Having applied the principles of public credit to the state of facts in Great Britain and France, such as I have been able to collect, I must observe, that all short sketches of this kind are intended only to satisfy a general curiosity which mankind has, to know a little of every thing. Although they may appear superficial and incorrect, to persons thoroughly instructed in those matters, they still are for our purpose; which is only to take them as something approaching nearer to truth than bare suppositions can do; and they sufficiently answer the purpose of illustrating the subject we are upon.

I now proceed to inquire what may be the consequences of this mighty 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 that 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, providing 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, and that 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 teaches 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.

This is a very rational conclusion from past experience; but it is only relative 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 might 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 kingdoms 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 operate 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: and if from small beginnings it has arrived at the pitch we now see, it is very natural to conclude, that, in time, it may become stronger, and at last, that 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 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 exigencies: 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 remains at home, it will animate every branch of circulation; and when the exigency, 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 new fund for contracting more debts, 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 is transferred to a new set of men, who were once the monied interest, and who afterwards acquire the lands, and consolidate this additional 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, 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 a monied interest into a landed interest, insensibly inspire the bulk of the landlords with sentiments analogous to a monied interest? Is not that 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 French King’s free revenue should afford credit to borrow this coin; and if, instead of providing a proportional supply of currency to fill up this new loan, the coin borrowed be sent out of France; how will 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, when money is confined to the coin, will be very long in adopting the sentiments of a monied interest; whether for its profit or loss, in the end, is not here the question.

We have now traced the contingent consequences of public credit so 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 those reciprocal sentiments of good-will among the two great classes of a people, and thereby preserves 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 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 was 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.

By the monied interest, properly, should be understood, those 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. I hope this idea is clear, and understood. Stock, therefore, I here consider as one great branch of solid property; so 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 arises from the land, money, trade, industry, &c. 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 debts increase, by the monied interest realizing into this branch of solid property, the more the taxes must augment; and consequently, the more the solid property of the funds themselves will be affected, as well as the land.

From this exposition of the matter, I think it appears pretty evident, that as proportional taxes affect every man’s income, according to his consumption; the landlord, cæteris 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 only pays the proportion of the last.

But the condition of the stockholder is not equal 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 that diminution, the value of land is augmented. 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 this respect, that he thereby diminishes the interest he pays upon his debts, if he has any; and if he has none, it enables him to borrow at a lower rate for the future; and by improving his lands with the money borrowed, he augments 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 enjoy 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 is 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 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 a million; it is paid in paper, and must be sent to Holland. If at that time a balance be due by Holland for a million, bills will readily be found for it. In this case, the balance of trade is borrowed by government, and is 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 the balance had not been due to them. This I call a lucrum cessans to the country.

But suppose no balance due 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 comes from 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 that 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 filled 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 to continue paying a higher interest at home for what they owe?

It is my opinion that still they ought to borrow, for the following reasons. That if the high interest at home proceeds 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 that 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, 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 is necessary, and that in consequence of it, too much should come to stagnate at home, after the demand of government is over, in that case, the monied interest would 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.

1mo, 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.

2do, That this income so created, may be either the property of natives, or of strangers.

3tio, That when money is found to stagnate, in a country where circulation is not diminishing, it may be supposed to proceed from the coming in of a right balance of trade.

4to, If stagnations in one part are 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.

5to, 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 out of 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 like payments made to Englishmen by other nations.

6to, 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 establishing luxury at home.

7mo, 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.

8vo, 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 is 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^[36].

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 only certain individuals, who pay it to others.

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, without proper measures being 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 will be raised on the subject for the payment of it. The question then comes to be, 1. How far may debts extend? 2. How far may taxes be carried? And 3. 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 that 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 vestige of our former ignorance in matters ©f taxation.

The notion of imposing (facto) 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 class must be determined by foreign trade; because this is affected in a certain degree by the price of domestic industry. Other taxes have not this effect, as we shall shew in its proper place.

But as foreign trade is not essential to the domestic industry, consumption, circulation, &c. of any nation, as has been proved in the second book, but only to their increasing in wealth proportionally to other nations; if foreign communications should be 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 will the consequence 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 they will administer for the 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.

Then government 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 only equal to the interest of the money wanted; and in that way set out upon a new system of borrowing, until the amount of taxes 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 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 only introduced it 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 those consequences are only 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 decide, that one of three events must happen, viz. either, 1. Debts will swell to such a pitch as at last to pay themselves: or, 2. The nation will be involved in a bankruptcy: or, 3. They will be fairly paid off.

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 is 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 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, I shall consider afterwards; at present, I shall 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 only partial; and by such an 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 cannot 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 taxes might so far diminish, as to prove insufficient to pay the interest of the national debt, and defray the expence of 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:

1mo, Every creditor of the state would become poorer in proportion to the diminution of his income.

2do, 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.

3tio, 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 then would 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 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 only 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 no 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 that 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 for 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 that 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 them, 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, interest 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 charity, would suffer: all the great establishments for labour and industry, would fall to the ground: the numbers of poor who are there maintained, would come upon a society, which is beginning to lose those tender feelings of compassion, which are more common in countries of idleness, in proportion as misery is more 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 perform this great revolution: the operation is not as yet compleated, and a total bankruptcy now would destroy every good effect 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, be 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. 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 inconveniencies beyond the power of any theory to extricate.

Upon the whole we may determine, 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. 1. A relief to those who pay them upon their possessions, or persons. 2. 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 which influence the application of public money, will point out better expedients than a bankruptcy for comparing those great national purposes.

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 acknowlege, 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.

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 combination 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.

1mo, That the most important object in paying off debts, is to get quit of those due to strangers.

2do, 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 inconveniencies 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 that 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 infinite: 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 that can be feared 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 to operate a total failure of 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, providing 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 such engagements, the best resolution a nation can take, is to adhere to them to the last extremity, and to banish from their thoughts every idea which may be repugnant to them.

CHAP. X.
Methods of contracting and paying off Public Debts.

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 the chief object of the lender, a much more extensive 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 contract 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 contracting 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 that 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, in the place 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 as to the people, is to enable them to do what he requires of them.

For that 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 it, in paying what is demanded of them by authority, as he himself has in paying what he is obliged to in consequence of his engagements.

If this general plan be not followed, the consequence will be, that 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 is prepared, every obstacle which occurs in establishing it is 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 that proportion, interest will not rise; and if borrowing should fall below that 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 a bubble in fact; 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 money in proportion to their property or industry; and to prevent the latter from ever failing for want of the medium, money, for carrying it on.

So long as interest stands 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 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 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 it 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 thethe lender finds 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 that 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 of 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, 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 transfer at discount; and when he transferred in favour of an Englishman, the debts may 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 rendred 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 that 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 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 more closely connected with that of his banks than was the case during the distress in Scotland: because if he does 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 not be paid; and his people will be oppressed. But if he pursues 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 industry or to consumption for want of money; a great part of the former solid property will be melted down into money; whatever part of that 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 stagnate in the hands of individuals, and will, in their favour, be realized in that part of the solid property which was 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 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 can only buy lands by selling 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 that operation, the money still remains in circulation; 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, that 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 infallible 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 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 banks 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. 11¾d. in the pound, is a bankrupt, as well as he who cannot pay one farthing.

I now come 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.

2do, 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.

3tio, 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.

4to, They may be paid in one sense, as shall be farther explained, by reducing the interest upon the capitals, without diminishing them.

5to, They may be paid off by converting them into annuities for lives.

6to, And lastly, they may be paid off under 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 gaining.

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 their 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.

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 the revolution, 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.