equal to the interest agreed on, it is called perpetual; and determinate, when it is granted either for life, or for a certain number of years.
The solidity of this security is essential to the borrowing upon the cheapest terms: let me suppose it to be as solid as land-property, and as permanent as government itself: what will the consequence be?
If we suppose government to go on increasing, every year, the sum of their debts upon perpetual annuities, and appropriating, in proportion, every branch of revenue for the payment of them; the consequence will be, in the first place, to transfer, in favour of the creditors, the whole income of the state, of which government will retain the administration. The farther consequences of this revolution will furnish matter for a chapter by itself.
If the borrowings of a state be in proportion only to the extinction of the old capitals, or of what I have called determinate annuities, then the debts will not increase.
When a statesman, therefore, establishes a system of public credit, the first object which should fix his attention is to calculate how far the constitution of the state, and its internal circumstances, render it expedient to throw the revenue of it into the hands of a moneyed interest. I say, this is the most important object of his deliberation; because the solidity of his credit depends upon it.
If, all the interests of the state duly considered, that of trade be found to predominate; less inconvenience will be found in allowing the moneyed interest to swell: but in monarchies, where the landed interest is commonly, and ought to be the most powerful, it would be dangerous to erect so formidable a rival to it. In political bodies every separate interest will consult its own; and in the contest between those who will be made to pay, and those who are to receive the taxes, under the denomination of creditors, the security of public credit will become precarious.
From this we may conclude, First, That in governments where the swelling of a moneyed interest is found to threaten the tranquillity of the state, care should be taken either to establish a sinking fund, for paying off, in times of peace, what may have been borrowed in times of war, or the plan of borrowing upon determinate annuities must be established.
Secondly, If natural cares be left to work their own effects, without a systematical plan of borrowing, the consequence will be a bankruptcy and a total failure of public credit, at least for some time.
Thirdly, If a state should find the mass of their debts to amount to so great a sum as to be insupportable, they might have recourse to a total, or partial abolition of them by an act of power.
Fourthly, If they allow their debts to swell without limitation, and adhere to the faith of their engagements, the whole property of the state will be in constant circulation, from one class of men to another.
Fifthly, If the debts contracted be the property of foreigners, these will either remove into the country, where their funds arise, or the property, that is, the dominium utile of the country, will be transferred from the natives.
These and many other combinations will arise from the extension of public credit; and an examination into the most natural consequences upon every supposition, will be the best way to acquire a distinct idea of the subject in general. To pretend to foretell any one certain chain of consequences, which may, in fact, result from any particular case, is, I apprehend, impossible; because every one of them will depend upon circumstances totally unknown. These consequences, in our way of examining matters of this kind, are all to be founded UpOn supposition. To supply therefore, in some measure, this defect, I shall first have recourse to examples of what has happened in the hitherto infant state of public credit; and as to cases which have not as yet taken place, we must have recourse to ingenuity, and endeavour to form the most rational combinations we can.
While the policy of States directed them to form treasures, there was no occasion for public credit. This policy prevailed until the rise of the Roman empire. Then all the treasures of the world were plundered, and the nations were inslaved. On this revolution, the exigencies of that great empire were supplied from the annual tributes paid by conquered nations. Under good reigns, this annual supply swelled the public treasure, until a prodigal Emperor squandered it away; and took to rapine and extortion, to fill up the void.
Upon the total dissolution of the Roman empire, Europe was overrun by barbarous nations, who, with as little industry as ever, supported their power by the military services of the whole people.
After the establishment of the feudal kingdoms under the chiefs who first laid the foundation of them, arose the Barons, or principal vassals, who, in imitation of their chief, erected small principalities, which by degrees grew independent.
This distribution of power into many hands had the effect of destroying all systematic plans of government. Princes were obliged to act according to the perpetual fluctuation of circumstances. until, by a revolution in their favour, the power of the vassals was swallowed up, and confined within the limits of a more regular authority.
In proportion as this revolution took place among the nations of Europe, the system of their government resumed a more permanent form. Justice was administered with more uniformity; and from this insensibly arose a body of laws, which, in some countries, were called customs: in others, as in England, common law. Wars then became less frequent; and the military services not being necessary on all occasions, insensibly became converted into taxes, proportioned to the exigencies of the time.
During this period, the coin and precious metals of Europe were in a great measure, lodged, in private coffers. If wars brought them forth for a short time, they soon found their way back again. Princes were generally poor; because they were generally extravagant, and spent money as fast as they got it. In proportion as industry and alienation increased, the coin came abroad; the inhabitants became easy in their circumstances; the state flourished, and acquired reputation. The riches and power of a state began then to be estimated, as they ought to be, not by their treasures locked up, but by what was found in circulation; that is, by their industry. Venice, Genoa, and the Hanstowns, set the example. The Jews, banished from France, on account of their extortions in the time of the holy wars, fled, as it is said, into Lombardy, and there invented the use of bills of exchange, for drawing their riches from those countries to which they durst not resort in order to bring them off. Interest for money began to be considered as lawful in many cases: merchants were protected by Princes, for the sake of the consequences of trade and industry: and from such small beginnings has this mighty engine of public credit sprung.
While Princes mortgaged their lands and principalities, in order to obtain a sum of money, they acted upon the principles of private credit. This was the case in the more early times, before government acquired that solidity which is necessary to establish a firm confidence. In proportion as it drew toward a regular system, the dawn of credit put on appearances analogous to the solidity of the fund upon which it was established.
The second step was to raise money upon a branch of taxes assigned to the lender, for the reimbursement of his capital and interest. We shall shew the consequences of this plan of credit from some examples, which will fully point out all its inconveniences.
This plan of administration was attended with so much abuse, and so much oppression, that statesmen began to despair of carrying on public affairs by such expedients; and therefore concluded that the only way to obtain money at the least expence, was to raise it on the subject within the year, or upon what they called short funds.
At length public credit assumed its present form. Money was borrowed upon determinate or perpetual annuities: a fund was provided for this purpose: and the refunding of the capital was, in many cases, left in the option of government, but never in the option of the creditor.
This is a short view of the progress of public credit. The principles upon which it is built are so few, that were I to confine myself to a bare deduction of them, little new or interesting could be said. I shall therefore steer another course: I shall collect the sentiments of some eminent politicians, who have either written upon, or acted in the administration of this branch of government; and by applying principles as we go along, I shall be enabled to point out the extraneous circumstances which are so apt to involve this subject in obscurity. Had we not before our eyes the numberless examples of this kind, it would hardly be possible to conceive how so great confusion, and so many calamities, could have followed upon the operations of public credit.
I have already observed, that by the cessation of the constant wars, in which all Europe was engaged during the feudal government of the barons, nations began to enjoy some sort of tranquillity. Upon this the military services became insensibly converted into taxes: and as Princes extended their jurisdictions over the cities, which had been formerly more immediately under the protection of the bishops who resided in them, taxes were augmented. These impositions were very inconsiderable, with respect to what they brought into the King's coffers. The policy in raising them was bad; the frauds in collecting them were great.
These considerations engaged Princes to begin by contracting debts, with a view, afterwards to pay them by temporary assignments to the taxes imposed.
From this again ensued the most terrible extortions on the side of the tax-gatherers, so often complained of by those who have written concerning the affairs of France, as we shall see in the following chapter.
Philip le bel, King of France, was the first who, in 1301, admitted, with great policy, the inhabitants of cities to have a seat in the states of the kingdom. He formed them into a distinct body, and called them tiers etat, or the third state, after the clergy and the nobility. His view was to facilitate thereby the jurisdiction he wanted to establish over those cities, and to engage them to consent to the imposition of taxes for carrying on his wars in Flanders, and for opposing the ambitious views of Boniface VIII. Accordingly, the people began to pay willingly, when once they found that they had a vote in what concerned them.
I take it for granted, that every tax, about that time, was imposed for a particular purpose, and assigned either to creditors, or to people who advanced money upon it: because we are told that the first imposition granted by the states to a King of France as a permanent branch of revenue, was an excise upon spirituous liquors granted to Philip de Valois, in the year 1345; at which time, however, according to Mr d'Eon's Memoires pour servir a l'Histoire generale des Finances, there were not less than twenty two different taxes known in France, which he enumerates as follows:
Tailles, complaintes, charges, redevances, coutumes, peages, travers, passages, centiemes, cinquantiemes, ôtes, chevauchées, subventions, exactions, chevaleries, aides, mariages, toultes, impositions, prisons, servitudes, and nouvellettes.
That all these impositions must have been mere trifles, I gather from a circumstance in the Political History of France, mentioned by the author just cited, which being itself exceedingly curious and tending greatly to confirm many things which I have advanced concerning the small circulation in former times, I shall here briefly relate it.
In 1356, John, King of France, applied to the States for 50,000 livres, about 9165 l. sterling, to pay his army. The States, besides several other taxes imposed to pay this sum, granted him 8 deniers on the livre, or 3 1/3 per cent upon all meat, drink, and merchandise, sold in France within the year; that is to say, upon the whole alienations of France. The tax, was levied, but fell far short of the sum required, and the deficiency was made up by a poll-tax.
Can any example be better calculated for forming a notion of the circulation of France at that time?
It may be here alleged that the prices of every thing were then so very low, that no judgment can be formed concerning the quantity of alienation from the smallness of the sum. This objection is of no force, as I shall presently shew.
We know from the records of the selling price of grain in France, which was then remarkably cheap in proportion to the years which followed and which had preceded, that in 1356, the septier of wheat, or nearly 4 Winchester bushels, sold for 17 sols 8 deniers of the then currency, which was 12 livres to the marc fine silver, and a French soldier's allowance for bread to this day, is 3 septiers, or nearly 12 Winchester bushels a year. Now let me suppose, that the whole 50,000 livres had been raised by this imposition of 3 1/3 per cent or 1/30 of the total value of the single article of corn sold at market, which was far from being the case, and then compare this with the number of men who could have been subsisted with all the corn sold in France at that time.
If 1/30 of the price were the tax, then by multiplying 50,000 livres by 30, we have the value of the corn sold; to wit, 1,500,000 livres: divide this sum by the value of what a man consumes in a year, to wit, 3 septiers at 17 sols 8 deniers, which make 2 livres 13 sols, and the quotient will be the number of portions for a man, to wit, 566,037. Since, therefore, the 50,000 livres could not be raised in consequence of the tax, it follows, that the whole alienation of France, at that time, fell far below the value of as much wheat as would have fed 566,037 men.
What a poor idea does this communicate of the state of Europe so lately as 400 years ago! It would be in vain to seek for examples to illustrate any principle of our complicated modern oeconomy in the histories of those times: their taxes, their credit, and their debts, resembled ours in nothing but the name.
I shall now come nearer home, and give an account of the ideas of public credit formed by Davenant, who flourished about the time of the revolution in 1688, which I may take to be the aera of public credit in England.
No person at that time, whose writings I have seen, appears to have so thoroughly understood these matters as Davenant. He was a man of theory, as well as knowledge of facts: he had an opportunity which, and he few people have, to be well instructed in the one and the other; turned his talents to the best advantage for promoting the interest of his country. He has written many tracts on political subjects, which, when carefully read and compared with what experience has since taught us, cast great light upon many questions relative to the subject of this inquiry.
Davenant, like other great men of his time, was of opinion that borrowing money upon what he calls short funds, was much preferable to that upon perpetual interest; and he thought the most adviseable plan of all, could it be accomplished, was to raise the money wanted within the year.
Men, at that time, had a terror upon them in contracting debts for the public: they considered the nation as they would a private man, whose interest is one, uncompounded, and relative to himself alone: in this light, creditors appeared as formidable as enemies; they were looked upon by ministers as such; and this general opinion on one side, contributed, no doubt, to make the monied people less interested in the distress of government, and more ready to lay hold of every opportunity of improving such occasions, for their own advantage.
Government was in constant war with creditors: when ready money failed in England, it had nothing to pay with but exchequer tallies, upon the taxes imposed. these were much more easily issued than acquitted. When the first year's amount of a tax was engaged, people considered the security for what was to follow as very precarious; consequently, the value of it diminished.
This method, however, succeeded far better in paying off debts already contracted, than in contracting new ones; and the hardships put upon those who had already advanced money to government, and who were paid by assignments upon taxes previously engaged, made people very diffident afterwards, except upon proper security. The limited form of the English government, prevented the violent proceedings of ministers, with respect to the public creditors, which were common in France; and this circumstance contributed, no doubt, to establish the credit of the former upon the better footing. But still the long expectation of payment for the capital and interest, upon a distant fund, made Davenant acknowledge that 700,000 l. in ready money would at any time go farther than a million in tallies; and yet he thought it was better for the state to borrow the million upon a plan of discharging the debt in three or four years, than to obtain the 700,000 l. at the expence of a perpetual interest of 8 per cent.
There were many more considerations which moved Davenant to prefer what he calls short funds to perpetual interest.
It was the general opinion in his time (not his own indeed, for he endeavoured to shew the fallacy of it) that money borrowed upon the anticipation of a fund, raised and appropriated for the discharge of it, was not a debt upon the state; because it did not diminish the former revenue. We have a remarkable instance of the prevalence of this opinion, in the famous memorial presented by M. Desmaretz to Philip Duke of Orleans, after the death of the late King of France; wherein he advanced, that during seven campaigns, from 1708 to the peace of Rastad, while he had been at the head of the King's finances, he had not increased the public debts by more than nine millions of livres capital: and yet when he came into the administration, in 1708, the King's debts did not amount to 700 millions; and we have seen, that at the time of his death, they were upwards of 2000 millions. But Desmaretz did not reckon the difference, which was no less than 1300 millions as any debt at all; because he had settled it upon funds of his own creation. This was so much the language of the times, that no criticism was made upon it.
It is remarkable, that Davenant, in giving an account of the debts of England, during the period of which he writes, that is, from the revolution down to the peace of Ryswick, hardly ever takes notice of the sums paid for interest upon them. The minds of men at that time were totally taken up with the payment of capitals; and provided these could be discharged in a few years, it was no matter, they thought, what they cost in the mean time.
As long as nations at war observe the same policy in their methods of raising money, the ways in which they proceed are of the less importance: but when any one state makes an alteration, by which more money is thrown into their hands than they could formerly obtain; this circumstance obliges every other state to adopt the same method. Thus while Princes made war with the amount of their treasures and annual income, the balance of their power depended on the balance of such resources: when they anticipated their income on both sides, for a few years, the balance was in proportion still: when, afterwards, they adopted long funds and perpetual interest, the supplies increased; but still the balance was determined as formerly.
The usefulness, therefore, of an inquiry into the principles of public credit, has not so much for its object to discover the interest of states in adopting one mode of credit preferably to another, as to discover the consequences of every one in particular; and to point out the methods for making them severally turn out to the best account not only for the state, considered as a body politic by itself, but also for the individuals which compose it.
When so many different relations are taken in, the subject becomes much more complex, and therefore the consequences which can be guessed only at must be less determinate: but on the other hand, it opens the mind, and suggests many hints which with time may be improved for the good of society.
People who barely relate political facts, afford only an excercise to the memory: those who deduce principles, and trace a chain of reasoning from them, give exercise to the understanding; and as a small spark may raise a mighty flame, so a hint thrown out by a slender genius may set all the great men of a nation on a plan of general reformation and improvement.
Let us now take a view of the state of public credit in England, at the peace of Ryswick; in order to shew how Davenant came to be so great an enemy to long funds, and more especially to perpetual interest. We shall at the same time point out from what causes proceeds the great change of sentiments at present.
At the peace of Ryswick, the debts of England, according to Davenant, in his fifth discourse upon the public revenues and trade of England, stood at 17,552,544 l. sterling; call it 17 millions and a half, as we have no occasion to calculate with exactness.
Of this debt the capital of 3 1/2 millions was sunk, as he calls it; because 1,300,000 l. was on lives at 14 per cent and what was over to make up the 3 1/2 millions, was intended to remain a perpetual burthen on the nation.
For paying the interest of this sum, no less than 400,000 l. a year was necessary, which makes on the whole above 11 per cent.
But then it must be observed, that more than one third of the sum was upon lives at 14 per cent: the debt due to the bank, of which we have spoken in another place, was 1,200,000 l. for which was paid 100,000 l. a year, including 4000 l. allowed for the charge of management: the remaining million was upon lottery tickets, bearing about 8 per cent the price at which the bank had lent.
The second branch of debts was near 11 millions, which, he says, were in course of payment; because they were secured upon branches of revenue engaged for discharging them. A part of this class of debts was to be extinguished in the year 1700: and whenever this was done, then a proportion of the appropriated taxes, amounting yearly to above a million sterling, was immediately to be taken off.
The third class of debts were those not provided for at all; which in the place referred to, he makes to amount to no more than 3,200,000 l. but he afterwards finds his mistake, and that they in fact amounted to above 5 millions and a half, which makes the debts of England at the peace of Ryswick, to have been near 20 millions.
Was it then any wonder, that a man who wished well to his country, should prefer borrowing upon short funds at any expence whatever in the mean time, rather than at perpetual interest, when he found that parliaments could not be prevailed upon to allow any tax to subsist one instant after the discharge of the debts for the payment of which it had been appropriated?
Besides, there was very little to be gained by borrowing upon long funds and perpetual interest, as long as the lenders considered their advantage to consist principally in getting their capitals refunded.
The plain matter of fact was, that trade at that time was only beginning to take root in England, and demanded funds to carry it on. The use of banks for turning property into money, had not then been discovered. Circulation, consequently, was confined to the coin; and profits on trade were very great. All these circumstances rendered capitals of essential use; and the consequence was, to raise interest to an excessive height.
Compare this situation with the present. Were the capital of 140 millions sterling thrown by Great Britain, in a few years, into the hands of the present creditors; were France, on the other hand, to throw in as much, what trade could absorb it? Capitals now are of value, in proportion only to the interest they bring; and so long as the interest paid on public debts is sufficient to keep circulation full, and no more, interest will stand as it is: when this ceases to be the case, as in time of war, we see interest begins to rise; and when, on the other hand, the interest paid, proves more than sufficient for the uses of circulation, as upon a return of peace, then, from the same principles, interest must diminish.
Davenant, like an able politician, who had the state of facts before him, reasoned according to actual circumstances. Whatever was borrowed on long funds, was charged on the standing revenue of the state, which parliament was very unwilling to increase in proportion to the charges laid upon it. This, of itself, was argument sufficient with him to cast his view upon short appropriations, or upon his favourite object, of raising money within the year, to supply the exigencies of the state.
But in this operation he found great difficulties. In his treatise of ways and means, article excises, where he is searching for expedients to provide money for the war, he plainly shews a thorough knowledge of this imposition. It had taken place in England as far back as the great civil war, and formed at the revolution about 1/3 of all the revenue: but what is very extraordinary, and which at present will hardly be credited, the excise had at that time the effect of sinking the price of the subject excised, instead of raising the price of what was produced from it. Thus the excise upon malt, after the revolution, had the effect of lowering the price of barley, instead of raising the price of beer.
This effect of excises Davenant saw; from which he, and since him, many more have concluded, that all excises fall ultimately upon the land.
This circumstance, together with a feeling for the interest of the great number of idle poor at that time, who must constantly suffer by excises, engaged Davenant to propose having recourse to the land-property and poll-taxes, for raising, within the year, the sums required for carrying on the war.
According to his proposal, there was to be no less than 3 millions raised by a land tax, besides half a million by a quarterly poll, which made together, above 100,000 l. more than all the permanent taxes of England put together.
A proposal of this kind coming from Davenant, shews the difference of situation between those times and the present. On this subject more is to be learned by comparing facts, than by all the reasoning in the world.
We have seen how credit stood in England during the reign of William III. It was then in its infancy, and was set upon the principles of a free and limited authority, exercised by ministers of state, at all times responsible to parliament at the risk of their heads, in case of any open violation of the public faith. This is the best of all securities against the bad exercise of power.
Whoever reads the admirable writings of Davenant, and compares his ideas with what experience has since taught us, concerning the nature of taxes and public credit, will plainly discover that the great distress of England at that time, proceeded from the following causes.
The war they were engaged in, was far beyond their power to SUppOrt, although they had the greatest part of Europe to assist them.
The bravery of the British nation was ill supported with money, the sinews of war.
The coin soon after the revolution fell into the greatest disorder, which sent it away; no expedient was found to supply its place for the uses of domestic circulation; and, consequently, the fixed revenue could not be paid, nor industry carried on.
The people were unaccustomed to taxes, tunnage and poundage, the branch with which they were best acquainted, and which they bore with the least murmuring, because it was little felt by individuals, together with the excise upon beer and ale, the hearth money, the posthouse, and wine-licences, composed the whole of the permanent revenue of the state, and amounted to about one million and a half sterling: besides which, the parliament had granted new customs (all to cease before 1690) to the amount of about half a million more, upon wines, tobacco, sugar, and French linnen. This was the state of the revenue at the revolution.
One would imagine that England, under so small a burthen, might have been able to make the greatest efforts.
Were we now to grapple with France, under such circumstances, what sanguine hopes should we not form of success! The case turned out widely different: the first benefit the nation expected in consequence of their liberty restored, was an abolition of the hearth money; a tax which raised over the whole kingdom, 245,000 l. This was considered as an insupportable burthen.
Such sentiments and dispositions in the English nation, might have been a sufficient indication of what was to be expected from the war; the consequences of which had, before 1695, produced the following changes in the revenue.
The tunnage and poundage, which at the revolution produced 600,000 l. was by this time reduced to 286,687 l.
The excise upon beer and ale, from 666,383 l. was reduced to 391,275 l.
The hearth money was abolished.
The post-house, from 65,000 l. was reduced to 63,517 l.
The wine-licences, from 10,000 l. to 5000 l.
The temporary customs which subsisted at the revolution, were now expired, and had been either continued by new grants, or by others of the same nature introduced in their stead. The former had produced 415,472 l. the new produced 373,839 l.
The last and most important grant of all, was an additional excise upon beer and ale, which produced 450,000 l.
The revenue at the revolution produced, clear of all charges, 2,001,855 l. sterling. A revenue established at pretty much the same rate, and nearly on the same objects, with an addition of a new excise, which produced 450,000 l. produced net in 1694, no more than 1,570,318 l. so that, deducting the new excise, the old revenue was diminished in its produce, no less than 1,081,527 l. or above one half, in five years time.
In a country like England, at that time, taxes were of little use to the state, and were an excessive burthen on the people.
What could they be paid out of? Not out of the value in the hands of the people; because there was no way provided for turning this value into money. The whole of the money coined before the end of the war in 1697, did not amount to 8 1/2 millions. It was not to be expected that during the war, foreign coin was to come in, except in consequence of borrowing; and we may be very certain, that all that was borrowed, and a great part of what had been coined at home, had gone out from the year 1695 to 1697. under these circumstances, the exchequer issued tallies of wood, a notably expedient for facilitating circulation! And the bank of England lent not one farthing upon mortgage. all that was possible to be raised on the land and on the people, by pound-rate, assessment, and poll-tax, was imposed.
Now let us recall our principles concerning circulation, alienation, and banking upon mortgage, and combine these with what we have so frequently repeated, and I think demonstrated, viz. that in proportion to the extent of alienation, and the demands for money, a circulating equivalent should be provided, so as to be ready at the hand of every person who has property to pledge for it; and then decide whether it was any wonder that credit in England should have been at so low an ebb at the peace of Ryswick; that taxes should have diminished in their produce; that interest should have risen to such an extravagant height; that the people should have groaned under a load from which they could not relieve themselves.
Under such circumstances, England appears to me in the light of a dumb man put to the torture in order to extort a confession.
Were eight or nine millions sterling in coin, and a few wooden sticks, the tallies, constantly sold at a great discount, a circulating value sufficient to supply the exigencies of a state which was spending annually at the rate of five or six millions?
The consequence of this total drain of money, was, that people could neither consume exciseable commodities, or pay the taxes laid upon their persons and solid property.
The excises failed, because the body of the people, who paid them, were interrupted in their industry, for want of money to carry on alienation. Those who were liable to the arbitrary impositions, such as the landlords, could not pay; because what they had, their land, could not be given in payment.
From what I have here laid together, we may determine, that as alienations among individuals cannot exceed the proportion of the circulating equivalent of a country, so a statesman when he intends suddenly to augment the taxes of his people, without interrupting their industry, which then becomes still more necessary than ever, should augment the circulating equivalent in proportion to the additional demand for it.
This, according to my notions, cannot be so well compassed as, 1. by establishing banks of circulation upon mortgage: 2. by relieving those companies of the load of paying foreign balances by giving bills at par, or at a small exchange: and 3. by providing funds abroad for the payment of them, according to the principles above deduced.
Such expedients will work their effect, in a nation where the public faith stands upon the solid security of an honest parliament, and upon that responsibility which is fixed upon those who are trusted with the exertions of the royal authority.
I think I may illustrate this operation by a simile.
A gentleman chooses to form a cascade of the water which serves to turn his corn-mill; consequently, the mill stops; but in its stead, he immediately erects another which turns with the wind. Coin is the water, bank paper is the wind, and both are equally well calculated for the use they are put to.
We have, in a preceeding chapter,given a general view of the state of public credit in England, at the end of the last century. In this, I shall briefly run through the most remarkable revolutions, both in sentiments and events, which have succeeded since that time.
At the revolution the revenue of England was about two million sterling, affected by two debts. The first was called the bankers debt, contracted by Charles II and, by letters patent, charged upon his hereditary excise, to the amount of upwards of 1,300,000 l. This debt was arbitrarily reduced to one half, in the last years of King William, and put at 6 per cent perpetual annuity, to commence no sooner than 1706. The other was a debt of 60,000 l. due to that Prince's servants, neglected to be paid by his successor, and discharged after the revolution.
At the peace of Ryswick, the national debt amounted to about 20 millions. The branches of taxes subsisting at the revolution, and continued till then, produced no more than about 800,000 l.; but by additional taxes laid on in the reign of King William, the whole revenue extended to 3,355,499 l. of which above one million was to cease before 1700, as has been said. This reduced the revenue, at the beginning of Queen Anne's reign, to nearly what it had been at the revolution: out of which if we deduct the interest of the national debt then subsisting, and the expence of the civil list, we shall discover the extent of the funds prepared for engaging in the war with France; and then by comparing the state of the nation at her accession, with what it was at her death, we shall form a general notion of the progress of credit at that period.
| The revenue of England at the accession of Queen Anne may be stated at about | 2,272,000 |
| The debts subsisting on the 31st of December 1701, were | 6,748,780 |
| Upon which the annual interest was | 566,165 |
| Queen Anne's civil list | 600,000 |
| Which two sums amounting to | 1,166,165 |
| Being deducted from the revenue, there will remain for the current service of the state | 1,105,835 |
What the exact amount of the revenue of England was at the death of the Queen, I cannot justly say. But as it may be comprehended under the three general branches of customs, excises, and other inland duties, we may form a guess at it, though imperfectly, I allow, from the number of articles in each.
At her accession, the customs comprehended fifteen articles; at her death, they amounted to thirty-seven: at her accession, the excises comprehended ten articles; at her death, they amounted to twenty-seven: at her accession, the other inland duties comprehended eight articles; at her death, they amounted to sixteen, including the land tax, then become in a manner perpetual, although laid on from year to year.
At her accession, the public debts amounted (as above) to near seven millions, at her death they exceeded fifty millions.
In fourteen years, from the revolution to her accession, the money granted by parliament, partly raised on the subject, and partly borrowed, or taken credit for, according to the custom of the times, amounted to above fifty-five millions. During the 13 years of Queen Anne, the money granted by parliament raised on the subject, or borrowed as above, amounted to upwards of 80 millions.
By this general sketch I do not mean to enter into exact details: facts must be sought for in books which treat of facts: our chief object is to examine the principles upon which the public credit was supported, let the exact sum of money raised be what it will.
The expences of the French war first engaged the nation to revive those taxes which had been suppressed; and to impose many others for a considerable number of years, in proportion to the money borrowed upon them, according to the principles of the former reign.
In 1702, interest was so low, that government got money at 5 per cent. It continued so till 1704, when some loans began to be made at 6 per cent and at this rate it stood during the war.
But in 1706, the exigencies of government were far greater than what all the money to be borrowed, or raised on the subject, could supply. This opened a door to the abuse of paying the growing deficiencies upon the taxes with exchequer bills, chargeable on distant funds. These fell constantly to great discount; and the unhappy servants of the state, who received them in payment, were obliged to dispose of them to people who could wait for an usurious reimbursement by parliament.
When these exchequer bills had once got into the hands of the monied people, they had interest with government to engage the bank to circulate them at 6 per cent interest: but as the funds upon which they were secured happened at that time, 1706, to be engaged for discharging debts previously contracted, the bank, during that interval, could receive no payment of this interest of 6 per cent so the expedient fallen upon, was to pay the bank compound interest for all the tallies and bills they were to discount, until the funds appropriated should be relieved.
This expedient, bad as it was, and burdensome to the state in the highest degree, proved of infinite service, both in establishing the credit of exchequer bills, and relieving those who received payment in them.
This operation was quite similar to those of banks of circulation upon mortgage. The bank of England was here employed in converting into money exchequer bills, secured upon the faith of government. Banks upon mortgage convert into money the property of individuals upon private security. Had, therefore, banks upon mortgage been established in England at this time, all those who had property would have got credits from them, and would have been enabled thereby to pay their taxes, and carry on their industry, without diminishing their consumption. The exchequer would then have had no occasion to issue discredited bills and tallies for making up deficiencies; because taxes would have been productive, and the state would have been relieved of this excessive burden of interest at 6 per cent accumulated quarterly in favour of the bank.
What extraordinary profit must have accrued to the bank by this operation, every one must perceive. They were not here procuring funds to lend at a great expence; all they did was to augment the quantity of their paper upon government security; which they knew well would remain current in the common circle of payments within the country; and the public borrowings were sufficient to furnish credit for the sums sent out of the country. In this view we may conclude, that almost the whole accumulated interest paid, became a pure profit to the bank, as well as a great augmentation of the national debt.
This operation of the bank in 1706, did not prevent subsequent deficiencies, in the payment of the navy, army, ordnance, and of many other articles. In 1710, they amounted to above nine millions sterling. This was too great a sum to be borrowed; and the bank durst not venture to discount more than what domestic circulation could support: so that after this great debt had circulated upon the discredited obligations which had been issued for it, and in this way had fallen again into the hands of monied people, at 30 and 40 per cent below par, the new proprietors of it were all incorporated into one great company, with a governor and directors, who got 6 per cent for the whole capital, with an allowance of 8000 l. a year for charges of management.
Thus all the original creditors for these deficiencies lost the discount; the monied people gained it, and the public paid for all.
When credit is in this languid state, every expence of government must rise in proportion to the discredit of the paper with which they pay, till at last the whole sum, with interest, accumulation, and expence, falls upon the state, as if every farthing of it had been frugally expended in ready money.
This is a general view of the state of credit in Queen Anne's reign.
Government had not, as in the former war, the inconveniences flowing from the disorder in the coin to combat with. These contributed more than any other circumstance, to raise the capital of the debts at the peace of Ryswick. Circulation, too, was considerably augmented, in consequence of the increase of taxes, public debts, and the operation of the bank in circulating exchequer bills and tallies. Yet money was still scarce, in comparison of what it night have been, had proper methods been contrived to preserve it upon a level with the occasions for it.
The incorporation, also, of nine millions capital in the hands of a corporation, which afterwards was called the South Sea Company, was an assistance to public credit, by increasing a monied interest, the principal view of which was to fill the government loans, on the lucrative conditions offered for them. And last of all, the strictly adhering to the public faith of engagements, without seeking, by acts of power, to indemnify the state for the losses it had been obliged to incur, from the circumstances of the times, laid the solid basis of national credit for the future.
Although the many taxes added to the former revenue, did not increase it in any proportion to the load laid upon the subject during this war, they served, however, as a good foundation for improvement, as soon as the effects of peace restored them to their full production. But the securities affecting these taxes having become every year greater, government was obliged to engage certain funds for thirty-two years to come, and sometimes longer; and many branches of taxes, which formerly had been granted for short terms, were then made perpetual. After the peace of Utrecht, the expences of the state were greatly diminished, and money began to regorge: so that in the year 1716, the first foundation of the sinking fund was laid, by opening a subscription for paying off about ten or eleven millions sterling, at that time, charged upon several branches of taxes, the produce of which amounted annually to 724,849 l. sterling.
The proprietors of these debts were allowed to subscribe into this new fund, at an interest of 5 per cent redeemable by parliament: and in case the whole subscription should not fill at that rate, the bank and South Sea company became bound to make it up, upon receiving a like annuity in proportion to their subscriptions.
The bankers' debt, of which we have spoken, the only public debt owing at the revolution, made part of those which were to be subscribed for.
The taxes which had been appropriated for the discharge of those capitals, from temporary, were made perpetual; with a clause added, that when the surplus of the fund, after payment of the interest, had discharged the capitals of all the national debt due the 25th of December in that year, the whole produce of the fund itself should remain at the disposal of parliament.
After this first operation in reducing the interest, the bank complied with a reduction to 5 per cent of what was due to them; and they began to circulate exchequer bills at a more moderate interest than formerly.
Public credit was now daily gaining ground. In 1719, the South Sea company, the capital of which was then swelled to eleven millions at 5 per cent with a sum of 9397 l. sterling for the expence of management, enlarged their views; and finding large profits to arise from so great a fund under one administration, formed a project of acquiring a farther sum of the public debts, which remained outstanding upon the original funds appropriated for them.
For this purpose they proposed to government to acquire, first, The property of above 16 millions of redeemable debts, bearing then 4 and 5 per cent interest; and to reduce the whole to 4 per cent at midsummer 1727. Secondly, To acquire the property of 794,000 l. of annuities upon lives, and for long terms, as they should agree with the proprietors, at 5 per cent upon the purchase-money, until 1727. and at 4 per cent afterwards. Annuities were then valued at fourteen and twenty years purchase, according to their length: they rose, however, during the operations of the South Sea, to 25 and 30 years purchase. Thirdly, They were to have a sum added to their former allowance for the charge of management, in proportion to this augmentation of their stock. Fourthly, That for the advantage which might follow upon this agreement with government, the company was to pay into the exchequer above seven millions sterling, toward discharging other national debts outstanding. And in the last place, they engaged to circulate a considerable sum of exchequer bills, and to pay the interest of 2 pence per cent per diem, which should grow upon them during seven years. (1)
From the operations we have been describing, we perceive, that the point of view in England, from the peace of Utrecht, has always been, to reduce the interest of the national debt; but never to leave in the hands of the creditors, any part of the savings made, in order to diminish the capital. These savings have constantly been thrown into a sinking fund supposed to be intended for extinguishing the capital: and were it employed for this purpose for a few years only, and not diverted to other uses, I am persuaded the consequence would be, to reduce the interest of money in England lower than ever perhaps it has been seen in any nation. That interest may be reduced, by making money regorge in the hands of the lenders, is, I think, an uncontroverted principle: that by regorging in France, anno 1720, it reduced interest to 2 per cent is a fact indisputable. I shall not pretend to say positively, that the total appropriation of the sinking fund, and an augmentation upon annual grants, to make up the void, would in Great Britain work this effect in a few years; but I think it is very probable that it would: and if the domestic creditors, in any state, where debts, due to strangers, are swelled to such a height as to exceed the whole profits made upon trade, shall by their influence, and from a motive of present advantage, obstruct a scheme of this nature; the consequence will prove, in the first place, to discourage, and then totally to extinguish commerce, and in a little time to occasion an unavoidable bankruptcy; as shall be farther explained in a succeeding chapter. I return to the South Sea company.
The proposal of the South Sea company, mentioned above, was accepted of, and ratified by act of parliament, 6 Geo. I. Chap. 4th. But the disaster which befel credit, in consequence of the ambitious views of those who were in the administration of that company, prevented the nation from reaping all the advantages which might have proceeded from it.
The reign of K. George I though little disturbed by foreign wars, produced not the smallest diminution upon the capital of the public debts; and those which subsisted at the peace of Utrecht, stood, at his death, at 50,354,953 l. The same taxes subsisted; and every one almost was by this time made perpetual, except indeed the land tax and malt duty, which to this day continue to be annual grants.
But alas! this apparent revenue, arising from a multitude of taxes, was of no use towards defraying the smallest extraordinary expence of government. Every article of it was engaged for debts; and the operations for reducing the interest were calculated only to produce a fund for discharging the capital. The civil list, indeed, that is to say, the expence of civil government, exclusive of army, navy, ordnance, and incidental articles, was paid from the permanent taxes, and considered as a charge upon them. But were not armies and navies then become as regular an expence upon every state in Europe as judges and ambassadors? Undoubtedly they were. Yet after the peace of Utrecht, in laying down the plan which has constantly been followed ever since, for defraying the regular expence of British government, these two great and unavoidable expences were considered as contingent only, and provided for by annual grants: and because armies, in time of peace, in former reigns, had proved dangerous to liberty from the abuse of power, they were still considered in the same light, at a time when liberty and trade were continually threatened from their armed enemies and rivals abroad.
When the continuance of peace, in the reign of George the First, had produced the effect of reducing interest, on many occasions, to 3 per cent the sinking fund began to gather strength. The land tax, from the year 1722, had not exceeded two shillings in the pound; and the extraordinary expence of government, according to the annual grants of the 13 years of his reign, did not exceed 34,800,000 l. or 2,670,000 l. a year. Public tranquillity was very little disturbed during the first twelve years of the succeeding reign; and all the extraordinary expence did not much exceed three millions per annum: yet this expence, small as it was, compared with what it has been since, was almost every year made out, by taking one million at least from the sinking fund: and in the years of the least expence, such as 1731 and 1732, the land tax was reduced to one shilling in the pound, at the expence of taking two millions and a half from the sinking fund.
These steps of administration I neither censure, or approve of. I must suppose every statesman to have good reasons for doing what he does, unless I can discover that his motives are bad. May not the landed interest, who composed the parliament, have insisted upon such a diminution of their load? May not the proprietors of the public debts have insisted on their side, that no money out of the sinking fund should be thrown into their hands, while the bank was making loans upon the land and malt duties at 3 per cent? Might not the people have been averse to an augmentation of taxes? When three such considerable interests concur in a scheme, which in its ultimate, though distant consequences, must end in the notable prejudice of perpetuating the debts, although opportunities offer to diminish them, what can government do? They must submit; and, which is worse, they cannot well avow their reasons.
Such combinations must occur, and frequently too, in every state loaded with debts, where the body of the people, the landlords and the creditors, find an advantage in the non-payment of them. It is for this reason that I imagine, the best way to obviate the bad consequences of so strong an influence in parliament, would be, to appropriate the amount of all sinking funds in such a manner, as to put it out of a nation's power to misapply them, and by this to force them either to retrench their extraordinary expences, or to impose taxes for defraying them.
The second period of George IId's reign, was from the breaking out of the Spanish war in 1739, to the peace of Aix-la-Chapelle in 1748. During these ten years, (1748 being included,) the extraordinary expence was, upon an average, very near seven millions; and at the end of the year 1738, the public debts amounted to 46,661,767 l. bearing 1,962,053 l. interest.
The first expedient for borrowing money during this war, was to continue the duty on salt for seven years; and to mortgage it at once for 1,200,000 l. according to the old plan. To this was added, the expedient of lotteries, and loans upon indeterminate annuities, according to the current value of money.
An additional excise upon spirituous liquors, brought in wherewithal to compensate these additional sums of interest; and the East India company, for lending one million at 3 per cent upon this occasion, had their charter continued from 1766 to 1780. This operation I also consider as an anticipation; and as it was to commence at the distance of 23 years from the time of the grant, could not fail of being very burdensome to the nation, however convenient it might be at that particular time.
Were the India company now, 1766, to purchase the renewal of their charter for 14 years, what a sum might be expected from it! Yet the value given for the grant they then obtained did not exceed 30,000 l. because the other annuities of 3 per cent. were sold at that time for 97 l. or, in the language of the funds, at 3 l. premium for every 100 l. subscribed; and this so early in the war as 1743.
The practice of borrowing upon premiums had taken place in Queen Anne's reign, and has of late years been very common. The credit of Great Britain is so firmly established, that in whatever way government inclines to borrow, the moneyed men are willing to lend, provided the loan be made according to the rate of interest at the time.
To avoid therefore the establishment of funds at different rates of interest, in proportion to the fluctuations of money, the bargain is made at one determinate rate. Suppose, for an example, 3 per cent. Then, according as money is found to rise above this rate in the market, a premium is paid out of the money subscribed; as in this case 3 l. was paid out of the 100 l. subscribed; that is, the subscriber retained it, and obtained his 3 l. annuity, for the payment of 97 l. so this remained a 3 per cent loan, instead of being, as it really was, at 3 9/97 per cent. and was sold and transferred as every other 3 per cent without occasioning any perplexity.
As the war continued, interest rose, from the demand for money, when the supplies became deficient.
The year following, viz. 1744, this manifested itself, by the conditions offered by government, which were. That, of two millions to be borrowed at 3 per cent as before, upon the whole sum, 1,500,000 l. should be formed into perpetual annuities, and the remaining 500,000 l. into a lottery, consisting of 50,000 tickets, to be sold at 10 l. each. The original subscribers to this loan subscribed therefore 10 l. for the ticket, and 30 l. for the annuity, in all 40 l.; for which they were to receive 3 per cent. But the premium consisted in this; that every subscriber for 10 tickets, that is, 400 l. of the total fund, had an annuity for life given to him of 4 l. 10s.
This made five thousand annuities on lives, of 4 l. 10s. each, or 22,500 l. a year to be added to the interest of 3 per cent. on the two millions, that is, to 60,000 l. a year of perpetual annuities. So that the whole loan of two millions this year cost government 82,500 l. of interest, of 4 1/8 per cent; 22,500 l. of which was to extinguish with the lives of the subscribers.
Now, if we suppose these life-annuities worth 20 years purchase, (2) this was the same thing as if government had given a deduction of 90 l. out of the 400 l. subscribed; consequently the remainder, which was 310 l. produced 12 l. This makes the rate of interest upon the loan to have been 3.87 per cent. And as government inclined that the loan should be made in this way, the lenders were willing that it should be so; and the difference between 3.87 per cent (the then rate of money) and 4 1/8 interest, which was paid by government, was a sinking fund, as it were, for the gradual extinction of the capital of the lottery for 300,000 l. during the lives of the annuitants.
In 1746, perpetual or indeterminate annuities were constituted at 4 per cent and the premium upon the ten lottery tickets was raised to 9 l. life-annuity.
It would be unnecessary to trace the various methods of contriving the premiums given in the succeeding years of this war. The principle upon which they were regulated was always to proportion them to the rate of interest at the time; and the motive was, I suppose, that by this method of borrowing, a part at least of the debt would become extinguished with the lives of the subscribers. There might perhaps be another, to wit, that by swelling the capital, for value not received, there was an appearance of borrowing at a lower rate of interest than what in reality was the case. Thus in 1747, when 6,300,000 l. were borrowed; instead of giving not quite 4 1/2 per cent. for this sum, they gave 4 per cent. upon 6,930,000 l. which capital, although money should return to 3 per cent was still to stand at its full value; whereas, had 6,300,000 l. been borrowed at 4 1/2 per cent. there would have been a saving of 600,000 l. upon the capital; and at the peace, the interest of 4 1/2 per cent would equally have come down to 3 per cent with the other funds.
During this first war of George the Second, the land tax was constantly at 4s. in the pound; and new branches of customs, excise, or other inland duties, were created in proportion to the swelling of the national debts, which, on the 31st of December 1748, amounted to 78,293,313 l. sterling, bearing 3,003,325 l. interest; and the sinking fund, or surplus of all permanent taxes then imposed, after paying the civil list, and the interest upon this capital, amounted to 1,060,948 l. sterling. During this war, the debts were increased above what they were at the end of 1738, by 31,631,346 l. sterling capital, and by 1,043,272 l. of interest or annuities.
The war was no sooner over, and the national expence diminished, than money began to regorge in the hands of the monied interest: an infallible consequence of such a violent revolution, when extraneous circumstances, such as occurred after the peace of 1763, do not prevent it.
To profit of this conjuncture, government, early in 1749, proposed that all the public creditors upon capitals bearing 4 per cent interest, redeemable by parliament, and amounting to upwards of 57 millions, who should accept of 3 per cent from December 1757, should have their debts made irredeemable until that time; and in the interval should continue to have 4 per cent till December 1750; and 3 1/2 per cent from thence, until the total reduction to 3 per cent in December 1757.
This bold undertaking had the desired effect. Many obstacles were thrown in the way; but the regorging capitals in the hands of many, made every one fear the reimbursement for himself; and the credit of France was then so low, that very few chose its funds as an outlet for their superfluous money.
But an outlet, unfortunately, was not wanting at the end of the last war in 1763, as we shall shew in its proper place.
Here then is a notable instance of the effects of regorging money. A small sum, when compared with a nation's debt, operates upon the whole capital; as a small balance upon trade affects the whole mass of reciprocal payments.
The reimbursement of 57 millions offered by government, in 1749, was, to the conviction of all the world, an impracticable scheme; but the stockholders seeing a large sum ready to be subscribed, at the interest offered, and feeling the effects which that regorging money must, in all events, have produced; willingly, and wisely perhaps, consented to the offer made them. Had they refused, and had the scheme proposed become abortive thereby, perhaps the nation, from the disappointment, might have been so far animated against the creditors, as to have consented to be at the expence of defraying the service of the following years, without encroaching upon the sinking fund. What effect this would have produced upon the rate of interest, in that conjuncture, no man can tell, nor will the real consequence of such a measure be ever known, until the happy trial be made. That it would have brought interest below 3 per cent in December 1757, is, I think, evident: for as matters stood, had the creditors of 57 millions been able to hold out, I must do them the justice to believe, they would not have accepted the proposal made to them; and an addition of all the sinking fund thrown among them annually, at a time they could not dispose of what they had, upon better terms than those offered to them, would undoubtedly then, as at all times, operate a very great national relief, in bringing down the interest of money.
During the tranquillity which continued from the peace of Aix-la-Chapelle, in 1748, to the commencement of hostilities in 1755, the money expended for extraordinary services amounted on an average to above four millions per annum. The expence of government was then increased, by supporting the colonies, and by several great and uncommon outgoings at home, for purposes mentioned in the supplies of those years.
A little before the breaking out of the last war, that is to say, on the 5th of January 1755, the national funded debt was reduced to 72,289,674 l. upon which was paid an annuity of 2,654,500 l. and the sinking fund amounted to 1,308,814 l. At the end of 1763, the year of the peace, the funded debt amounted to 130,586,789 l. 10 s. besides above 9 millions not provided for. So that at the end of last war the national debt exceeded 140 millions; besides the value of the annuities granted in 1757, 1761, and 1762. Hence it appears, that the war occasioned an augmentation of upwards of 58,297,116 l. upon the funded national debt; (3) besides the difference between the unfunded debts at the beginning and end of the war; and also the value of those annuities.
I shall, before I conclude this chapter, present a short scheme of the state of the nation at that time: but first let us take a view of the methods used to borrow so large a sum in the short period of eight years.
Until 1757, money was borrowed by government, at very little more than 3 per cent but then a loan of 5 millions being necessary, government consented to create annuities of 4 1/2 per cent irredeemable for 24 years. By this expedient the monied people eluded the operation of reducing the interest of this fund, upon the return of peace. How far this expedient was to be preferred to the former, of increasing the capital beyond the money paid; or whether it would not have been still better to have paid for the money wanted, according to the current rate of interest in the market at the time, waiting until a peace might afford a favourable opportunity of reducing it, I shall not take upon me to determine. (4)
I have observed how rash it is for any one to censure acts of administration, when the motives of a statesman's conduct are unknown. This, however, I have sometimes ventured to do, in speaking of things which happened many years ago; but we ought to be more cautious as we come nearer to our own times, because not having, as in the case before us, a course of experience to point out the errors, we must entirely rely upon our own sagacity, and reason from analogy only.
During the last war, as in that preceding it, taxes were increased in proportion to the interest of the money borrowed; and new impositions were now laid on the articles of great consumption, which produced abundantly. The new malt-duty of 3d. per bushel, and the new beer-duty of 3s. per barrel, bring in net into the exchequer near 820,000 l. per annum, and discharge the interest of above 27 millions sterling, at 3 per cent. Such a sum raised at the end of a war so very expensive, and at the very time when the credit of France was totally fallen, must have operated in the strongest manner, and did in fact operate more, perhaps, than any other consideration, to put an end to that war, the most glorious that Europe has beheld since the beginning of this century, or perhaps in any age whatever: advantageous to Great Britain, notwithstanding all the expence, provided that the consequences happen to correspond to what may be reasonably expected.
I shall now set before my reader a short state of the taxes, debts, and public funds of Great Britain, at this bright period of her history.
From the best authority I have been able to procure, the revenue of the state, considered under the three general branches of customs, excise, and other inland duties, which comprehend the whole permanent income of this kingdom, was then as follows:
Customs net into the exchequer, about £2,000,000
Excise in all its permanent branches net, about 4,600,000
Other in land duties net 1,000,000
Land tax at 4s. in the pound 2,000,000
Annual malt tax net 613,000
In all 10,213,000
Let us next state the annual charges and appropriations settled upon this fund.
First then the civil list, to the amount of 800,000
Secondly, The interest of about 131 millions of funded debts at different rates of interest, about 4,500,000
Thirdly, The interest of nine millions not then provided for, supposed to be at 4 per cent. 360,000 In all of regular and permanent annual charge 5,660,000
So there remains free, about 4,553,000
From which if we deduct the annual grants of land and malt-taxes, which extend together, as above, to 2,613,000
There will remain as the produce of the sinking
fund (5) 1,940,000
In this state, nearly, stood the affairs of Great Britain after the conclusion of the peace in 1763.
It now only remains to offer some conjectures why, after the conclusion of this peace, as after the peace of Aix-la-chapelle, money was not found to regorge, so as to furnish an opportunity of reducing the rate of interest upon all redeemable debts, and by that to raise the amount of the sinking fund, and more firmly to establish the national credit.
After the fall of the credit of France toward the end of 1759, Great Britain had the command of all the money to be lent in Europe; and accordingly amazing sums were borrowed in 1760, 1761, and 1762. Of the sums borrowed, a great part, no doubt, was the property of strangers; but they, not being so well acquainted with the affairs of this nation as the English themselves, instead of subscribing to the loans, lent the money to our own country people, who, in hopes of a great rise upon the return of peace, filled the subscriptions with this borrowed money.
The consequence was, that no sooner did the funds begin to rise after the peace, than many creditors demanded their money of those who had invested it in the public funds. This obliged the latter to bring their stock to market, and this again had naturally the effect of keeping the funds very low. Some, more prudent than the rest, had borrowed upon a long term of repayment: which had the effect of putting off still longer the settlement of the funds in the hands of the real proprietors, and of taking them out of those who only held them nominally.
Besides this accidental cause of the low price of the funds, other circumstances, no doubt, greatly contributed to produce the same effect.
How great soever the balance of trade, that is, of exportations above importations, may have been of late in favour of England, still the mighty sums drawn out by the foreign creditors have certainly, upon the whole, prevented much money from coming home on the general or grand balance of payments. While this continues to be the case, it is impossible that much money should regorge at home in the hands of the natives, and until this shall happen, there can be no hope of seeing the 3 per cents rise above par. But then the rise, small as it is, since the peace, may encourage us to hope that this favourable change is not far off: for had the profits of our trade been quite unable to balance the loss upon our foreign debts, the funds would undoubtedly still continue to fall, which is demonstrably not the case from the circumstances of the loan in April 1766, obtained by government, with the assistance of a lottery indeed, at 3 per cent. (6)
Here then was an outlet provided for more money than all that could regorge at home, viz. the payment of those foreign creditors, to whom the stockholders were indebted. besides this, the sale by government, of such tracts of land in the new acquired islands in the West Indies, provided another; money was even placed in the funds of France soon after the peace, until the adventurers were checked by the operations of the King's council, in reducing both capitals and interest upon them, contrary to the original stipulations with the creditors. A lucky circumstance for Great Britain, as it forces, in a manner, all the money of the continent into the English funds, which equally remain a debt upon the nation, whether high or low in the market.
I now proceed to inquire what be the consequences of this might change produced upon the policy of industrious and trading states from the establishment of credit, debts, and taxes.
I have, from the very beginning of this inquiry, occasionally taken notice of the influence which such a change must make upon the spirit and manners of a people. The lower classes, who are slow in forming combinations, do not soon comprehend the necessary consequences of such revolutions. Even ministers have been often at a loss to judge of the consequences which might follow upon some steps of their own conduct relative thereto, although taken upon mature deliberation.
When public credit is employed for raising money upon a plan of refunding the capital, either by uniform annual payments exceeding the interest, or by funds established for sinking the capital, no contingent consequences can happen, provided the plan be executed: the debts contracted will be paid, and matters will return to their former state.
When public credit is employed for raising money upon payment of a perpetual interest; or if, whatever be the plan laid down, capitals should not happen to be discharged, but the debts should swell continually; in this case, the contingent consequences are many and various, far exceeding any man's sagacity to investigate.
If we judge of them from what past experience has taught us, we may conclude, that, in one way or other, all debts contracted will in time disappear, either by being paid, or by being abolished: because it is not to be expected that posterity will groan under such a load any longer than it is convenient; and because in fact we see no very old public debts as yet outstanding, where interest has been regularly paid out of a fund which has remained in the possession of the state.
This is a very rational conclusion from past experience; but it is relative only to the circumstances of past times. While the debtors are the masters, there is no difficulty of getting clear of debts: but if the consequence of this new system should be to make the creditors the masters, I suppose the case may be different. Farther,
In former times public debts were contracted between the state and its own subjects; but at present we see that in such loans, foreigners, even enemies, are invited to concur: and the better to engage them to it, a total immunity is promised from all taxes upon the interest to be paid by the borrowers.
This circumstance has already drawn the attention of Princes, in the discussion of their reciprocal concerns. We saw how, in the treaty of Dresden, which took place after the King of Prussia's invasion of Saxony in 1745, it was provided by the 6th article, that all debts due by the bank of the Steuer to that Prince's subjects, were to be paid, on presentation of their contracts.
We have not indeed as yet seen wars carried on for the payment of debts; but the case may happen, and kingdom may be carried off upon such pretensions, as well as private property. What a chain of contingent consequences arises from this single combination, were this a proper place to introduce them!
But without going to the supposition of Princes or nations becoming reciprocally engaged in debts, and thereby involving such mighty interests in the support of public faith, we may easily conceive, that a monied interest, of a long standing, may have influence enough to produce a change upon the spirit and manners of a people.
Let me here take the example of Great Britain. Do we not see how the spirit of that nation is totally bent upon the support of public credit? And do we not see how absolutely their commercial interest depends upon it? Can it be supposed, that every one has combined all the consequences which may flow from the constant swelling of their debts? Or, indeed is it possible to determine what will be the consequences of them? This however we may suppose at least, because we see the progress of it already, that the interest of the creditors will daily gather strength, both in parliament and without doors: and if from small beginnings it have arrived at the pitch we now see, it is very natural to conclude, that, in time, it may become stronger, and that at last, the creditors of the nation may become the masters of it.
When any one interest becomes too predominant, the prosperity of the state stands upon a precarious footing. Every interest should be encouraged, protected, and kept within due bounds. The following speculations are intended for the application of principles to new and unexperienced combinations; where natural causes may work their direct and immediate effects, and thereby prove prejudicial to the general welfare, unless they be foreseen in some degree, and proper remedies be prepared against them.
Europe was possessed by our ancestors free from taxes; our fathers saw them imposed, and we now see how fast they become mortgaged for our debts. We can as little judge of the extent of our credit, as they could of the possibility of contributing so large a fund for the support of it.
As the plan of imposing taxes has been extended, we see the public coffers every day receiving a vast flux of money, and like the heart in the human body, throwing it out again into circulation. Happy state, could it be lasting, and were this flux and reflux preserved in a due proportion to all the uses for which it is intended! But states have their vices, as well as private people. Public opulence should be proportioned to public exigences: but how often do we see ambition putting on the face of public spirit, and animating the resentment of a nation, under colour of providing for her security? Hence wars, from wars expence: recourse is had to credit, money is borrowed, debts are contracted, taxes are augmented; all this increases circulation, which demands a supply of currency: this is procured by melting down the solid property. These operations performed, the public money is either sent abroad, or remains at home. If sent abroad, more property must be melted down, in order to fill up the void. If it remain at home, it will animate every branch of circulation; and when the exigence, which required this additional quantity of money, is over, what circulation finds superfluous, will stagnate in the hands of the monied interest, and will either form a fund for the filling of new loans to government, or it will be laid out in the purchase of the property formerly melted down, which produced it; and thereby will be consolidated a-new.
Every interest in a state must influence the government of it, in proportion to its consequence and weight; and every government must influence the spirit of the people who live under it.
Now, as we have seen how industry creates wealth; how wealth and confidence create credit; how credit creates debts and taxes; how these again occasion an augmentation of money, by the melting down of property; and how this property becomes transferred to a new set of men, once the monied interest, who afterwards acquire the lands, and consolidate this quantity of money which is become superfluous to circulation; does not this chain of consequences represent a kind of circle, returning into itself? And is it not plain, that without the intervention of this engine, namely the money created in proportion to the demand for it, the chain would be cut off, before it could reach the link from which it first set out? Will not this conversion of the former monied interest into a new landed interest, insensibly inspire the bulk of the landlords with sentiments analogous to a monied interest? Is not this evidently more and more the case every day in England? And from this may we not prognosticate the solidity of public credit in that nation?
If on the other hand we find, as in France, industry in times of peace drawing wealth from other nations, and thereby increasing the coin, upon which alone credit is circulated through the kingdom; and then foreign expence sending it away in times of war; must not circulation keep pace with the coin, that is to say, be circumscribed within the proportion of it?
If the solidity and extent of the King's free revenue should afford credit to borrow this coin; and if, without providing a proportional supply of currency to fill up the void, the coin borrowed be sent out of France; how can the ordinary circulation be carried on?
Let us here recal to mind what was said in the 22d chapter, upon banks, where we distinguished voluntary circulation, which is buying, from involuntary circulation, which is paying: we there observed how paying must always take place of buying; consequently, we may here determine that taxes must be paid before buying, that is consumption, can go on. The deficiency therefore of coin for circulation, will, first, proportionally affect the trade, manufactures, and consumption of France, and afterwards the revenue which arises from them. Is not this the constant complaint in France, when war carries off their coin? The remonstrances of all their parliaments are filled with it.
In times of peace, the amount of what comes from the people is greater than in time of war: but then there is coin sufficient for all the payments; and when they are made to the royal treasury, they immediately return into circulation, and no hurt is felt.
I insist the more upon this principle, and I introduce it in so many different ways, and under such a variety of views, because I take it to be one of the most important considerations in the whole doctrine of credit, and one which I have never seen suggested by any French or English writer upon this subject. Many are the complaints for want of money; but no method have I ever seen proposed for obtaining it from solid property; the easiest and safest of all operations, when conducted with honesty, and according to principles.
As money therefore is the means of closing the chain of consequences already mentioned, and forming it into a circle, as has been said, we plainly see how, when it is wanting, the same effects cannot be produced; and consequently the country of France, where money is confined to the coin, will be very long of adopting the sentiments of a monied interest; whether for its profit or its loss, in the end, is not here the question.
We have now traced the contingent consequences of public credit as far as to shew how it may tend to influence the spirit of a people, and make them adopt the sentiments of a monied interest.
The allurement of acquiring land-property is very great, no doubt, especially to monied men. The ease and affluence of those, on the other hand, who have their capitals in their pocket-books, is very attracting to the eyes of many landlords, especially at a time when they are paying the heavy taxes laid upon their possessions.
The firm establishment of public credit tends greatly to introduce these reciprocal sentiments of good-will among the two great classes of a people, and thereby to preserve a balance between them. The monied interest wish to promote the prosperity of the landlords; the landlords, the solidity of credit; and the well-being of both depends upon the success of trade and industry.
Let us now suppose what is actually the case in Great Britain, that from the swelling of public debts an enormous fund of personal property is created. This is formed out of the income of the whole nation; and as it has been purchased by those who have lent money to the state, in common language it is included in what we call the monied interest: it is however very distinct from it, as will be understood from what is to follow.
The capital of the public debts is the price which has been paid for the annuities due to the creditors, and is now no more money to them than land is money to the landlord. It may be turned into money, no doubt; but so may land.
The monied interest, comprehends, those only who have money, not realized upon any fund, and who either employ it in the way of trade, in the way of industry, in jobbing in land, in stock, or in any way they please, so as to draw from it an annual income. While it is fixed, that is, given for any permanent value, it ceases to be money; when it is called in, it becomes money again. Let stock, therefore, suffer ever so many alienations from hand to hand, it still continues stock: it never can become land, it never can become money, until it be paid off by government. I hope this idea is so clear, as to be well understood. Stock, therefore, I here consider as one great branch of solid personal property; as far as the security of government is solid and good; and as such, may be melted down into money by banks, as well as any other thing.
Now I have said that this fund is formed out of the income of the whole nation; consequently by fund, here, I do not understand the capital, which exists no more, but the interest which is drawn for it: it is this interest, I say, which is paid from the land, the money, the trade, the industry, &c. which forms one great branch of the monied interest of England. From the land, out of the amount of the taxes charged upon it; from the money, trade, industry, &c. out of the amount of proportional taxes, such as excises, customs, salt-tax, stamp-duties, and the like.
The more the national debts increase, by the monied interest realizing into this branch of solid property the funds, the more the taxes must augment; and consequently, the more the proprietors of the funds themselves must be affected by such taxes, as well as the landlords.
From this exposition of the matter, it may be concluded, that as proportional taxes affect every man's income, according to his consumption; the landlord, caeteris paribus, who pays a land tax, as well as his proportion upon his consumption, is more hardly dealt with than the proprietor of the other branch of solid property, the funds, who pays his proportion only of the last.
But the condition of the stockholder is not equally favourable to that of the landlord, for two very plain reasons. The first is, that the income of his stock cannot increase; that of the land may. The second is, that the swelling of this great capital of stock has the effect of sinking the interest upon it, and consequently of diminishing the income of the stockholder: and in proportion to this diminution, the value of land must augment. Now I readily allow that the augmentation upon the value of lands is no inducement to a landlord to turn them into money; because he would then lose upon his money, what he gains upon the additional price received. But it is a great advantage in another respect, namely, that he thereby diminishes the interest he pays upon his debts, if he have any; and if he have none, it enables him to borrow at a lower rate for the future; and by improving his lands with the money borrowed, he may augment his income much beyond the proportion of the interest paid.
It is therefore necessary, in imposing land taxes, rightly to combine every circumstance; that the load of all impositions may be equally distributed upon every class of a people who enjoys superfluity, and upon no other. If, after a fair deduction of principles, this shall appear a thing possible to be done, we may expect to see statesmen engaged to depart from the old maxim of grasping at what is readiest and nearest at hand, to wit, the landed property, with a view to spare a class of people, which, in a well regulated state, never can be made to feel the burden of any proportional tax whatsoever; I mean the industrious poor.
I now proceed in my inquiry into the nature and consequences of the swelling of this great branch of property, the public funds.
As to the nature of it, we have said already, that it is formed by realizing money into stock. When government borrows, the lenders must be people who have money. If the loan be made at home, the money is no sooner paid in, than it is spent; and as we may suppose that it would not have been lent, had either the lenders found it necessary for their current expence, or had they found a more profitable way of realizing it than by lending it to government, we consider it as having been in a state of stagnation; but being lent to government, it is thrown into a new channel of circulation.
Farther, this money stagnating in the hands of the lender, either proceeded from his income, which exceeded his expence, or from the profits of his industry. In either case, the country is neither poorer or richer, when considered in a cumulative view, than if the same sum had been lent to private people at home.
Let us next suppose the money to have been borrowed for the exigence of a foreign war. In this case, if it be borrowed at home and sent abroad, it must first be converted into the money of the world, gold and silver, and then sent off, to the diminution of this kind of property; or it must go abroad in the money of the country, credit, to the diminution of the annual income upon which the credit is established. As this last operation may not be so clear, an example will explain it.
Government borrows one million; it is paid in paper, and must be sent to Holland. If at that time a balance be due by Holland of one million, bills will readily be found for it. In this case, the balance of trade is borrowed as it were by government, and becomes converted into a capital of a million in the public funds, the interest of which will remain at home, and continue to be the property of the nation. But as the value of this balance is sent to Holland and spent abroad, it is, upon the whole, to the nation, as if no balance had been due to them. This I call a lucrum cessans to the country.
But suppose no balance to be due by Holland at the time the million comes to be sent off, I say the consequence will be, to alienate in favour of foreigners a part of the annual income, proportional to the whole interest paid for the loan, whether it has been subscribed for by foreigners, or by natives.
If the subscription be filled by foreigners, the consequence is evident: it is equally so in the other case, upon a little reflection.
Suppose then the million subscribed for, and paid in London. Bills are sought for; none are found, I mean in the way of reciprocal compensation, does not this sum immediately become a balance against London? And as a country loses all such balances, and the country to which they are due gains them, this million is lost to England, and forms what I call a damnum emergens; that is to say, her former property or income is so far diminished, or comes to be transferred to strangers.
From this we may conclude, that in all matters of public borrowing, it is of no consequence whether the subscription be filed by natives, or by foreigners, when the value of it is to be sent abroad.
Let us next examine the state of the question when the loan is made in order to be spent at home, as is the case after a war, when the unfunded debts come to be paid off.
We have said that loans are filled by money stagnating, which the owner desires to realize: if he cannot do better, he lends it to government; if he can do better, he will not lend it.
While the uses of domestic circulation absorb all the money in the country, that is to say, when there are private persons ready to borrow all the money to be lent, at this time government cannot borrow at home; and if they did, by offering a high interest for it, the borrowing would do harm to circulation; because it would raise interest at home, or disappoint those who would gladly borrow it, for little more than the interest offered by government.
Let us next suppose that after a war, when the unfunded debts are either bearing a high interest, or selling at discount, government shall find an advantage in opening a subscription, which may be filled from abroad, at a lower rate than the then actual value of money. Suppose, I say, the Dutch should be willing to lend at 3 per cent while money in England stood at 4 per cent. I ask if, in this case, government ought to borrow from Holland, at the expence of sending the interest out of the country, rather than suffer such debts to sell at discount; or continue paying a higher interest at home for what they owe?
It is my opinion that still they ought to borrow abroad, for the following reasons. That if the high interest at home proceed from want of money, that is to say, from circulation not being full enough, it is their interest to borrow, were it for nothing else than to supply circulation; because unless this be full, all industry must languish. But suppose it should be said that circulation is full enough, that industry suffers no check from that quarter, but that there being no superfluity of money, interest stands 1 per cent higher than it would do were there considerable stagnations. In this case also, I think it is their interest to borrow, were it for no other reason than to produce such stagnations.
It is a general rule every where, that there is no having enough without having a superfluity; at least there is no certainty of one's having enough without finding a superfluity. Borrowing abroad, therefore, in small sums, at such a time, will produce stagnations at home, from which succeeding loans may be filled, after circulation is sufficiently provided: and even in case more should be borrowed from strangers than may be found necessary; and that in consequence of this, too much money should come to stagnate at home, after the demand of government is over; the monied interest would then lend, in their turn, to other states, where interest is higher; and the annual returns from that quarter would more than compensate what must be sent away, in consequence of the former borrowing.
From these combinations, let us draw some conclusions.
First, That the effect of public borrowing, or national debt, is to augment the permanent income of the country, out of stagnating money, and balances of trade.
Secondly, That this income so created, may be either the property of natives, or of strangers.
Thirdly, That when money is found to regorge, in a country where circulation is not diminishing, it may be supposed to proceed from the coming in of a right balance of trade.
Fourthly, If stagnations in one part be found to interrupt circulation in another, public borrowing, for domestic purposes, has the good effect of giving vent to the stagnation, and throwing the money into a new channel of circulation.
Fifthly, That the sum of interest paid by any nation to strangers, shews the general balance due by the nation, after deducting all the profits of their past trade from all the expence of their foreign wars.
But here it must be observed, that as on one hand we are comprehending all that is paid to foreign creditors, on account of the funds they have in England, for example, so on the other hand, must be deducted from this, all the payments made to Englishmen by other nations.
Sixthly, From this last circumstance we discover that the lending to other nations by private hands, produces the same effect to a nation as if the state were actually paying off the debts due to strangers. Consequently, when Moses permitted the Jews to lend to strangers at interest, and forbade such loans among themselves, his view was to establish a foreign tribute, as it were, in favour of his own nation, instead of promoting luxury at home.
Seventhly, As the balance due to a nation upon her trade, is found to compensate, pro tanto, the money she spends abroad, we may from the same principle, conclude that so soon as she ceases to expend money abroad, the balance of trade in her favour, if not realized at home in some new improvement, will diminish, pro tanto, the interest, or capitals due to strangers. This is evident from the nature of balances, of which we have treated already.
Eighthly, The consequence, for example, of England's owing large sums to strangers, will, from the same principle, constantly prevent exchange from rising very high in her favour, when the balance of her trade comes to be paid to her: because on every such occasion, her foreign creditors will be glad to disappoint exchangers, by furnishing bills for their interest, or capitals, to those who owe the balance; the consequence of which is plainly to diminish the foreign debts.
This circumstance implies no loss to the nation which is creditor in the balance of trade, and debtor upon the capitals; because we have proved that the price of exchange never affects a nation, but certain individuals only, who pay it to others of the same nation.
This is sufficient, I think, to point out in some degree the nature of a national debt. I come next to examine the consequences of its constant augmentation; when proper measures are not taken, either to pay it off, or to circumscribe it within certain bounds.
In what is to follow, I shall throw all consideration of capitals totally out of the question; and as to the amount of taxes, it is quite indifferent whether the money proceeding from them be in consequence of an improvement made upon those already established, or from new impositions: such combinations will come in more properly afterwards.
If the interest paid upon the national debt of England, for example, be found constantly to increase upon every new war, the consequence will be, that more money must be raised on the subject for the payment of it. The question then comes to be. First, How far may debts extend? Secondly, How far may taxes be carried? And Thirdly, What will be the consequence, supposing the one and the other carried to the greatest height possible?
I answer to the first, that abstracting from circumstances which may disturb the gradual progress of this operation, before it can arrive at the ne plus ultra, debts may be increased to the full proportion of all that can be raised for the payment of the interest. As to the second, How far taxes may be carried, I shall not here anticipate the subject of the following book, any farther than is necessary to resolve the question before us.
Taxes, we have said, either affect income, or consumption. The land-tax of England is now at 4 shillings in the pound, upon a supposed value of the property affected by it, which is all real and personal estates, the stock upon lands, and some few other particulars excepted.
This tax may be carried to the full value of all the real estates in England. As for personal estates it never can affect them proportionally; and this part of the statute of land-tax which passes every year, and imposes 4 shillings in the pound on personal estates, carries in it a mark of our former ignorance in matters of taxation.
The notion of actually imposing 20 shillings in the pound upon the real value of all the land-rents of England, appears to us perfectly ridiculous. I admit it to be so; and could I have discovered any argument by which I could have limited the rising of the land-tax to any precise number of shillings under twenty, I should have stated this as the maximum rather than the other.
The second branch of taxes comprehends those upon consumptions, excises, and the like. The maximum as to this branch must depend upon the interests of foreign trade; because this is affected in a certain degree by the prices of domestic industry. Other taxes have not this effect, as we shall shew in its proper place.
But as foreign trade on the other hand is not essential to the support of the domestic industry, consumption, circulation, &c. of any nation, as has been proved in the second book, but merely to its increasing in wealth proportionally to other nations; were foreign communications cut off entirely, I perceive no limit to which I can confine the extent of proportional taxes. Let me therefore suppose a term beyond which impositions of all kinds must come to a stop, and then ask, in the third place, what the consequence will be? I answer, that the state will then be in possession of all that can be raised on the land, on the consumption, industry and trade of the country; in short, of all that can be called income, which it will administer for the public creditors.
When this comes to be the case, debts become extinguished of course; because they come to be consolidated with the property: a case which commonly happens when a creditor takes possession of an estate for the payment of debts equal to its value.
Government then may continue to administer for the creditors, and either retain in its hand what is necessary for the public expence of the year; or if it inclines to shew the same indulgence for this new class of proprietors as for the former, it may limit the retention to a sum equal only to the interest of the money wanted; and in this way set out upon a new system of borrowing, until the amount of taxes once more extending to the amount of the public revenue be transferred to a new set of creditors. This is the endless path referred to in the ninth chapter of the second book, which, after a multitude of windings, returns into itself.
A state, I imagine, which would preserve its public faith inviolable, until a period such as I have been supposing, would run little risk of not finding credit for a new borrowing. The prospect of a second revolution of the same kind with the first would be very distant; and in matters of credit, which are constantly exposed to risk, such events being out of the reach of calculation, are never taken into any man's account who has money to lend.
The whole of this hypothesis is, I readily agree, destitute of all probability; because of the infinite variety of circumstances which may frustrate such a scheme. I introduced it merely to shew where the constant mortgaging of a public revenue may end; and to disprove the vulgar notion, that by contracting debts beyond a certain sum, a trading nation which has a great balance in its favour, must be involved in an unavoidable bankruptcy. To say that a nation must become bankrupt to itself, is a proposition which I think implies a contradiction.
In the last chapter we have been running through a chain of consequences relative to the increase of public debts, which appear as extravagant to us at present, as it would have appeared to Davenant, to have supposed the debts of this nation to grow up to their present height, without the risk of involving the nation in a general bankruptcy.
But these consequences are merely contingent. The present debts may either be paid off, or the nation may be involved in a general bankruptcy. In either case, the vast property in the funds, this great article of permanent income, belonging to natives and to foreigners, must wither and decay, and at last disappear altogether.
We may therefore conclude, that one of three events must happen, viz. either First, Debts will swell to such a pitch as at last to pay themselves: or, Secondly, The nation will be involved in a bankruptcy.. or, Thirdly, They will be fairly paid off, or at least circumscribed within reasonable bounds.
The first supposition we have examined; the second we are now to consider; the last will be the subject of the following chapter, with which I shall conclude this book.
I shall advance no argument to prove that the scheme of a public bankruptcy is either lawful, honourable, or expedient, if voluntarily gone into by a state; because I think it is diametrically opposite to every principle of good government. It is a maxim uncontroverted, that a contract ought to be binding between the parties contracting, and that it ought to be fulfilled in every article. If the public good be alleged as an overruling principle, to which every other must give way, I readily admit the justness of the exception. There is another of equal force, the impossibility of performance. When such arguments are used to engage a nation to commit a deliberate act of bankruptcy, two things must be examined: the first, is the interest which the public has in adopting the scheme: the second, the consequences of it. What reasons a state may have for breaking faith with her creditors, I shall consider afterwards; but let us first enquire what might be the consequences of a general and total bankruptcy in England; from which we may gather what difference it would make, were it partial only; and by this inquiry, we may be led to discover the proper method of breaking faith, in case it should become unavoidable. This is what in another place I called bringing credit decently to her grave; when, after being overstretched, it can no longer be supported.
A bankruptcy may take place in two ways: either as a consequence of circumstances which cannot be prevented; or by a deliberate act of government.
Were the trade and industry of England to decay, the amount of all the permanent taxes might so far diminish, as to prove insufficient to pay the interest of the national debt, and defray the expence of civil government. Were the people to be blown up into a spirit of revolt against taxes, the same event would probably happen. In either case, the natural and immediate consequences of the bankruptcy would probably follow one another in this manner:
First, Every creditor of the state would become poorer in proportion to the diminution of his income.
Secondly, Consumption and the demand for work would diminish in proportion to the part of that income withheld, which the creditors annually expend for these purposes.
Thirdly, Trade would directly suffer, in proportion to that part of the said revenue yearly thrown into it by the public creditors at present; and it would consequently suffer, in proportion to the hurt resulting to private credit, from the consequences of the bankruptcy.
The creditors would then lose all, the trade of England would be undone, and the multitudes who live in consequence of the demand for their industry from the one and the other, would be reduced to misery. These immediate effects would first manifest themselves in the capital. The consequences would soon be felt all over England: a diminution upon the consumption of the fruits of the earth; a stagnation of that commerce which is carried on between London and the country (which we have seen to be equal to the amount of all the taxes, and to all the land-rents spent in London) would soon throw every thing into confusion. But taxes would be abolished: of that there is no doubt. Let a deliberate bankruptcy take place without any abolition of them by law, they would soon sink to nothing, from the utter impossibility there would be found to pay them.
A total bankruptcy, therefore, coming upon England, either from a decay of her trade, or a disturbance in collecting the public revenue would have the effect of plunging the nation into utter ruin at home: what might be the consequences from abroad, I leave to the reader's sagacity to determine.
Let me now suppose a bankruptcy to take place from a deliberate act of power, with a view of expediency.
The difference between the two consists in this; that in the first, all the consequences we have mentioned would follow one upon another, without a possibility of preventing them: in the other, a plan to prevent them might be concerted.
Let me then suppose, that government shall find it expedient, at any time, to use a spunge for the public debts; that they shall fear to external bad consequences, either from the resentment of those states who may be hurt by it, or from the ambition of others who may profit by it; that they shall cooly resolve to sacrifice the interest of all the creditors in favour of the whole body; and that they shall deliberate upon the plan to be followed, in order to bring about so great a revolution, without essentially hurting any interest in the state, that of the creditors alone excepted.
In this case, I imagine, they would begin by ordering the amount of all that is paid to the creditors, to be set apart as a fund for the execution of the plan.
They would purchase all over England, every article of produce and manufacture which might remain upon hand for want of a market: they would feed all those who would be forced to be idle for want of employment: they would instantly put proper employments into their hands; one week's delay in the execution of this part of the plan would throw the manufacturing interest into such confusion, as to be past all remedy: they would furnish credit to all the merchants subsisting, in proportion to what they had lost by the extinction of the funds: they would establish offices every where, to supply the wants of those who would be totally ruined, until by degrees they could re-establish confidence, the parent of trade, the mother of industry. By such precautions, properly taken, and properly executed, none would suffer but the unhappy creditors and their families, who, from great opulence, would be reduced to poverty.
As far as human prudence is insufficient for going through so great a detail all at once; so far would the effects of a general bankruptcy add hurtful consequences to those which in every case are unavoidable.
Were a statesman endowed with the supernatural gift of turning the minds of a nation at his will, and of foreseeing every consequence before it happened, such a plan might be executed. Another who, with the greatest capacity ever man was endowed with, would, for expediency, not from necessity, deliberately undertake a general bankruptcy, I should consider as a madman.
I should rather prefer to submit to the natural consequences which might result from an accidental bankruptcy, than endeavour to avoid them by a plan too complicated for human wisdom to execute.
Let us next suppose the scheme to be fairly executed from a view of expediency, no matter how, and all inconveniences prevented during the execution, what would be gained by it?
If by the supposition all taxes be kept alive, for at least a certain time, in order to prevent a total confusion, certainly no body could gain during this period; even the state itself would lose, because every branch of consumption would infallibly diminish. But that time elapsed, and taxes reduced to the lowest, who would be the gainers? We shall see when we come to the doctrine of taxation, that a sudden abolition of taxes, in consequence of a bankruptcy, would be advantageous to no body, but to creditors upon mortgage, and to the idle: not to landlords; because their incomes would diminish more than in the proportion of the present land-tax, at least their improvements would be interrupted, and their rents ill paid: not to the manufacturing classes; because at present they pay no taxes, but in proportion to their idleness or extravagance, as shall be proved: the monied interest, not secured on land, would I suppose be extinguished; trade and credit at an end. The gains then would be confined to those who have money secured upon land, where the capital is demandable. In such a situation, the interest of money would rise beyond all bounds; and a debt which might have been considered as a trifle before, might then carry off an estate. The idle also who live peaceably upon a very moderate income would find a great advantage from the fall of prices for want of consumption, and from the distress of the industrious; but the indigent poor, who are supported from voluntary charity, would suffer: all the great establishments for labour and industry, in public workhouses and hospitals, would fall to the ground: the numbers of poor who are there maintained at present would come upon a society, which is beginning to lose those tender feelings of compassion, which in countries of idleness, are more or less prevalent in proportion as misery is more or less familiarly before them.
To say all in one word, a total bankruptcy, and abolition of taxes, would bring this nation back to the situation it was in before taxes and debts were known.
Does any body imagine that our present situation is not analogous to our present policy, and that it is possible that independently of the same circumstances we should long continue to enjoy the advantages we feel? No: were we in the same situation as formerly, we should feel as our fathers felt. They had as good understandings to improve their circumstances as we have; but they had to do with an idle. we with an industrious common people. Trade and credit have been long at work to effect this great revolution: the operation is not as yet compleated, and a total bankruptcy now, would destroy every good effect of it for a long time.
Were taxes made to cease, the large sums which proceed from them would disappear entirely. Money would not, as some imagine, become equally distributed among those who now pay the taxes, and so proportionally increase every man's income. The reason is plain: the money paid for taxes, circulates; because it is demanded by the public, and is spent by it. Were taxes suppressed, people having less occasion for money than formerly, would circulate less in proportion. It is the necessity of paying taxes, which creates this money for the payment of them; and when this method of creating is not contrived, the taxes cannot be paid, as has been often said. Now it is this great flux of money from taxes which animates the trade of England: take them out of the circle, what becomes of the whole?
To suppose, therefore, so great a revolution in the circulation of a country, as that produced by the cessation of taxes; and to suppose no interruption from it upon the state of industry, and the employment of the people of this nation, is a proposition I must reject, as being contrary to all principles; and to this among the rest, that it would be a most sudden, and a most violent revolution; which throughout the whole course of this inquiry, we have found to involve inconveniences beyond the power of any theory to point out or to remedy.
Upon the whole we may conclude, that the fatal consequences of a bankruptcy would be many; and that the good resulting from a total abolition of taxes would be confined to two objects. First, A relief to those who pay them upon their possessions, or persons. Secondly, A diminution of prices in favour of the idle at home, and of trade abroad: great objects, no doubt, could they be obtained at less expence than the consequences of a total failure of public credit and domestic industry. Perhaps when we come to examine the Principles of taxation, we shall find that taxes do not raise prices so much as is generally believed; and those principles which influence the application of public money, will point out better expedients than a bankruptcy for compassing the great national objects which we have just now mentioned.
But let us suppose a case, which may possibly happen, as matters seem to go on. Suppose, I say, that by continuing to carry on long and expensive wars, the sum of interest paid to strangers should exceed all that the nation can gain by her trade. In this case, there must be a general balance of payments against her every year, which very soon would manifest itself by the most fatal consequences.
The bank of England would be the first to feel them, by the departure of all the coin and precious metals. Trade would feel them next, and then indeed they would become universal.
In such a situation, I fairly acknowledge, that I cannot discover any expedient to avoid a bankruptcy. Engaging the foreign creditors to become citizens, by the allurements of the greatest privileges, and bills of naturalization, are vain speculations. Unless some resource, hidden from me, should, upon such an occasion, open itself, in the deep recesses of future events, I believe the nation would soon be driven upon the fatal rock of bankruptcy. The idea of a nation's becoming bankrupt to itself, I have always looked upon as a contradiction; but that it may become bankrupt to the rest of the world, is quite consistent with reason and common sense.
I shall not take upon me to suggest what mode of bankruptcy would in such a case be the best; a total, or a partial one. The partial, I am afraid, would, in England, work effects almost as hurtful as the other. But if ever the case should happen, the only way will be, to watch over every symptom of the approaching catastrophe, and to improve circumstances to the best advantage.
I cannot omit inserting in this place the opinion of a most sagacious and most intelligent foreign merchant, most consolatory to Great Britain, with respect to the debts she owes to foreigners.
The late Mr Megens, who lived many years in England, composed a treatise in German, which Mr Horsley translated in 1752, under the title of the Universal Merchant. In the 31st Section of this work is the following passage:
'And although it cannot be denied, that for as much as foreigners are become great creditors in the public debts of England, a great sum of interest must be annually made good to them. Yet if it appear that the private people abroad, are more indebted to the private people here, than such interest amounts to; the nation has no prejudicial draught upon it, on account of such debt; and that the general balance of trade is highly in favor of England.'
Few people, I am persuaded, have any such idea as this laid down by Mr Megens. Happy, for Great Britain, could it be verified!
Of what infinite consequence is it then for a British statesman to inquire into the amount of debts owing to strangers, and into the state of the balance of trade? In speaking of exchange, I threw out many things concerning the idea of putting that branch of business into the hands of the bank, in conjunction with the exchequer. Were the state brought into the dilemma of either submitting to this gradual decline of trade, from a cause which could not be removed; or of being pushed to the necessity of leaping into the terrible gulph of a deliberate bankruptcy; in such a dilemma, I say, what infinite advantages might not be drawn from the management of exchange?
I have heard it said, that the debt owing to strangers was a great advantage to England; because it drew people to that market where their funds are settled. I allow all the force any one can give to this proposition: But alas! what would it avail, whenever England becomes incapable to furnish goods equivalent to all her imports from abroad, added to all she owes to her foreign creditors?
I am very far from supposing the present situation of England to forebode the approach of any such disaster; but it is good to represent to one's self some determinate object, by which we may judge of our situation in times to come.
Debts have increased far beyond the imagination of every mortal. Great men have uttered prophecies, which have proved false, concerning the consequences of a debt of one hundred millions. From this most people conclude, that they will go on until some unforeseen accident shall dash the fabric to pieces. I have been pretending to shew how they may go on in a perpetual chain. But alas! one fatal circumstance was there omitted; and now that it has been taken in, I think it serves as a datum, to resolve the most important problem of this science, viz. How to determine the exact extent of public credit. The solution of which is, That it is not necessary that public credit should ever fail, from any augmentation of debts whatever, due to natives; and that it must fail, so soon as the nation becomes totally unable either to export commodities equal to all their imports and foreign debts, or to pay off a proportional part of their capital, sufficient to turn the balance to the right side.
From this proposition two corollaries may be drawn.
First, That the most important object in paying off debts, is to get quit of those due to strangers.
Secondly, That whatever circumstance has a tendency towards diminishing the burden of foreign debts, should be encouraged.
If it be said, that whenever our foreign debts exceed the balance of our trade, the best way would be to break faith with strangers, and keep it with the subjects of the state: I answer, that were the thing possible, which I apprehend it is not, the consequence might prove equally hurtful.
The greatest of all the inconveniences proceeding from a bankruptcy, is the ruin of industry, and the stop put to circulation. Can it then be supposed, that a country might execute so glaring a scheme of treachery to all her neighbours, and still continue her correspondence with them in the open way of trade? Certainly not. Were all foreign trade to be stopt at once, what a revolution would it occasion! The circulation of foreign trade, in the city of London only, exceeds perhaps the amount of all the taxes. A stop put to this would occasion such a stagnation, as would ruin the nation as much as if the bankruptcy were to become universal. I do not here pretend minutely to trace consequences, which are finite: all that can be done, is to suggest hints, which every one may pursue, in proportion to the extent of his combinations.
The intention of touching upon this subject at all, is to shew, that the expedient of a spunge, which is frequently talked of as a remedy against the consequence of debts, is, perhaps, more dangerous than any thing which can be apprehended from them. The reason is, that the spunge implies a more sudden bankruptcy than any one brought on in a gradual way, by natural causes.
Were natural and irresistible causes totally to cut off all profit upon the trade of Britain, one cannot say how far the other nations of Europe might not find it their interest to assist us, provided we did our utmost to preserve our good faith to them. And as I think I have made it sufficiently evident that nothing can be gained by openly violating public faith, the best resolution a nation can take, is to adhere to it to the last extremity, and to banish from their thoughts every idea which may be repugnant to it.
We are now to collect together, in one view, the several methods of contracting and paying off the debts of a nation. Such methods may be deduced, either from principles, or from what practice has pointed out.
The foundation upon which public credit is built, is the existence of a sure and sufficient fund for performing the engagements contracted.
When, in the early times of public credit, the repayment of the capital was an express condition of the loan, a much more extensive public fund was necessary than at present, when no more is required than the payment of the interest. As such funds never can be formed but from taxes, or general contributions from the people, the greater they are, the larger must the contribution be. Whenever therefore there is occasion to contact debt, the chief object of a statesman's care should be, to model the spirit of his people so as to dispose them to concur in the proper resolutions to render the plan proposed as easy as possible in the execution.
In the first place, the body of the people must be made sensible that the consequence of contacting debts must imply a diminution upon the income of some individuals; but that the fewer the obstacles thrown in the way of the loan are, the less will this diminution be.
In the second place, he must gain the confidence of his people, so far as to impress them with a firm belief that he will consult their good, and nothing else, in what he undertakes.
And in the last place, he must gain the confidence of those from whom he is to borrow; and convince them that all covenants between the public and them will be religiously performed.
In a limited and free government, these three requisites are essential to the firm establishment of public credit.
Where the power of the statesman is unlimited, he may substitute his authority over the people who are to pay, instead of confidence; but with respect to those who are to lend, he will find no room for any such substitution: confidence here is the only expedient.
All therefore that is required of the statesman with respect to the people, is to enable them to do what he requires of them.
For this purpose he must establish credit with them, for finding the contributions he is to exact of them; because they will have as much occasion for credit, in paying what is demanded of them by authority, as he himself has in paying what he is obliged to pay, in consequence of his engagements.
If this general plan be not followed, the consequence will be, that the produce of taxes will fail on one hand, and public credit on the other.
If all this operation cannot be previously concerted, the plan of borrowing must be circumscribed to funds previously established.
When money is borrowed before the fund be prepared, every obstacle which occurs in establishing it, becomes a drawback upon the confidence of those who lend, and renders the conditions less favourable to the state which borrows.
In the contract of loan, the first article to be agreed upon is the rate of interest. We have, in the beginning of this book, examined the causes of its rise and fall; and have in general determined, that when the demand is for borrowing, interest rises; when for lending, interest falls.
As the object of the borrower is to have interest low, the statesman who intends to borrow, must use all possible means to increase the quantity of money in circulation.
But if coin alone be used as money, and if this coin be sent out of the country, when borrowed, and if what is sent away cannot be replaced at will, the scheme of augmenting money becomes impracticable: it will daily become more scarce, more difficult to procure, and interest must rise higher every day. Symbolical or paper money, that is credit, must then be established at home, upon the firmest basis: this will enable every one to pay what he owes; consequently, the taxes will be paid, the creditors will receive what is due to them regularly, money will every year augment in proportion as debts are contracted; and if borrowing do not augment beyond this proportion, interest will not rise; and if borrowing should fall below this proportion, interest will sink.
Is not this whole doctrine verified in the strongest manner by the operation of the Missisippi? At the death of the late King of France, money had disappeared. Some years before, he had, for seven millions in coin, engaged his kingdom for thirty-two millions; upon a distant fund indeed, but still it became a debt to be paid. Paper money had not been introduced three years, when interest fell to 2 per cent. The paper indeed was actually a bubble; but we have shewn that it became so from bad management only.
By the augmentation of money, capitals cease to be so valuable. By the melting down of property, the very capital, though in the hands of the state, may be turned into money by the creditor, whenever he has occasion for it; in the same way as the coin which is buried in the vaults of the town-house of Amsterdam, is constantly performing all the uses of circulation.
The method, therefore, of borrowing money to the best advantage, is previously to establish a fund of credit, arising from annual taxes; to provide the people who are to pay them, with credit or money in proportion to their property or industry; and to prevent the latter from ever failing for want of the medium, money, for caring it on.
If in time of peace interest shall stand high, relatively to other states with which you are at war, throw as much money as possible into the hands of your creditors, in payment of the debts already contracted; because the more you throw in there, the more you will draw out, if you have occasion to borrow more; and if you have no occasion to borrow more, the lower you will reduce the rate of interest, by augmenting the fund of money to be lent.
From these principles I conclude, that every nation which sets out by contracting debts with its own citizens, must begin by borrowing upon condition of repaying the capital in a short term of years. This is also the best method to engage the people to contribute largely without murmuring. The reason is, that when taxes begin to be imposed, the mass of circulation becomes proportionally augmented; and the paying back of considerable sums to the creditors, prevents, on the one hand, the debts from increasing so fast, and supplies circulation and facilitates new borrowings on the other. While this plan of augmenting circulation is carrying on, the statesman must prevent his expence abroad from diminishing circulation proportionally at home. This is to be accomplished by opening loans for foreign expence in foreign countries, and by paying the interest only of such loans, with the greatest punctuality.
The difficulty of performing this, is no argument against it. It must either be done, or credit will be hurt; because without obtaining credit abroad, it is impossible to defray any expence incurred abroad, beyond what the metals of your country and the exports from it can pay: that is, in other words, beyond the quantity of metals exported, and general balance in your favour upon all reciprocal payments with the world.
If it be said, that nations never pay the interest of their debts any where but at home, I answer, that it is so much the worse for them; because wherever the debts or interest is to be paid, the lender always states his account as if the payment were made in his own house. All the expence to him of sending his money to the place of subscription, and of drawing back his returns, are compared with the interest offered by the borrower; and if upon the whole the lender find his account in the bargain, he subscribes; otherwise not. Since therefore the money borrowed must in this case be sent abroad, it is an advantage for the borrower to be under an obligation to provide a method of sending it; and by this means he will borrow cheaper than he can do, when he refunds to every lender all his expence and trouble in getting his interest remitted to him.
I am now deducing principles, and therefore shall not enter into a discussion of the many objections which occur against this plan, from foreign considerations; such as the facility it might procure to a statesman in defrauding his foreign creditors, and several others which might be formed: all I say is, that this is a cheaper and more systematical way of borrowing, and it has this good effect, that it constantly points out the state of the external debt, from which alone a bankruptcy is to be feared.
Were a favourable balance to return after an expensive war, the payment of this foreign debt would be the consequence then, as much as now when the payment is made at home, and rather more so; because who ever owed a balance (to England, I suppose) would then pay his debts at London, with money due by England, payable at Antwerp, for example; consequently, he would remit at discount; and when he remitted in favour of an Englishman, the debts might be considered as discharged upon the foreign fund, and stated a-new upon the funds payable in London. Could the payment of the interest of the public debts be rendered susceptible of such transfers upon all occasions, it would, I imagine, have a remarkable effect in favour of public credit.
This thought suggested itself, while I was considering the situation of a country where borrowing is in its infancy; and it occurred as an expedient for preventing foreign expence from draining the country of the money necessary for circulation at home. This, in every combination of circumstances, is the most important object of a statesman's care, while he is engaged in wars abroad.
Now whether the money of a country be paper or coin, it is equally taken out of circulation, by every foreign payment. When it is coin, it goes out of the country, as well as out of circulation: when it is paper, it does not go out of the country, certainly, but by coming upon the debtor in it for payment, it is equally taken out of circulation; and what the debtor gives for it (viz. a bill of exchange upon another country) goes out of the country. And unless this bill of exchange can be paid with value exported in merchandize, it will remain a debt upon the country, contracted in favour of some other nation.
This I hope will be sufficient to recall to mind what has been so fully explained in the 13th chapter upon banks; where the same question was stated with regard to the payments Scotland was obliged to make to England, towards the end of the last war. The same principles operate in the case before us, and may be applied to every circumstance of it; with this difference only, that here the statesman's interest is supposed to be more closely connected with that of his banks than was the case during the distress in Scotland: because if he do not support them by a systematical chain of conduct, he will drain the fund of circulation by his remittances; his credit will fail; his taxes will no more be paid; and his people will be oppressed. But if he pursue his plan systematically, circulation will be kept full; his credit will be supported; his taxes will be paid; his people will be easy: because no check will be put either to their industry or consumption for want of money; a great part of the solid property will be melted down into money; whatever part of this money is lent to the state will be, by that operation, consolidated into a new species of property, the public funds; and if, after the borrowing scheme is over (that is, when peace is restored) circulation should be contracted, a part of the money will then stagnate in the hands of individuals, and will, in their favour, be realized in that part of the solid property which was formerly melted down in order to produce it. That is, lands will be sold by the former proprietors, and will be acquired by those who have money not realized in stock; and for which money, circulation has no farther demand. This is the reason why, at the end of every war which has run the nation in debt, lands have constantly risen in their value, even when considerable quantities of them have been offered to sale.
If it be said that the stock-holders are those whom we commonly see buying the lands, and not those who have sums not realized:
I shall, in answer, observe, that the stock-holders cannot buy lands unless they sell their stock, to those who have money not realized; so it is still the money not realized which is employed in buying every article of solid property: and even after this operation, the same money will still remain in circulation as before; because it is impossible to realize even paper money itself, except when the creditor in it becomes proprietor of the property upon which it is secured; and if the money be coin, it is plain that this cannot be realized any farther than it is by nature. When therefore we say, that a man realizes his money, we do not mean any thing farther, than that he gives his money to another in exchange for solid property. Thus when an estate is bought in a country where banks upon mortgage are established, a part of the price is commonly taken out of circulation altogether; because in consequence of the price paid, the bank is refunded what it had melted down of the land sold; consequently, this paper becomes consolidated a-new, as it were, with the lands which are relieved of the mortgage.
But when lands are sold in a country where there is no paper, the price remains in circulation as before; and if the quantity of coin in circulation should exceed the uses for it, a case which seldom happens in these days, it would be exported, and realized abroad.
When this complicated and systematical scheme of credit is not established, the fallible consequence is, that money disappears: consequently, interest rises. The taxes formerly imposed cannot be paid: consequently, it is in vain to seek to augment them; because in proportion as they are augmented, they become less productive. If money be borrowed upon remote funds, engaged for other debts previously contracted, and if public faith be at all events to be preserved, the consequence must then be, that the public will be eat up by usurers.
This was the case in England during the wars of Queen Anne.
So early as 1706, government, as has been said, began to borrow at 6 per cent upon funds already engaged. What was the consequence? The exchequer having no money to pay the interest as it fell due, paid with tallies; these fell to great discount, and had they remained long in that discredited situation, lending would have stopt, or interest would have risen, as in France, so high as to lose the name of interest altogether. This was the case, in the example above cited, when seven millions ready money, borrowed by the late king of France, became a debt of thirty-two millions on the state.
Upon the occasion above mentioned, government availed themselves of the bank of England, as I say every private citizen should have a power to do, on every occasion, when his credit is good, though money should fail him. They engaged the bank to discount all tallies issued for the interest of debts; that is, in other words, to turn those sticks into money: but as public credit was so low that money could not be found to discharge even the interest of the advance made by the bank, the government consented, that all advances of that kind should bear compound interest quarterly, at 6 per cent. What a monstrous profit to the bank! what a charge upon the state! Had a bank of circulation upon mortgages been established at that time, money would have come in at a moderate simple interest to individuals, who would have availed themselves of them, for the payment of all public burdens. Instead of which, industry was made to, suffer the public money did not come in; taxation stopt; expences went on, and deficiencies were paid by the public at this monstrous charge.
On the other hand, had it not been for the assistance the bank then gave the state, in circulating those exchequer tallies, bills, &c. it is very certain that credit would have failed as totally in England as it had done in France in 1708, when Desmaretz undertook the finances. This minister had no bank to avail himself of, and accordingly he run France in debt at the rate of two hundred millions of livres per annum, during seven campaigns; of which, I am persuaded, he did not receive one half, or near it, in effective value.
What I have said will, I hope, be sufficient to shew that the only way for any state to borrow, is previously to provide a fund for making good what is agreed upon with the lenders; and that all expedients to supply the want of it will in the end bring great expence upon the people, either by involving them in an excessive burden of debts, in case public engagements should be held sacred, as has constantly been the case in Great Britain; or by driving the state to a bankruptcy, as was the case in France upon the death of the late King. I call it a bankruptcy, because all that was owing was not paid. A man who pays no more than 19s. 11 3/4d. in the pound, is a bankrupt, as well as he who cannot pay one farthing.
I come next to the methods of paying off debts when already contracted.
Public debts may be divided into two classes, redeemable and irredeemable. Redeemable debts may be paid off in several ways, which we shall briefly enumerate before we compare their several advantages.
First then, such debts may be paid off at once, by refunding to the creditors the whole capital, with all arrears of interest.
Secondly, They may be paid off yearly, according to a certain rule to determine the preference, and order of payment: for this purpose, a determinate sum must be set apart as a sinking fund for discharging the capital and interest.
Thirdly, They may be paid off cumulatively and proportionally every year, by incorporating the sinking fund into the money appropriated for discharging the interest, and by placing all that is paid beyond the interest, as payment in part of the capital.
Fourthly, They may be paid in one sense, as shall be farther explained by reducing the interest upon the capitals, without diminishing them.
Fifthly, They may be paid off by converting them into annuities for lives.
Sixthly, And lastly, they may be paid off below the value of the capitals, by the means of lotteries; where the state may gain what the creditors choose to lose from a desire of gaming.
To one or other of these methods, may be reduced all the fair and honest expedients which a state may employ to get rid of its debts, without any breach of public faith, or without proceeding to the extremity of prescribing conditions of payment, which the creditors are forced to accept against their will.
As for the irredeemable debts, I apprehend, that, without consent of the creditors, no change upon the condition of loan can justly be made.
I shall next point out the advantages and disadvantages of the several methods of discharging debts, as they may affect the separate, or cumulative interest of a state.
Were large debts which have subsisted for a long time to be paid off all at once, it would occasion a sudden and a violent revolution, which is always attended with inconveniences.
Were, for example, the proprietors of lands to consent to sell off a part of their estates for the payment of the public debts, the quantity of land brought to market, would sink the price of it very considerably; from which would arise a great detriment to landlords. I shall not here inquire from whence such a sum of money could come; that it may be produced is very possible, from what happened in France in the year 1720.
Could a treasure be brought from India (let me suppose) sufficient at once to discharge the debts of Great Britain, circulation would become so glutted with money, that interest would fall to nothing. This would be a temporary loss to all the former creditors, until they had time to lend to the other states of Europe; who would, in consequence of this circumstance, sink the rate of interest upon their own debts. Something like this was the consequence of paying off all the debts of France with bank notes in 1720, upon which interest fell, as we have observed above, to 2 per cent.
When, in the second place, debts are paid off partially every year, according to a certain rule, it is expedient to have the capitals reduced into shares of a determinate value, as is the practice in France, that they may be drawn out as in a lottery. The lots drawn may then be paid, and no detriment will follow to any particular creditor, more than to another. because if by being paid there be either profit or loss to the creditor, it will affect the value of the whole stock in proportion. If, upon the establishment of such a plan, the stock be found to rise, it will be a proof that either the interest formerly paid was below the common rate, or that the credit of the state was looked upon as precarious: if it should sink, contrary conclusions may safely be drawn.
This is a common method of paying off debts in France, where funds are more commonly divided into shares than in Great Britain.
In 1759, the King opened a subscription for seventy-two millions of livres upon the general farms: this sum was divided into seventy-two thousand actions, bearing 5 per cent and it was stipulated, that upon the renewal of the farms in 1762, twelve thousand actions should be drawn by lot, and paid off monthly; so that in six months the whole debt was to be discharged. The third method of applying what is annually paid above the interest, in extinction of the capital, is the measure proposed by Cardinal de Richlieu for discharging the debts of Frances. only the Cardinal went to work in a very arbitrary way, both in determining the interest, and in fixing a value upon the capital, equally detrimental to the creditors.
To apply this to an example. Had England at the time government first established a sinking fund, arising out of the savings which were made upon reducing the rate of interest, from time to time, continued to pay to the creditors the same annual sums as formerly; and thereby applied what was paid beyond the interest, to the payment of the capital, there could not have been any misapplication of the sinking fund; and the debts by this time would have been greatly diminished. Whereas by applying the sinking fund to the service of the year, for the ease of the people and advantage to the creditors, the consequences may prove exceedingly inconvenient.
The fourth method of reducing debts is that adopted by Great Britain, viz. by reducing the interest paid upon them. From this we discover the reason why taxes, even in time of war, are seldom augmented in this kingdom much above the proportion of the interest of the money borrowed.
We have, in the second chapter of the first book, boldly declared this to be against principles, and the authors of such a scheme were there stigmatized as men of no foresight: we now see how much people may be mistaken in their conclusions in political matters, when they are formed upon too narrow combinations.
Were capitals intended ever to be paid, no doubt the conclusion would be just; but if it be resolved, that capitals shall never be considered as the object of attention, and that the interest alone shall be looked upon as the real burden, then all payment of capitals is unnecessary, except so far as by paying a part of them, it may serve to reduce the interest upon the rest, by making money regorge in the market beyond the uses found for it.
This plan cannot be carried on while a nation is engaged in an expensive war, which absorbs all the money to be lent: but it becomes the object of a statesman's care, after peace is restored, and when trade begins to bring in a balance upon exportations.
We have seen how this balance tends every year to diminish the capitals due to strangers, and to keep money at home. Then is the time to extend taxation beyond the uses found for money to pay the interest. Two or three millions extraordinary, raised at the close of a war, and thrown into the hands of the creditors of Great Britain, in extinction of their capitals, would soon engage them to cry for mercy. They would find no outlet but France for such sums; and it is precisely after a war, that France is busy in playing off the arbitrary operations on her debts, which reduces her credit too low for any one to trust her with money. Let peace continue for a tract of years, confidence will there advance apace, and then it will become more difficult to make money regorge in England.
To say that taxes are already beyond all bounds, is, in other words, to say the nation is no more in a state of defence: because, should Britain be again involved in an unavoidable war, the consequence will be, either to render more taxes indispensable, or to oblige the nation to submit to any terms demanded by her enemies.
If it be therefore true, that taxes may still be augmented, the most proper time for augmenting them, is, at the very close of a war; because then every circumstance favours the scheme, as we shall now explain.
We have said above, and experience proves the truth of it, that at the end of a war circulation becomes too full for domestic uses; and that the superfluity of money is realized upon property. This is the consequence of a sudden stop in national expence. Were taxes at such a time augmented, part of this regorging money would find a vent by the augmentation upon domestic circulation which taxes would occasion; which augmentation would circulate into the exchequer, instead of becoming consolidated with property, as has been said, and coming into the hands of government, would be poured into those of the creditors, in payment of part of their capitals. There it would regorge anew; because it is observed, in general, that those who have property in the funds are not apt to squander money when unexpectedly thrown into their hands; on the contrary, they are commonly found to live very much within their income.
But suppose it should not immediately regorge, it would then increase expence and consumption; consequently, would advance industry, and render every branch of excise more productive. In every supposition we can make, public opulence would be augmented: money would regorge at last; and then the creditors would come with their application to government to suspend the reimbursement of capitals, and to accept, in lieu of that, a diminution upon the interest.
This is the golden opportunity for diminishing the public burden occasioned by debts; and this method of compassing so desirable an end, is far preferable to that of compelling creditors to submit to a diminution, by offering a sudden reimbursement, which was put in practice in Britain in the year 1749, as has been observed. Had the public waited with patience one year longer, and then thrown in a few millions more than they did into the hands of the creditors, the proposal of reducing the interest would have come from the other quarter; which in all bargains with creditors is of the greatest consequence to the debtor.
The sum of interest thus diminished, upon an obligation to suspend the reimbursements of capitals for a limited time, three questions will naturally occur: 1. Whether the taxes should be diminished in proportion: or 2. If they should be allowed to subsist with a view to apply the overplus of them to national purposes: or 3. Whether it may not be most adviseable to turn such a part of the debts into annuities for lives, as may absorb the saving upon the former interest paid. The first two questions I reserve for the following book, where they will be fully examined; the last is the fifth expedient already proposed for acquitting the public debts. As the nature of it is abundantly evident, I shall repeat only what I formerly observed, namely, that this method of establishing a sinking fund, has the advantage of being less exposed to misapplications than any other.
The last expedient of paying off capitals, below the original value, by the means of lotteries, should take place only after the interest of money is brought so low as to cut off any near prospect of reducing it still farther.
I shall not pretend to guess at the lowest point to which the rate of interest may be brought, by the expedients of increasing money at will, by the means of banks upon mortgage. I have in the seventh chapter of the first part of this book, thrown out a hint of a land-bank, which opens a very wide field of speculation; but in this place, it would be unnecessary to enlarge upon that subject.
Let me suppose the rate of interest brought lower in Britain than any where else, it will nevertheless be subject to periodical risings, on many occasions.
Upon every such emergency, capitals will sink in the market below par.
It is then only that a state can have recourse to this last expedient of opening lotteries, and taking in subscriptions at the market price of the funds subscribed into them. And although the annuities to be paid upon the lottery fund be regulated by the rate of interest at the time, and consequently above the standard of the other debts; yet the same methods of reducing it afterwards will constantly produce their effects, and thereby diminish the capital by degrees.
In like manner, in time of war, when the public funds fall greatly in their price, government may open new subscriptions, and receive payment for them in their own paper at the market price, allowing a small premium in the rate of interest. If the creditors willingly subscribe upon these conditions, no violation of public faith can be alleged. By this operation, the capitals will be diminished, and the advanced rate of interest paid during the war, will return upon the peace to where it was: then the new subscriptions may be paid off, or subscribed for again at a lower rate than before.
Suppose it then resolved, that in time of war, the nation's creditors should be allowed, at certain times, to subscribe their capitals in books opened at the bank for that purpose, one quarter per cent. above the selling price. Would not this have the good effect of supporting the price of stocks on one hand, and of reducing the capital of the national debt upon the other? Example:
Let me suppose that in time of war, the 3 per cents. sell at 74 3/4, might not government receive them at 75, and constitute the new subscription at 4 per cent? What interest could any one have not to subscribe, who at such a time intends to sell his stock? His 3 per cent sold to government at 75, and turned into a 4 per cent. would afterwards, when sold in the market, produce 1/4 per cent more than if it had not been subscribed into the new fund.
Perhaps in Change Alley, where calculation is carried to the utmost pitch of refinement, even this eventual advantage to government might sink the value of the new 4 per cents. Let this be allowed. The answer is, that when people compute with such nicety, and comprehend in their calculations every circumstance the most minute, it is, I think, the interest of a state (whose views should extend far beyond the period of human life) to grant a premium upon such subscriptions more than sufficient to indenmify the subscribers, according to the most rigid calculation concerning their present advantage.
The smallest profit to be discovered by the nicest pen will engage the monied man to subscribe; consequently, the capitals of debts may be diminished, at a loss to the public almost imperceptible. And for this imperceptible loss in the mean time, the greatest national advantage may be obtained at a distant period.
It is now full time to close this book, which has swelled far beyond its due proportion. The subject of credit and debts is so connected with many questions relating to taxes, and to the application of their amount, that the unity of the subject would have suffered little in blending them together. But as I find it to be a great relief to the memory to interpose, now and then, a pause; and as taxes were intended to be treated of by themselves, according to the plan I at first proposed, I shall make no alteration in it.
At the end of the first and second books, I subjoined a chapter of recapitulation; in the third book, this was supplied by a very full table of contents; here, because of the intimate connection of the subject of this and the following book, I shall refer the reader to the end of the volume, for a full recapitulation of both.
1. After the long and particular account I have given of the Missisippi, I shall not enter into a like detail concerning a scheme which proceeded upon the very same principles; to wit, the artifically raising the value of a stock, by promising dividends, out of funds which were nowise proportioned to them.
I shall therefore, in a very few words, first compare some of the operations of the South Sea scheme with those of the Missisippi; and in doing it, point out the principal differences between them.
The great profits upon the Missisippi were expected from the interest paid by government for the great loan, from the farms of the revenue, and from the profits upon their trade.
Those of the South Sea were, at setting out, first, The profits upon their trade: secondly, The allowance made them by government for the expence of management: thirdly, The difference of receiving 5 per cent for the money they laid out in purchasing the public debts, when money was at 4 per cent as it was when the scheme was set on foot: and fourthly, The surplus money subscribed into the stock above par, in consequence of the artifices used to enhance the value of it.
The seven millions they were to pay to the state, seemingly for no value received were a sort of compensation for receiving the 5 per cent for 7 years, at a time when money was worth no more than 4 per cent.
These advantages raised, at first, the value of the original stock of eleven millions. The consequence was, that the proprietors of the 16 millions of the redeemable debts, which were to be bought in, when they came to subscribe their capitals into the new stock, transacted them at a proportional discount; which discount, being good against the government in favour of the company, served to discharge proportionally the seven millions the company was to pay. This gave an additional value to the stock; and so it rose, greatly indeed above this proportion. Then the company promised a dividend of 10 per cent for one half year, upon their capital, at midsummer 1720; this dividend was to be paid in stock, which was constantly rising in its value; but no information was ever given to the public concerning the funds which were to produce this dividend; so every one concluded that there were hidden treasures in the hands of the company which enabled it to promise such large dividends. Accordingly, stock rose from 300 per cent to 375; then to 400, and at last to 1000 per cent; and in proportion as it rose, the wealth of the former subscribers augmented from the surplus above par, paid by the latter, and those who subscribed last, bore all the loss upon the blowing up of the scheme.
But one great difference between the South Sea and Missisippi, was this: That in France there was abundance of money in the hands of the public, for purchasing the actions, at the exorbitant price to which they rose; but in England there was not: consequently, in France, the rate of interest fell to 2 per cent and in England, the great demand for money to borrow, raised it beyond all bounds.
Those who subscribed in money, paid down no more than 10 per cent at subscribing; but became bound to pay up the remainder. But when the stock tumbled, people were better pleased to lose the 10 per cent they had paid, than to pay up the remaining 90 per cent according to the terms at subscribing. Those indeed who subscribed their former capitals at a vast discount, did not labour under the same inconvenience for want of money; but this discount became as real a loss to them, as the cash subscribed became a loss to the money subscribers, the moment that those who were in the secret, and who, by the most infamous chain of artifices, had blown up the public frenzy, began to realize and sell out, and that the whole was discovered to be a cheat. So that upon the whole, the English scheme had intrinsically a much worse foundation than the French. The first blew up from an absolute necessity, and for want of any bottom at all; the last from misconduct, and rather from folly than knavery. I return to an account of the scheme.
The original capital of the South Sea company, was 11,750,000 l. The redeemable debts which the proprietors of this capital afterwards proposed to purchase, amounted to 16,750,000 l.; and the value of the irredeemable, or what were called the absolute terms, was computed at 15,058,000 l. together 31,808,000 l. sterling.
The proprietors of this original capital of 11,750,000 l. consulted their own advantage only, in purchasing in this large sum of debts, which were to be converted into additional stock; and therefore sounded very high the great advantages of such a transformation of them; first, From the profits of the trade, which they were to enjoy exclusively. And, secondly, From the great addition to their wealth, from the constant rising in the price of their stock. They carried their views to nothing less than obtaining a majority in the house of commons, by the weight of their wealth, and of becoming the absolute rulers of the nation.
The public being from the beginning intoxicated with such ideas, subscriptions for stock were opened at 200 per cent above par; and some of the proprietors of the 31,808,000 l. subscribed at first their capitals at a proportional discount; that is, they made over a debt of 100 l. for 33 1/3 in South Sea stock; and successively the subscription rose to 1000 per cent. These immense profits being incorporated into the gains of the general stock, were proportionally shared by the subscribers themselves, who became proprietors; and the higher the stock rose, the more these gains augmented. This influenced the infatuation; and the dividends augmenting in proportion to the price of subscription, there appeared no end of the rising of the stock.
The first dividend offered, as has been said, was 10 per cent half-yearly in stock; this was afterwards converted into no less than 30 per cent in money, for that half-year: and when stock rose to 1000, a dividend of no less than 50 per cent per annum, in money, was promised for twelve years to come.
Had stock risen to 2000 per cent the dividend could have as easily been carried to 100 per cent per annum, as it had been to 50 per cent when at 1000.
But whence was this dividend to be paid? The company and the directors took good care never to give to the public any light as to this particular.
To prevent, therefore, such abuses in the rising of the South Sea, it ought to have been provided by parliament, that in taking in subscriptions, and offering dividends, the directors should, on the one hand, have informed the public, first, Of the money owing to them by government, secondly, Of the money gained by the subscriptions above par. And thirdly, Of the profits upon their trade. And, on the other hand, of the debts due by them; and of the nett balance upon their books, in their favour.
This would have been fair dealing. But to pretend the necessity of secrecy, in a point where a nation is interested, was in itself a mere pretext; and had it been otherwise, it might have been answered, that a company which is obliged to have recourse to such secrets, ought to be prevented from dealing with those who were to remain ignorant of them, however deeply interested.
2. This may seem a high valuation, and is, in fact, far beyond what any of those annuities sold for: but as the interest of money cannot be estimated, for a constancy, at more than 3 per cent and that probably the best lives were chosen, the value to government of such annuities may well be estimated at 20 years purchase. By De Moivre's tables, annuities for the most favourable ages, interest being at 3 per cent are valued at 19.87 years purchase; and his valuations are generally allowed not to be too high.
3. The annuities of 1757, are estimated, by the author of the Consideration on Trade and Finances, at 472,500 l. or at 14 years' purchase; and the annuities of 1761, 1762, at 6,826,875 l. or at 27 1/2 years' purchase. But this valuation seems too low.
4. This question has been determined in the affirmative, in a pamphlet ascribed to Mr G. Grenville, entitled, The Present State of the Nation, an. 1768: page 12 in the note.
5. I find that the sinking fund is now estimated at 2,100,000 l. by the author of the Considerations on Trade, etc. above cited. I am also informed that the net produce of the customs exceeds 2,200,000 l. considerably: but 4,600,000 l. is rather the gross than the net produce of the permanent duties of excise; that is, of all the excise duties, excepting the annual malt-duty. It must also be observed, that the annuities payable to the national creditors amounted, the 5th January 1764, to more than 4,720,000 l. But on the other hand, the interest of the unfunded 9 millions is rated too high, as appears from the author above quoted. I cannot pretend to give exact details. The general sketch here stated is sufficient for my purpose.
6. The loan of 1766, was 1,500,000 l. at 3 per cent. Every subscriber for 100 l. had an annuity of 3 per cent on 60 l. and 4 lottery tickets, valued to them by government at 10 l. each, in all 100 l. The prizes and blanks in the lottery amount to 600,000 l. and bear 3 per cent paid by government. The annuities amount to 900,000 l. and bear also 3 per cent. The number of tickets are 60,000. Hence at 10 l. each, they amount to 600,000 l.
The advantage government reaps by this way of borrowing, is, that the desire of gaming, raises the lottery tickets above their value, when thrown into the hands of the public; and this advanced value being a profit to those who receive them in part of their subscription, this profit they share with government. Example. In April 1766, when government borrowed 1,500,000 l. at 3 per cent, the 3 per cents were at 89: consequently, the difference between 89 and 100, which is 11 l. must have been supposed to be the sum which the subscribers, from the propensity of people to game, had a reasonable, or rather a certain expectation of gaining upon the sale of 4 lottery tickets, that is, 2 l. 15s. upon every one.
To know therefore the real par of a lottery ticket, you must proceed thus: it costs the subscribers 10 l. for which they receive from government 3 per cent. This 10 l. as 3 per cents stood at 89, is worth at that rate no more than 8 l. 18s. Add to this sum what the public must pay for the liberty to play, which we have stated above at 2 l. 15s. and you have the exact par of a lottery ticket at 11 l. 13s.
Whatever they sell at above 11 l. 13s. is profit to the subscribers, whatever they sell below 11 l. 13s. is a loss to them.
This profit though small in appearance, is greatly increased from another circumstance, viz.
That the subscribers may sell their subscriptions at a time when they have really advanced but a small part of it. The first payment is commonly of 15 per cent on their subscription: when they sell, they make this profit upon the whole capital. Suppose then 15 per cent paid in: if the profit upon selling be no more than 1 per cent upon the capital, that 1 per cent turns out no less than 6 2/3 per cent upon the money they have advanced. Thus a person who is possessed of 1500 l. only, may subscribe for 10,000 l. in this loan: he pays in his 1500 l. and receives his subscription; when he sells, he sells 10,000 l. subscription, upon which he gains 1 per cent, 1 per cent. of 10,000 l. is 100 l. so (in one month suppose) he gains by this means 100 l. for the use of 1500 l. But as a counterbalance for this profit, he runs the risk of the falling of the subscription, which involves him in a proportional loss if he sells out; or in the inconvenience of advancing more money than he had to employ in that way, in case he should prefer keeping his subscription for a longer time, in hopes of a rise in the public funds. By this mode of borrowing, government profits by the disposition of the people to game. But this propensity has its bounds, and at present it is found by experience not to exceed 60,000 lottery tickets, or 60,000 l. Were, therefore, a subscription of 3 millions taken in upon the same plan with the present of 1,500,000 l. the regorging number of tickets would so glut the market, that the whole would fall below the par of their supposed value. 7. We must always carefully avoid confounding the grand balance of payments with the balance between importation and exportation, which I consider as the balance of trade. 8. Experience shews, that when the debts of a nation have come to a height, the public creditors become people of great consequence, upon account of the ease and affluence of their circumstances. They are not exposed to the many hidden expences incident to land proprietors. They are a class in the state but lately known; the capital of their wealth is hidden; and opinions concerning their rank, and the figure they ought to make, are as yet unformed. Whereas the family of a land proprietor is known; his expence may surpass that of his predecessors without much observation; but if it should fall below it, he commonly sinks in the estimation of his neighbours, who seldom put circumstances together which can only be guessed at. An heir to a landed estate, is bred up from his infancy with the notion of living like his father: the son of a monied man has commonly very different sentiments; and even when any of this class takes a turn to expence, the lustre of it is all displayed round his own body; that is, in his own house, and in his own family: no country seats, hounds, horses, servants in every quarter, family interest to keep up, little economy in spending. In a word, every one feels better than I can describe that landed men commonly exceed, and monied men commonly live within their income.