those who have imported French commodities to England. Upon this hurtful
branch of commerce, the exchange occasions a profit; the consequence of
which is, to encourage importation.
This is not all. The merchants exporters, who have lost, cannot draw
back their loss upon the return of their trade; because the return of
their trade is the _money_ due by France, the balance included. Whereas
the merchants importers may draw back their loss upon the return of
their trade; because that return is _merchandize_, which they can sell
so much the dearer to their own countrymen.
If the balance be in favour of London, importers gain, as we have seen;
when it is otherwise, and when they are obliged to pay the exchange,
they indemnify themselves, by the sale of their goods so much the
dearer. High exchange, therefore, _may_ hurt exporters, but never _can_
hurt importers.
Let us next examine the operation of exchange at Paris.
In the Paris market, the demand will be for bills upon London for money
in Paris; and he who demands must pay the exchange. The debtors,
therefore, to the nation-creditor, must pay the exchange, and the
creditors to the nation-creditor will receive it; and as both are
Frenchmen, the profit and loss to Paris exactly balance one another.
But the debtors to the nation-creditor are here the importers of English
goods; consequently, this trade, hurtful to France, would be hurtful to
the importer, could he not indemnify himself by selling them so much the
dearer to his countrymen.
The creditors, again, to the nation-creditor, who gain the exchange, are
the exporters of French goods to England; so that here the exportation
meets with an encouragement from a balance against the country.
From the advantage found upon exchange in favour of exporters, and the
loss upon it to the prejudice of importers, in the case of a wrong
balance, it has been believed, that a wrong balance produced upon
importations and exportations are effects equal and contrary, which
destroy one another, and thereby bring the balance even.
In answer to this, I have two short arguments to offer.
The first is, that were the argument conclusive, it would hold good in
reversing the proposition; to wit, that the consequence of a favourable
balance would be to destroy the difference also, and bring the balance
even. This I never heard alleged.
My second argument is the strongest: that the enhancing of the prices of
importations will not so effectually discourage the sale of them at
home, as the enhancing the prices of exportations will discourage the
sale of them abroad; for the reasons I shall give presently. But in the
mean time,
If the compensation be considered only in relation to the merchants
importers and exporters, there, indeed, I agree, that _their_ profit and
loss upon the exchange is most exactly balanced; because what the one
party gains the other loses; and the country loses the balance only, as
has been said.
The reciprocal debts thus transacted by bills of exchange, we see that
no profit can be made, nor loss incurred, either to London, or Paris, by
that operation.
The profit to Frenchmen is compensated by the loss to Frenchmen; the
same may be said of the English merchants: but the balance due after
those operations are over, and the more remote consequences of high
exchange, affect the relative interest of the two nations.
This balance is generally sent by the country-debtor, either to the
country-creditor, or to their order in a third country, to which they
are indebted.
The transportation and insurance of this balance is an expence to those
who owe it, and the profit, if any there be on that operation, naturally
falls to exchangers of the same nation, who conduct it. So whether
exchange be paid upon bills drawn, or expence be incurred in the
transportation of balances, no profit can accrue upon that to the
nation-creditor, to the detriment of the debtor: it must, therefore, do
hurt to both, relatively to nations where, upon the average of trade,
exchange is lower.
I come now to the method of transporting balances in the metals.
We have seen how the creditors of the nation-debtor pay exchange upon
the sale of their bills on Paris, which owes the balance. If by the
operations of exchangers, this exchange should rise, to their detriment,
higher than the expence, trouble, and insurance, of bringing the balance
from Paris, then they will appoint some factor at Paris, to whose order
they will draw bills upon their debtors in that city; and as what the
Paris-debtors owe to London is stated in pounds sterling, the
London-creditors will value the pound sterling, according to the rate of
exchange, in their favour; and in their bills upon their Paris-debtor,
they will convert the sum into livres, including the exchange.
By this operation, we see how the transportation of the balance may
become the business of the creditors to the nation-debtor: which is a
combination we have not as yet attended to: a few words will explain it.
When the creditors of the nation-debtor sell their bills, they must pay
the exchange, as has been said. When they draw bills to the order of a
friend in the place where the balance is owing, they superadd the
exchange. This their debtors pay: but then they themselves must be at
the trouble and expence of bringing home the money.
It is from this alternative which both parties have of either sending
what they owe to their creditors in bullion, or of allowing them to draw
for it at the additional expence of paying the exchange, that a check
upon the extravagant profit of exchangers arises: and from this
combination arises all the delicate operations of drawing and remitting.
Into these we shall not inquire: the principle on which they depend
appears sufficiently plain, and this is the principal object of our
attention.
I proceed now to consider how far those reciprocal profits and losses,
between merchants in the same country, affect the trade of it in
general.
When the balance is favourable, we have said that the exporters lose the
exchange, and the importers gain it; and both being citizens, the
country would not be concerned in their relative interests, were it not
that these interests are connected with that of the country, which reaps
great benefit from the trade of those who deal in exportations, and loss
from the other.
If, therefore, exchange is found to hurt exportation, when the balance
is favourable, in this respect the country has an interest in bringing
it as low as possible. But as it may be said that since the return of an
unfavourable balance hurts in its turn the interests of importation, and
favours the other, exchange thereby operates a national compensation; it
will not be improper, in this place, to throw out one reflection more,
in order to destroy the strength of that argument.
Were this proposition admitted, as I am afraid it cannot, from what we
have already said, it affords no argument against doing what can be
done, to render exchange as little hurtful as possible to exportation,
during the favourable balance. But as to the question itself, of
national compensation, I cannot allow that even _exporters_ and
_importers_ are thereby brought on a level in point of trade: for this
reason, that the exchange affecting the exporters, in proportion as it
augments, discourages manufacturers, who must have regular, and even
growing profits, according to the increase of demand. These the merchant
exporter cannot afford; because he _cannot_ draw back from his foreign
correspondents, any advance upon manufactures at home, arising from
domestic circumstances. But when the merchant importer is affected by
the exchange against him; this additional expence he _can_ draw back;
because he sells to those who are affected by all domestic
circumstances.
Let us therefore determine, that it is the interest of a state to
disregard that compensation which is given to exportation by a wrong
balance, which does so much harm; and to avoid the discouragement given
to it by a right balance, which does so much good. The only way to
compass those ends, is to keep exchange as near to par as possible.
Could reciprocal debts be always exchanged at par, and could the expence
of bringing home, and sending a balance abroad, be defrayed by the
state, I think it would prove a great advantage to the trade of a
nation. I do not pretend to say that, as matters stand, the thing is
practicable; but as it is a question which relates to my subject, and
seems both curious and interesting, I shall here examine it.
At first sight, this idea will appear chimerical; and some readers may
despise it too much, to be at the trouble to read what may be said for
it. I shall therefore set out by informing them that the scheme has been
tried, in a great kingdom in Europe, under a great minister; I say it
was attempted in France, in the year 1726, under the administration of
Cardinal Fleuri, and produced its effect; although it was soon given up,
from a circumstance which, I think, never can occur in Great Britain.
After the last general coinage in France, 1726, exchange became so
unfavourable to that kingdom, that there was a general outcry. The
Cardinal, to put a stop to the clamour, and set trade to rights, as he
thought, ordered Samuel Bernard, at that time a man of great credit, to
give bills on Holland at par, to all the merchants. To enable him to
place funds in Amsterdam, for the payment of his bills, the Cardinal
supplied this exchanger with sufficient quantities of the old coin, then
cried down, and paid for the exportation of it to Holland.
Upon this exchange on Holland came to par; and all exchangers at Paris
looked on the operation with amazement. The minister, however, in a
short time discovered, that by this he was undoing with one hand, what
he wanted to establish with the other. He therefore stopped in his
career, after having paid, perhaps, ten times the balance due to
Holland.
By unfolding the combination of this operation, I shall be better able
to cast light on the question before us, than in any other way.
When the general coinage was made in France, by the arret of the month
of January 1726, all the old coin was cried down, and ordered to be
recoined. The mint price of fine gold _per_ marc was fixed at 536 livres
14 sols 6 deniers; and the silver at 37 livres 1 sol 9 deniers. These
were the prices at which the mint paid for bullion, when offered to be
coined. But the King, as if he had a right upon the metal in the old
coin, commanded it to be delivered at the mint at no higher rate than
492 livres for the marc of fine gold, and at 34 livres for the marc of
fine silver: and to compel the possessors of it to bring it in, all
exportation and melting down was made highly penal; the avenues from
France were beset with guards to prevent the going out; and the melting
pots were strictly watched. Upon this, the possessors of the old coin,
rather than sell it to the mint at so great an undervalue, had recourse
to exchangers for bills upon Holland for it: and these being obliged to
send it thither at a great expence and risk, exacted a very high
exchange, which, consequently, affected the whole trade of France.
Politicians persuaded the Cardinal, that exchange had got up so high,
not from the discredit cast on the old coin, but because of the wrong
balance, and the alteration which had been made at that time upon the
denomination of the new: and that so soon as the balance against France
was paid, exchange would return to par. Upon this the Cardinal set
Bernard to work, but he soon discovered his mistake; and by arret of the
15th of June the same year, raised the mint price of the old coin, and
then exchange became favourable.
These are all facts mentioned by Dutot, and yet he never will ascribe
the rise of exchange in France to any other cause than to the tampering
with the denominations of their coin: an operation which may rob one set
of people in favour of another; but which has very little effect upon
exchange, when other circumstances do not concur, as in the case before
us.
Now had the high exchange against France been owing to a wrong balance
upon her trade, is it not evident that the Cardinal’s operation would
have succeeded, that all demands for bills at Samuel Bernard’s office
would have been confined to the exact extent of that balance; that the
reciprocal debts would have been negotiated between the merchants at
par; and, consequently, that all expence upon exchange would have been
saved to individuals, at the small charge to government of transporting
the balance paid for the bills by the merchants at Paris?
Were prosperous trading states, therefore, conducted by statesmen,
intelligent, capable, and uninfluenced by motives of private interest,
they would make it a rule to be at the expence of sending off, and
bringing home all balances, without the charge of exchange to traders:
but the consequence of either neglect, or incapacity in the man at the
helm, would then become so fatal that it might be dangerous to attempt,
at once, so great a change in the present method of paying balances: but
I never make allowances for the defects of a statesman, while I am
deducing the principles which ought to direct his conduct.
I shall next slightly point out the bad consequences which, _upon an
unfavourable state of commerce_, might result from such a plan; and
without recommending any thing to practice, leave the reader to judge of
the expediency.
We see, that by a statesman’s giving bills at par, _on all occasions_,
and being himself at the expence of transportation and insurance, in
bringing home and sending off all balances, exchange would of itself
come to par.
The first consequence of this would be, the total annihilation of the
exchange business; and if, after that, any interruption should happen by
neglect in the statesman, trade might suffer considerably.
Another consequence is, that the most destructive trade would go forward
without a check, as long as merchants could pay the par of the bills
they demanded upon foreign parts: and this they would constantly be
enabled to do, while there was either coin or paper in circulation, as
has been explained in treating of banks of circulation upon mortgage.
The consequence of this would be, to oblige the state to pledge the
revenue of the country to strangers, in proportion to the balance owing,
over and above the extent of the metals to discharge it.
Now the question is, and this I shall leave to the sagacity of my reader
to determine, whether, as matters stand, there be any check proceeding
from high exchange which can prevent the bad consequences here set
forth. I suspect there is not. We see the most enormous sums lent by
nations to nations; raising the exchange against the lenders; turning it
in favour of the borrowers, but never preventing the loan from going
forward. Does not Great Britain, as well as France, owe amazing sums to
other nations, at the expence of paying the interest out of their
revenue? And have not all those sums been transacted by exchangers, who
have made great fortunes by it? Are not the most unfavourable balances
paid in the ordinary method? Are there not, therefore, already,
instruments in the hands of all nations, sufficient for their undoing?
How could their ruin be accelerated by this alteration in the mode of
performing the same thing?
But let it be observed, that our business, in this chapter, is to search
for methods to advance the prosperity of flourishing nations, who have a
balance owing to them; and here we have been setting forth the bad
consequences which result from _these_, to others who are in decay.
Every argument, therefore, drawn against this scheme, in favour of the
idle or prodigal, is an argument in favour of it, with respect to the
industrious and frugal. As all nations are liable to alternate
vicissitudes of prosperity and adversity, the principles here laid down
require to be carefully combined with domestic circumstances, before
they be applied to practice.
It was with a view to this distinction, that, in the title of this
chapter, I pointed out the question there proposed, as relative to the
state of it in a _prosperous trading nation_; and I am not quite clear
how far it might not be advantageous in every case: but this question I
shall not here enlarge upon. What has been said, will, I hope, be
sufficient to point out the principles upon which the decision depends;
and if any statesman inclines to try the consequences of it by an
experiment now and then, nothing is so easy as to do it, without any
detriment. This is proved from the operation performed by the French
cardinal, on the occasion of a very unfavourable and high exchange.
------------------------------------------------------------------------
CHAP. V.
_How, when other expedients prove ineffectual for discharging of
Balances, the same may be paid by the Means of Credit, without the
Intervention of Coin or Bullion; and who are those who ought to conduct
that Operation._
We have now applied the principles formerly laid down, towards
discovering the most proper expedients for removing or palliating the
three inconveniences to be struggled with in regulating exchange. 1. How
to estimate the value of a balance due: 2. How to pay it with the coin
or bullion of the country: and lastly, How to prevent the price of
exchange from affecting any thing more than the balance to be paid,
after all reciprocal debts have been compensated.
It remains to inquire, what are the most proper methods to acquit what a
nation may owe, after it has done all it can to pay the value of their
balance in the other way.
At first sight, it must appear evident that the only method here is to
give security, and pay interest for what cannot be paid in any other
value. This is constantly done by every nation; but as the ordinary
methods are very perplexed, and are attended with expences which raise
exchange to a great height, and thereby prove a prodigious
discouragement to trade in general: it would be no small advantage,
could all this loss on exchange be equally thrown upon every class
within the state, instead of being thrown entirely upon its commerce.
As this is the expedient to be proposed, it will not be amiss to
observe, that foreign balances arise chiefly upon four articles. 1. The
great importation and consumption of foreign productions. 2. The payment
of debts and interest due to foreigners. 3. The lending money to other
nations. And 4. the great expence of the state, or of individuals,
abroad.
Could all the bad consequences arising from these four causes, and the
high exchange occasioned by them, be cast upon that interest alone which
occasions them, I would not propose to lay the whole body of the nation
under contribution for repairing the loss.
But if from the nature of the thing, as matters stand, the whole be
found to fall upon trade, without a possibility of preventing it, in
this case, I think, it is better for the nation, _in cumulo_, to lend
its assistance, and share the burdens, than to allow it to fall upon
that part of the body politic from which the whole draws its vigour and
prosperity.
It cannot be denied, that when a heavy balance is due by a nation, it
has the effect of raising exchange upon every draught or remittance.
When bills are demanded to pay a foreign claim, it cannot be determined
from what cause the claim has arisen. Whether for national purposes or
not, the exchange is the same, and equally affects the whole interest of
trade.
If this be a fair state of the case, I think we may determine, that such
balances are to be paid by the assistance and intervention of a
statesman’s administration.
The object is not so great as at first sight it may appear. We do not
propose that the value of this balance should be advanced by the state:
by no means. They who owe the balance must, as at present, find a value
for the bills they demand. Neither would I propose such a plan for any
nation who had, upon the average of their trade, a balance against them;
but if, on the whole, the balance be favourable, I would not, for the
sake of saving a little trouble and expence, suffer the alternate
vibrations of exchange to disturb the uniformity of profits which tends
so much to encourage every branch of commerce.
We have abundantly explained the fatal effects of a wrong balance to
banks which circulate paper; and we have shewn how necessary it is that
they should perform what we here recommend. There is therefore nothing
new in this proposal: it is only carrying the consequences of the same
principle one step farther, by pointing out, as a branch of policy, how
government should be assisting to trade in the payment of balances,
where credit abroad is required; and this assistance should be given out
of the public money.
The greatest, and indeed, I think, the only objection to this scheme,
is, that by it the condition of our foreign creditors will be bettered,
for no value received from them. This I allow will be the case when the
balance is against England: but it will be compensated to the creditors
by the loss they will sustain when the balance is in her favour. But
supposing there should be a benefit to foreign creditors, will not this
circumstance raise the confidence of all the world in the English funds?
If there was a proposal made for lowering the rate of money, by
refunding the debts which bear a higher interest than what money can be
procured for, were the continent to pour her wealth into our
subscription, might we not then more readily expect a supply from that
quarter? Besides, is not all the interest due to foreign creditors paid
in bank paper? Is not this demandable in coin, and will not this coin be
exported, if credit be not found? Were the bank of England to keep a
subscription open, at all times, in Amsterdam, for money to be borrowed
there, on the payment of the interest in that city, who doubts but loans
might be procured at much less expence than at present, when we beat
about for credit every where, until by the return of a favourable
balance upon the trade of England, she shall be enabled to fill up the
void.
I feel my own insufficiency to unfold the many combinations which such
an operation must imply. I therefore shall not attempt what, at any
rate, I must leave imperfect. What has been said, combined with what has
been thrown out on the same subject, in treating of other matters, is
sufficient to give a hint, as to the expediency of the plan in general.
And as to the objection which arises from the payments to the public
creditors abroad, I shall reserve the more ample discussion of it till I
come to consider the doctrine of public credit.
END OF THE THIRD PART.
------------------------------------------------------------------------
------------------------------------------------------------------------
AN
INQUIRY
INTO THE
PRINCIPLES OF POLITICAL OECONOMY.
------------------------------------------------------------------------
BOOK IV. | OF CREDIT AND DEBTS.
PART IV.
OF PUBLIC CREDIT.
------------------------------------------------------------------------
CHAP. I.
_Of the various Consequences of Public Debts._
The principles which influence the doctrine of public credit are so few,
and so plain, that it is surprising to see how circumstances could
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 confounded so 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, 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 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 the 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 rendred 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 set
itself free, 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 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 in 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 transport, 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 only in proportion 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 money’d
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
money’d interest to swell: but in monarchies, where the landed interest
is 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 pay, and those who receive
the taxes, under the denomination of creditors, the security of public
credit becomes precarious.
From this we may conclude, 1_mo_, That in governments where the swelling
of a money’d 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.
2_do_, If natural causes 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.
3_tio_, 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.
4_to_, 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.
5_to_, 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 of 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 combination, is, I
apprehend, impossible; because every one of them will depend upon
circumstances totally unknown. These, 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.
------------------------------------------------------------------------
CHAP. II.
_Of the Rise and Progress of Public Credit._
While the policy of Princes 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 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 that great 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 their 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 administred with more uniformity; and from this 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 lodged,
in a great measure, in private coffers. If wars brought them forth for a
short time, they soon found their way back again. Princes 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
Hans-towns, 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 countries to which they durst not resort 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
that 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 liability which is necessary to establish a firm confidence. In
proportion as it drew towards 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 inconveniencies.
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 that
purpose: and the refunding of the capital was, in many cases, left in
the option of government, but was never to be demandable by 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 writ 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 a confusion, and so many
calamities, could have followed upon the operations of public credit.
------------------------------------------------------------------------
CHAP. III.
_Of Anticipations, or borrowing Money upon Assignments to Taxes for the
Discharge of Principal and Interest._
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 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, and
to pay afterwards 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 writ on 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 estate, 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 à 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_,
_chevaucheês_, _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 mention 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 3⅓ _per cent._ upon all meat, drink, and merchandize, sold in France
within the year; that is to say, upon the whole alienations of France.
The tax was levied, but fell so far short of the sum required, that it
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 preceeded, that in 1356, the septier of wheat, or 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 12 Winchester bushels a year. Now
let me suppose, that the whole 50,000 livres had been raised by this
imposition of 3⅓ _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 that 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 was 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. So
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 only 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 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 æra of public credit in
England.
No person at that time, whose writings I have seen, appears to have so
thoroughly understood those matters as Davenant. He was a man of theory,
as well as knowledge of facts: he had an opportunity which few people
have, to be well instructed in the one and the other; and he turned his
talents to the best advantage for promoting the interest of his country.
He has writ 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 of 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 advanced money to government, and who were paid by
assignments upon taxes previously engaged, made people afterwards very
diffident, except upon proper security. The limited form of the English
government, prevented the violent proceedings between ministers and
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 of 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
advances, 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 of about 1300 millions; because he had settled
them 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 providing 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; and to point out the methods of
making them severally turn out to the best account for the state,
considered as a body politic by itself, and 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 only be guessed
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, only afford an exercise 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 the great change of
sentiments at present proceeds.
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 3½ 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 3½ 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 that 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 had not then been discovered, for turning property into money.
Circulation, consequently, was confined to the coin; and profits on
trade were very great. All these circumstances rendred 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 only of value
in proportion 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 that 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
that imposition. It had taken place in England as far back as the great
civil war, and formed at the revolution about ⅓ 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
was, at that time, 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 enterprize 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; and 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 post-house, 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 would 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._ and 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 that value into
money. The whole of the money coined before the end of the war in 1697,
did not amount to 8½ 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
notable 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.
------------------------------------------------------------------------
CHAP. IV.
_Of the State of public Credit in France before the reign of Louis XIV.
and of the Sentiment of the great Richlieu upon that Subject._
Having laid before my reader the sentiments of Davenant on the subject
of public credit, which were analogous to the then state of England, it
may be instructive to compare them with those of another very great man,
in a rival nation; I mean the Cardinal de Richlieu.
The constitution of Great Britain at present, is pretty much what it was
in Davenant’s time: and that of France does not differ widely from what
it was at the death of Louis XIII.
Britain and France are two nations, rivals in every thing worthy of
emulation, and similar in those distresses which are the inseparable
concomitants of modern ambition, debts and taxes.
As long as the constitution of the two governments shall stand as at
present, Britain will constantly have the advantage in borrowing: France
will have it in paying off her debts. It is this contrast which engages
me to enter into the following detail. I consider it not only as a piece
of historical curiosity, but as a subject of profound reflection, from
which much instruction may be gathered.
The fate of kingly power was decided, both in Britain and in France,
much about the same time. In France, it was supported by Cardinal de
Richlieu; in Britain, it was broken to pieces under Charles I.
Before that time there was no fixed form of government established in
either country; nor can ever a regular constitution take place any
where, until the mechanism of a state becomes so complex as to render
changes extremely difficult. This is becoming the case more and more
every day; and upon this and nothing else will depend the stability of
our present forms.
Let us now take a view of the sentiments of a great minister, delivered
in writing by himself, in his political testament; the authority of
which would never have been called in question, had the matter it
contains been properly attended to, and well understood.
It is in the 7th paragraph of the 9th chapter of the testament, where
the Cardinal shews his ability in paying off the debts of France: and in
going through the subject, he casually has thrown out several things,
which enable us to form a judgment of the state of taxes, and of the
effects they were found to produce in his time.
“It is pedantry,” says he, “to maintain that a prince has no right to
draw money from his subjects, and that he ought to content himself with
the possession of their hearts. None, however, but flatterers, the pest
of society, can maintain, that he may draw from them, justly, whatever
he thinks fit; and that his right extends, in this particular, as far as
his will.”
The taxes of France at this time had been augmented far beyond heir due
proportion; and this had produced many strange and contradictory
phænomena; which, as we shall now see, misled the Cardinal in many
respects; because his experience was not sufficient to discover the
causes of them.
“The augmentation of impositions on the people,” says he, “does the King
_so much_ hurt by raising prices, as to compensate all he can gain.” If
we suppose that the King gained by the augmentation; that is to say,
that the tax, when increased, really produced more than before, and
raised prices proportionally; then the King could only lose his
proportional part, but never the whole. If the tax, by being augmented,
produced less than before, which was the case often, then he lost by a
diminution upon his income, not by the rise of prices. But this was not
the case; because deficiencies of that kind could not fall upon the
King, but upon his farmers.
The true reason was, that the King paid most of his expences by
assignments upon the taxes; and then, no doubt, the higher they were
raised, and the more difficult to recover, the dearer every undertaking
would cost the King.
This reasoning upon the effect of taxes shews, that at that time the
doctrine of them was not well understood. No wonder: theory is not
sufficient to lay open political consequences, even to the greatest
genius. All our information as to these matters arises from experience,
and all our instruction from our attention and reflection.
As a proof of this, he mentions, almost in the same place, an effect of
the increase of taxes, which is quite contrary to the former.
“Consumption,” says he, “diminishes, as taxes augment.”
This is a contingent, but not a necessary consequence, as we have seen,
and has the effect of lowering prices.
I mention these particulars, only to shew how little this great man had
studied the principles of taxation, or combined the causes of those
phænomena which he saw arising from them.
Such contrary effects could not fail to be felt, when taxes were raised
in the manner usual at that time, and when no method was contrived for
augmenting the currency.
In Richlieu’s time the custom was to treat with the _partisans_, as they
were called, or undertakers for the farm of taxes; and for a sum of
money, valued at a certain interest, to give them a right to levy
certain impositions on the people, esteemed equivalent to the rate
agreed upon; some in one province, some in another, as the parties could
agree. Then the partisans fell to work with the people, and committed
the most horrid extortions. In the 4th §. of his 4th chapter, he says,
“The abuse is carried such a length, as to be quite insupportable, and
must end in the ruin of the state; the people are plundered, not taxed;
fortunes are made by rapine, not industry: using the partisans like
spunges is very just; but liable, on the other hand, to great abuse,
when not conducted with moderation and justice.” This is a very
different system of taxation from that carried on in England in
Davenant’s time, and must have produced effects very dissimilar.
But it may be asked, if these partisans in France had found out means of
raising money, far beyond the King’s intention; what prevented the
Cardinal from examining into such means, and using them in a gentle and
equitable manner, to the extent only of satisfying the creditors for the
money borrowed from them?
In those days several difficulties occurred, which rendered this
expedient impracticable.
1_mo_, The partisans would lend in no other way; they would have nothing
to do with the King as a debtor: his credit was not well established;
and by having the direct administration of a tax, they considered
themselves as more secure.
2_do_, Had the King levied the money on the people, and been paymaster
to the creditors himself, there would have been no gains to the
partisans but what were stipulated: had they exacted more than legal
interest, they exposed themselves to great danger; and consequently
would not lend. So, by delivering up the people to be plundered, the
King made a better bargain, he thought, than any other way; and if the
partisans plundered the people, the Cardinal plundered them in his turn.
3_tio_, At this time there were not, as now, merchants of extensive
credit, and fair character, who serve as interposed persons for the
whole money’d interest in Europe, and who can fill a subscription for
millions with a single name.
The partisans themselves, as the Cardinal observes, had often neither
money or credit at setting out: but by parcelling their undertaking into
many hands, they got together what was necessary. Thus the subaltern
associates were in a moment, like locusts, spread over the whole face of
the country, and plundering went on in every quarter.
This represents a quite different system of credit from what we see
established, even in France, at present; where the tax-gatherers are
still loudly complained of, though much more than they deserve. The mode
of raising the taxes is now most exactly specified by the King; and
nothing more can be exacted than according to the plan laid down; but in
every case severe penalties are imposed upon frauds, and when levied,
are accounted for to the farmers; but when compounded for under-hand,
sink into private men’s pockets.
In a country where taxes are rightly established, industrious people
have no occasion to indemnify themselves by fraud for the taxes they
pay; they have a more certain method of being refunded. This shall be
explained in its proper place.
By this method of oppression in the Cardinal’s time, a great part of the
odium was removed from the King, and cast upon the partisans. The people
resembled a dog who bites the stick with which he has been struck,
instead of biting him who holds it[21].
Footnote 21:
Thus were taxes established in France, in spight of the great aversion
of that nation to them. The exigencies of the state were apparent;
Princes were considered as under an absolute necessity to find money
at any rate; they appeared to be in the hands of unrelenting usurers,
who became the execration of the people, to whose fury they were
sometimes delivered over, when stripped of their wealth: the people
were now and then relieved of a part of their burthen; the tax
remained under milder management; formed an addition to the King’s
revenue, and served as a fund for future emergencies.
But the nature of man is such, that the more he grows in wealth, the
more the desire of spending it increases. Thus the fund provided for
unforeseen emergencies, is insensibly incorporated with that which is
appropriated for the current service of the state.
Nothing however is more certain than that in time of war, far greater
sums are required than any people can pay, without contracting debts.
Is it not then indispensibly necessary, either, 1_mo_, To have a sum
locked up in treasure? Or, 2_do_, A fund appropriated, to borrow upon
in time of war, which may serve to pay off the debts in time of peace?
Or, 3_tio_, To borrow upon the stipulation of an annual payment, which
may, in a certain number of years, acquit both interest and principal?
The first is the plan of the King of Prussia; the second that of
England; the third is, in a good measure, that of France: Holland
borrows no more, and pays as she can what she owes; Spain lives on her
income; and Austria remained in the old way till very lately, without
credit, and consequently without much debt.
I have now said enough to point out the method of borrowing money in
France at this time, from which the nature of the security may easily be
gathered.
The Cardinal, upon the supposition of an approaching peace, enters into
the plan of paying off what had been contracted. He was resolved to
preserve credit; for even at that time, the consequence of that great
engine was sufficiently felt by this great man, to relieve the people,
and to get rid of the debts.
After a long detail of all the branches of the revenue, and after
shewing how they might be improved, he draws out a general state of
them, and of the debts affecting them; and then adds, “The total revenue
of the kingdom amounts to near 80 millions;” (the silver was then at 27
livres 10 sols the marc fine, which, valued at 2_l._ 4_s._ sterling,
makes the 80 millions worth above 6 millions sterling) “of which there
is above 45 millions engaged for the debts. By good management I pretend
that this immense load of debts, which seems to be the ruin of the King,
shall turn out to his ease and opulence. Some imagine it would be a
right measure to free the state entirely of her burthen, (a general
spunge) but as she cannot, certainly, support all the burthen, so
neither does reason dictate that she should be entirely set free.” No
modern statesman could form a better judgment of things. The Cardinal’s
ideas are just and profound; and it is astonishing how a man
uninstructed by our experience should see so far into remote
consequences.
He next lays down different schemes for paying the debts, upon the
return of peace and tranquillity. They are all arbitrary, more or less,
according to the standard of English ideas of credit. But if we abstract
from one expedient lately discovered, to wit, the diminishing the
interest, and allowing the capitals to remain, I doubt if any modern
statesman could discover any other than those which the Cardinal has
proposed.
A preliminary step to all his schemes was, _by an act of power_, to
reduce the debts which bore a higher interest, to that of the 16 penny,
or to a little more than 6 _per cent._ This method of reduction has
constantly been and is still practised in France.
Then he proposes to enter into an account with the creditors for the
sums they had received; and to consider whatever they had obtained above
the legal interest, as payments in part of the capital.
This scheme however he rejects, upon examination. He says it is
agreeable to equity; but that it would have the effect of totally
destroying all credit for the future.
The second expedient was, to reimburse the creditors the sums which they
really paid for the annuities assigned to them: but that he found
impossible to verify; because they had had the address to specify, in
their contracts, sums far exceeding what they really paid. For this
reason he rejects the second expedient also; and adopts a third, as the
best plan of any for paying off the debts. This was, to value the
capitals at what they then sold for in the market, before the peace was
concluded.
This method appeared to the Cardinal the most equitable, at least he
says so, and the only one practicable; but in my opinion it was the most
arbitrary of the three; the most liable to abuse, and the most opposite
to the principles of public credit, as at present established: and yet
it is a thought, which, when conducted with justice, may upon some
occasions answer excellent purposes, as I shall observe in a proper
place.
Had he adopted the first expedient, of ascertaining the value of the
real advance, there was an appearance of justice; because the creditors
were thereby represented as usurers; and by repaying them what they had
advanced, by the enjoyment of an income above the legal interest, he
treated them with more indulgence than the laws allow between private
persons: but when money was borrowed in time of war, a higher interest
should have been allowed for it than in time of peace, when it was to be
paid off; and therefore to take the standard of peace, in reckoning with
the creditors who had lent in time of war, was an evident injustice.
Could he, according to the second scheme, have discovered exactly the
sums which had been paid for the annuities given, and offered
reimbursements upon that footing, less could have been said against it;
because the mentioning more in the contract than what had been paid, was
a palpable fraud against the King.
The third method, which the Cardinal approves of, contains this piece of
great injustice, that the antient creditors of the state who had paid 12
years purchase for their contracts, that is, those who had lent at about
8 _per cent._ might by this scheme be paid off with one half of what
they originally paid. If it be answered, that nothing is worth more than
what it can bring; I answer, that it may be worth more than what it can
bring _at a particular time_. During a war, an annuity which had been
bought at 12 years purchase in time of peace, will fall to five,
providing annuities can then be bought at that rate. The new loans
constantly regulate the value of the old capitals; but upon a return of
peace, they will rise to the original value.
Another injustice here was, that a minister, by borrowing a sum at a
very high interest, at a time he wanted to set a value on the capitals,
might sink this value. And, in the third place, the greatest injustice
of all consisted in this, that the Cardinal had no thoughts of any
reimbursement, as we shall see by what follows.
There was, at this time, one class of annuities constituted at 8 _per
cent._ These he proposed to reduce to 6 _per cent._ as above, by his
preliminary operation. Such annuities sold at that time for five years
purchase. These, says the Cardinal, _we must fix at that value_; and by
allowing the proprietors to enjoy them for 7½ years, the capital and
interest will be paid off.
Other annuities constituted upon the _taille_ sold for six years
purchase, which, by the same rule, were to be paid off in 8½ years.
The annuities and other debts charged at this time upon the _taille_
alone, amounted to 26 millions a year; and by this scheme, the whole was
to be paid off in 8½ years.
Besides these, there were engagements upon other branches of the
revenue, which sold at different prices. All were to be set upon a
proportional footing. The annuities which sold the dearest, were at 7½
years purchase, which were to be paid in 11½ years.
Thus, by the Cardinal’s scheme, the debts of France, which at this time
bore an interest of about 45 millions, were entirely to be paid off, in
about 12 years, without any new imposition; and when that was concluded,
the lands were to be discharged of 26 millions of yearly _taille_, near
two millions sterling, and the King was to have a clear revenue of 53
millions, or about 4 millions of our money, which with the 26 millions
taken off the _taille_, make 79 millions; the total amount of the French
revenue at that time.
I shall now point out the characteristic differences between the
principles upon which the credit of England and France were established,
at the two periods of which we have been speaking.
Had two such writers as Davenant and Richlieu been to be met with in the
same age, and at a time when England and France were engaged in
contracting debts, the contrast would have been stronger; but as it is,
it suits our purpose. The debts contracted in France from 1708, when
credit fell, to the end of the war in 1714, were in consequence of
rapine and extortion, as in Richlieu’s time: and the operations upon
them, after the peace of Utrecht, resemble those of Richlieu in some
very material circumstances. Such as, 1_mo_, That all the debts were
then, by an act of power, put at 4 _per cent._ without any regard to the
original stipulations. 2_do_, That what the Cardinal despaired of
accomplishing, the Regent undertook, and executed, at a great expence to
the King, and with great injustice to many individuals.
He established a commission, called the _visa_, to inquire into the
unfunded debts, which amounted to 600 millions. His intention was, to
discover the effective sums which had been paid for the grounds of debt.
The most favourable classes of these debts consisted in arrears of pay
to the army, indemnities for pillage, and the like, constituted by notes
issued from the office called the _extraordinaires des guerres_, which
were diminished ⅕; the second class was diminished ⅖; the third class ⅗;
and the last of all, sums due to brokers, usurers, &c. were diminished
⅘.
But alas! there was not the least shadow of justice in this operation;
because long before the _visa_ was established, most of the grounds of
those debts had circulated from hand to hand, under the greatest
discredit: so that the real sufferers were then beyond the reach of the
indemnity offered; and the usurers and brokers who had bought them up,
were those who made fortunes by them. The Cardinal’s plan of paying at
the selling price, would have proved, _in this particular case_, more
rational, and more according to equity, than any other: so greatly do
circumstances influence our decisions in all political matters!
By the _visa_, the 600 millions were reduced to 250 millions, and put at
4 _per cent._ like all the other debts. No plan was proposed at first
for paying off the capitals; but a sum was appropriated, though very ill
paid, for discharging the interest. We have discussed sufficiently the
famous operations of the Missisippi; by which an attempt was made to
throw the whole national debt on the company of the Indies; and we have
seen how it succeeded.
The distance, therefore, of Richlieu’s time, from Davenant’s, occasions
very little deception in comparing the principles of French and English
credit: and when we come to examine the present state of that question,
I am afraid we shall find, in France, enough of the old system still
remaining, to verify my observation, that the French have the advantage
in paying their debts; the English, in contracting them. Where the
balance of advantage may lie, will be the subject of more speculation.
The first essential difference I find between the credit of France and
that of England, in the two periods we are considering, relates to the
_coin_. In the first, the value of _it_ had been very well preserved: no
considerable alteration had been made upon _it_, from 1602 to 1636, that
the Cardinal raised the denomination of the marc of fine silver, from 22
livres to 27 livres 10 sols, as has been said. Whereas from the
revolution, until the establishment of the bank in 1695, the _coin_ had
suffered in England a debasement, from clipping, of near 50 _per cent._
This circumstance, more than any other, affected the credit of England,
and increased the expence of King William’s war. In Richlieu’s time,
circulation and trade had made more progress in France than in England
at the time Davenant lived. The revenue left by Henry the Fourth was
double to that of England at the revolution: and, in general, the income
of the Kings of France had far exceeded that of the Kings of England,
for many reigns before that of the great Henry. Borrowing also, upon a
fixed and permanent interest, had been known in France so far back as
Francis the First.
That Prince was the first, I find, who contracted a regular debt, at
perpetual interest, upon the town-house of Paris, at about 8 _per cent._
when the legal interest in England, under his contemporary Henry the
Eighth, was 10 _per cent._
The predecessor of Francis, Louis XII. had of gross revenue, charged
with his debts, which eat up near one half, above 2,500,000_l._
sterling. Dutot, Reflex. Pol. Vol. I. p. 204. Francis I. left to his
successor in 1546, a gross revenue of 2,685,314_l._ sterling, and of
nett income 2,287,998_l._ according to Dutot and M. de Sulli.
Under Henry II. and Francis II. the gross revenue stood at about
2,618,000_l._ sterling.
Under Charles the IXth, I have not been able to discover any thing which
can be relied upon: but his successor Henry III. according to Sulli,
had, in 1581, a revenue of 3,250,000_l._ sterling, and left only about
16 millions of livres of debt, which was no great sum.
To this Henry IV. succeeded; and by the capacity and unwearied
application of his great minister M. de Sulli, it was raised to above
six millions sterling, at the beginning of the reign of Louis XIII. This
revenue, by his wars and expences, was left greatly incumbered; but
still the taxes were established which brought it in; and so early in
the reign of his successor Louis XIV. as the year 1683, his revenue
extended to no less than 9,182,914_l._ sterling, according to Dutot.
Reflex. Pol. Vol. II. p. 256[22].
Footnote 22:
These sums are all converted into sterling, according to the value of
the French livre at the different periods here mentioned.
Let any man, acquainted in the least with the history of England,
examine the fixed revenue there, under Henry VII. and VIII. Edward,
Mary, and Elizabeth, and their successors, down to the revolution; and
they will evidently see the great disproportion of wealth, proceeding
from taxes, in the one and the other kingdom.
From these facts I conclude, that debts and taxes in France were much
more familiarly known in Richlieu’s time, than possibly they could be in
England when Davenant wrote.
Public credit had long grown up in that kingdom, under the hard
influence of regal power: whereas in this it had sprung up lately, under
the protection of liberty, and a most limited authority.
To that cause I ascribe the difference we find between the principles of
English and French credit; and to an effect similar to the cause I
ascribe the gigantic steps by which Britain has outstripped her powerful
rival in the establishment of her credit, since the beginning of this
century.
It is folly to prophecy, I know; but I may be allowed to conjecture,
that the same causes which have raised the credit of this nation to such
an amazing height, will either force the French from their old
principles, or they will, some time or other, bury her credit in the
dust.
Had one half of the acts of power been exerted with us, which have been
so familiar in France: had half the liberties been taken, in tampering
with the claims of creditors; a total bankruptcy would long ere now have
been the consequence: but in Britain credit is young; and has been
tenderly reared. In France she is old, and has been accustomed for many
ages to rougher usage. But example works wonderful effects, especially
when nations live together in this great European society; and the
advantages of a security to be depended on will every day more and more
engage the money’d interest to prefer this to any violent and precarious
profits.
How nicely does not Davenant employ political arithmetic, in order to
make true estimates of the taxes to be imposed, and appropriated for a
term of years, for extinguishing principal and interest? How exactly has
not the account between the state and the bank been carried on from
1695, to this day? How faithfully have not all parliamentary engagements
been observed? When, in 1749, a most natural operation was performed, to
reduce the interest of the debt of Great Britain, by gentle steps, from
4 to 3 _per cent._ what an outcry did it not make, although an
alternative was left to the creditors, either to receive an actual
reimbursement, or to accept of the new terms? The credit of Great
Britain must have appeared to France in the light of a pettish child,
educated in the house of a too indulgent parent: her own is not treated
with such gentleness; and when our money-jobbers try their hand at
Paris, and meet with disappointments from unexpected acts of council; to
prevent the laugh going against them, for trusting to the credit of
France, they turn it off by a jest, and pretend that they were only
playing as at the Groom-Porter’s, or in Change-Alley.
In a word, what would totally ruin the credit of England, does not
equally affect that of France. An act of power there, no doubt, throws a
damp upon it for a time; and if that act of power takes place at a
critical juncture, it may cost her very dear; as it has lately cost her
the continent of North America; which, I think, was sold for 32
millions, withheld from her creditors, for a short time, in the end of
1759. But this act of power, and many others since, have not ruined the
credit of France: many trust her still; only those who purchase in her
funds, at present, take about 2 _per cent._ off from their interest, as
a premium for the insurance of her good faith, until she recovers her
mercantile reputation[23].
Footnote 23:
Money invested in the French funds, _anno_ 1766, will bring the
purchaser 6 _per cent._ This I consider as 4 _per cent._ for the
interest, and 2 _per cent._ premium for the risk; and were she now to
borrow any considerable sums, I suppose the insurance would rise in
proportion.
------------------------------------------------------------------------
CHAP. V.
_Of the present state of public Credit in Great Britain._
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 millions
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 reduced to one half, in the last years of King William, and put at 6
_per cent._ perpetual annuity, to commence from 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 succession, with what it was at
her death, we shall form a general notion of the progress of credit,
debts and taxes in England during 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[24] 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
Footnote 24:
The Queen got from parliament 700,000l. for her civil list; but she
immediately ordered 100,000l. to be annually paid to the uses of the
war.
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 those 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 be
suspended 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, was pure profit to the bank, and 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 suspend: so that
after this great debt had circulated upon the discredited obligations
which had been issued for it, and in that 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 real 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 rises
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 might 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 additional 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 charges laid upon them 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 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 was
satisfied with a reduction to 5 _per cent._ of that paid 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, whose capital 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 great profits to arise from such a
fund under one administration, formed a project of acquiring a large sum
of the public debts, which remained outstanding upon the original funds
appropriated for them.
For this purpose they proposed to government to acquire, 1. 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. 2. To acquire a sum 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. 3. They were
to have a sum added to their former allowance for the charge of
management, in proportion to this augmentation of their stock. 4. That
for the advantage which might follow upon this agreement with
government, they were 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[25].
Footnote 25:
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 artificial
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, 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, the farms of the revenue, and
the profits upon their trade.
Those of the South Sea were, at setting out, 1. The profits upon their
trade: 2. The allowance made them: 3. 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 4. 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
that 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 the public concerning the
funds which were to produce this dividend; so every one concluded that
there were hidden treasures in their hands, which enabled them 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 of want of money; but that 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 much less
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 they were to purchase in, 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; 1_mo_, From the profits of the trade, which they were to enjoy
exclusively. And, 2_do_, 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 33⅓ 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 that
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 have
informed the public, 1_mo_, Of the money owing to them by government.
2_do_, Of the money gained by the subscriptions above par. And 3_tio_,
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.
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 that purpose for a few years only, and not diverted to
other uses, I am persuaded the consequence would be, to reduce interest
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 that 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 the national debt. 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 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 the 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 money’d men are willing to lend, provided the
loan be made at the then rate of interest.
To avoid therefore the establishment of funds at different rates, in
proportion to the fluctuations of money, the bargain is made at one
determinate interest. Suppose, for an example, 3 _per cent._ Then,
according as it is found to rise above that 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
39⁄97 _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._ 10_s._
This made five thousand annuities on lives, of 4_l._ 10_s._ 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, or 4⅛ _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[26],
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 that way, the lenders were willing that it should be
so; and the difference between 3.87 _per cent._ (the then rate of money)
and 4⅛ interest, which was paid by government, was a sinking fund, as it
were, for the gradual extinction of the capital of the lottery for
500,000_l._ during the lives of the annuitants.