Most of the great estates consist of fee_An Inquiry into the Principles of Political Oeconomy (Vol. 2 of 2) Being an essay on the science of domestic policy in free nations. In which are particularly considered population, agriculture, trade, industry, money, coin, interest, circulation, banks, exchange, public credit, and taxes

thousand a year land estate, covers sometimes with his nominal property

(_dominium directum_) a whole country of fifty parishes; but the real

property (_dominium utile_) of this vast extent is subdivided into a

number of small fees, of which he is only lord paramount; and what

remains is the property of the lower classes, who pay what is called

_Rentes Seignoriales_, or noble rents, consisting in money and grain.

These rents can nowise be affected by any tithe imposed, because they

bear no proportion to the produce: and supposing they did, as in some

provinces, where they are called _agriers_, (which is the ⅙ or ⅛ sheaf

paid to the lord) the tithe, instead of taking a tenth of the _agrier_,

takes a tenth of the whole crop; consequently, only one tenth of this

sixth or eighth sheaf falls upon the lord; the tithe of all the rest

falls upon the poor proprietor or lessee, who the more he is industrious

is oppressed the more by this imposition; because it carries off the

tenth of his expence and labour, as well as of the farm which he rents.

This is the tax which the Marechal de Vauban recommended to be raised

universally over all the land-property of France, when the tithe was at

the highest. To this the late reformer adheres; but proposes the

twentieth instead of the tenth; and after a nice calculation of the

gross produce of France, he estimates one twentieth part of it to be

worth about 95 millions of livres _per annum_. Hence I conclude, that

the twentieth part of the income, or one shilling in the pound of all

the revenue of solid property in France, fairly collected, would not

much exceed one third of that sum, or about 30 millions, or 1 333

333_l._ sterling. This first part, therefore, of the Marechal’s tithe,

imposed at 1⁄20, would lay a tax equal to three shillings in the pound

on the poor lessees and vassals of the nobles, while, contrary to his

express intention, the whole fee-farm and noble rents of France, would

escape taxation. From this we may conclude, that no tax upon land-rents

can possibly be raised by way of tithe: as also that when it is taken in

kind it is the most oppressive, the most unequal, and the most

discouraging to industry, that ever was contrived.

The Marechal’s principal motive for proposing this mode of taxation, was

to avoid the difficulty of obliging the nobles to pay the taille. He

found also, that there would be great ease in collecting this revenue

for the King, without demanding money of the lower classes. The

consequence, however, would have been, either to ruin all lessees, if

they continued to pay the same rent for the lands as formerly; or to

introduce the greatest inequality imaginable among proprietors, if the

tithe had been totally cast upon their rents: but as to the method of

settling accounts between master and tenant, in consequence of this

tithe, both the Marechal and the reformer are totally silent.

The Marechal’s _Dixme royale_, with all its defects, is a book of great

value, from two considerations.

The first, that he had all possible access to come at the true state of

the nation. The second, that he wrote with great impartiality, and with

a sincere desire to serve the landed interest, without intending to hurt

that of the King his master. From this book, we have an opportunity of

judging of his notions of taxation; and from the consequences he himself

points out, we discover the miserable state of the common people in

France, whose situation at this day is not much changed for the better.

The Marechal’s scheme was to reduce the whole revenue of France under

four heads.

The first, a general tithe of all the fruits of the earth, without

distinction, which we have already explained.

The second, a tithe upon every income whatsoever, even upon the profits

of labour, servants wages, employments, possessions, and trades of all

denominations.

The third, was a modification of the _gabelle_, or the duty upon salt.

The fourth, which he calls the fixed revenue, was to be composed of the

domain, and several other branches of taxes which he allowed to subsist,

judging them, I suppose, not hurtful to the state.

I shall now shew wherein the Marechal’s plan of taxation is contrary to

principles, and leave the reader to make his conclusions.

First, he has declared in many places, that his intention was only to

impose a tax upon the income of land, which he understands to be that

part which remains after the deduction of all expences of cultivation

&c. in other words, what every one understands by land-rent, and which,

no doubt, is the only proper object of taxation: but in order to impose

upon this part his royal dixme when at the real tenth, he takes the

tenth part of the whole produce, instead of the tenth part of what goes

for the rent; and, as far as I have been able to discover, he never

perceives that there is the greatest difference between these two

quantities.

The second article was the tithe of every income, not consisting of the

fruits of the earth.

Where an income arises from a branch of property which can render it

determinate, I shall form no objection to a tithe or two shillings in

the pound upon it. But when he comes to tax lawyers, attorneys,

physicians, &c. according to the value of their emoluments, I own I

cannot find a possibility of preventing abuse in the collection, or

inequality in the imposition of the tax.

The Marechal’s principal point in view was agreeable to the standing

maxim in France, to make every one contribute according to his income.

Very right, so far as it is possible, without implying much greater

inconveniences than what can be compensated by this imaginary equality.

I call it imaginary, because in the execution it will be found, that no

body will really pay what they ought, except those whose income cannot

be concealed. Whenever any part can be hid, there must, in my opinion,

result a great inequality, and great oppression, in endeavouring to

ascertain it.

A short observation will suffice to give a view of his notions with

regard to merchants and trade in general. His intention was to be very

indulgent to this class of inhabitants; and he feels all the advantages

of trade. He proposes, however, to proscribe all notes of hand payable

to bearer, as it is a method of concealing wealth and exacting interest

for money; which he supposes to be contrary to scripture. Trade would be

ill carried on with the Marechal’s restrictions.

When he comes to the lower classes, which he supposes to comprehend one

half of the people, to wit, all tradesmen, manufacturers, and

day-labourers, their wives and children; he takes the example of a

weaver, as a middle term, to judge of the gains of the tradesmen and

manufacturers. He supposes this weaver to have a wife and family, to

work 180 days only (because of the many holidays, as well as accidental

avocations) at 10½_d._ sterling a day. This makes his year’s labour

worth 7_l._ 17_s._ 5_d._ sterling. Of this he takes 10_s._ 10½_d._ for

the greatest tithe. Besides this, he exacts of him for his salt-tax, for

four persons in his family, 12_s._ 9_d._ So that this man, whose whole

labour is only worth 7_l._ 17_s._ 5_d._ sterling, is to pay 1_l._ 3_s._

7½_d._ of cumulative taxes out of it, which is above ⅐ of the whole fund

of his poor subsistence: after which he adds, “This, in my opinion, is a

tax high enough for a weaver, who has only his two hands to gain his

bread with, and who has house rent, meat and clothes to provide for a

family, who frequently can gain very little for themselves.” To this I

must agree.

I shall give one specimen more of what the Marechal considered as an

ease procured to day-labourers, in their then situation; which relief,

however, they have not hitherto obtained.

These he also supposes to work 180 days in the year, at not quite 8¾_d._

sterling. He values his year’s labour at 6_l._ 10_s._ 6_d._ sterling,

and here is the employment of this sum according to the plan.

He is to pay for tithe of his _industrie_ £ 0 8 8½

For his salt-tax 0 12 9

For five English quarters of rye 4 7 1

For clothes to the family, utensils, and repairs 1 1 11½

———————

6 10 6

I have been the more particular upon this part of the plan, because it

gives us a notion of what the Marechal thought a moderate easy tax laid

upon 8 000 000 of inhabitants, to wit, 2 000 000 men and 6 000 000 women

and children, according to his calculation.

I come next to the tax he proposed to lay upon salt, of which mention

has been made.

This tax is of the nature of an excise, and is called the _gabelle_,

which we have explained already in a note; and the objections to it, as

the Marechal has proposed them, are no less than three very material

ones.

First, the proportion of the duty is far too great, considering the

value of the commodity. The second is, that being imposed upon an

article of subsistence, it operates immediately on the price of the

salt, and only consequentially on the price of labour. This is no great

objection, were the proportion moderate; because insensibly the price of

labour would rise, were the tax generally and exactly levied in

proportion to the consumption: but this was not the case; and this

circumstance opens the last objection, and the greatest of all, to wit,

that the tax, proportional in its nature, is rendred cumulative, by

being raised at the end of the year, in order to oblige every one to

consume the salt required.

Now by this mode of levying the tax it loses every advantage, and

becomes an addition to the tithe laid upon the industry of the consumer.

If every man in England were to be rated at the end of the year, in

proportion to the excise of as much beer as he may reasonably be

supposed to consume, would that be an excise? certainly not. It would be

a poll-tax to all intents and purposes, which no man could draw back.

I have little or nothing to object to the fourth article of the

Marechal’s plan. He proposed no essential change, either as to the

imposition, or method of levying the taxes which composed it. The

principal heads of them are,

1_mo_, The royal domain, or the king’s landed estate, together with all

casualties attached to royalty, or feudal superiority; stamp-duties, and

the _controle_ of public acts by notaries.

2_do_, The customs upon importation and exportation.

3_tio_, Certain taxes of the purely proportional kind; among which was

one upon tobacco, and one upon liquors drank in public houses in the

country. Here entire liberty is left to the consumers; and the taxes are

principally calculated to affect, or, as he calls it, to punish luxury,

intemperance, and vanity. With this view, he wittily proposes an

imposition upon large and ridiculous wigs, at that time much in fashion,

and upon several other articles of extravagance.

This is a short sketch of the Marechal’s system of _royal tithe_,

considered as to the principles only, upon which the several taxes were

intended to be imposed. The treatise contains several admirable things;

especially with regard to recapitulations of inhabitants, lands, houses,

animals, &c. highly deserving the attention of the statesman, who

intends to execute any plan for national improvement.

I shall now set before the reader the Marechal’s calculation, as to the

amount of the four articles, when at the lowest, and at the highest

taxation. When the tithe is understood to mean the 20th part of the

fruits, &c.

I. The tithe of the lands 60 000 000

II. The tithe of all revenue and industry 15 422 500

III. The salt-tax at eighteen livres the minot[51] 23 400 000

IV. The fixed revenue 18 000 000

——————————

Total of the four articles, when at the lowest taxation 116 822 500

——————————

When the tithe is understood to mean the tenth part of

the fruits, the two first articles are just double of

what they are stated at above, viz. 150 845 000

The salt-tax at thirty livres the minot 39 000 000

The fixt revenue never changes, and stands always at 18 000 000

——————————

Total of the four articles, when at the highest

taxation 207 845 000

——————————

Footnote 51:

The _minot_ is a measure of capacity equal to three Paris bushels, or

the fourth part of a septier; which is about one half of an English

quarter. This makes the _minot_ to be about an English bushel. The

Marechal proposed that this quantity, when at the lowest price, should

be sold for 18 livres, or 1_l._ 6_s._ 1½_d._ sterling; and when at the

highest, at 30 livres, 2_l._ 3_s._ 6½_d._ from which we may judge of

the exorbitancy of the gabelle, even after all the diminution he

thought proper to make upon it. The French money mentioned in the

Marechal’s Dixieme royale, is here converted into 52¼_d._ sterling,

for the French crown of three livres: because the silver coin in

France, at the time he wrote, was 30 livres 10 sols the marc (Dutot,

chap. 1. art. 6.); and at present it is at 49 livres 16 sols.

In imposing this tax upon the fruits, he allowed no exemptions, not even

in favours of the princes of the blood: for this he gave an excellent

reason. Tithes, said he, were the ancient patrimony of kings. The Roman

emperors and kings of France enjoyed them. From those duties no noble

was exempted. This appears from the ecclesiastical tithe, which, he

alledged, to be nothing but the royal patrimony, alienated in favour of

the church; consequently, there is nothing derogatory in paying the

tithe, although nothing be more so than paying the taille. So great is

the difference between terms, when the ideas of a nation are connected

with them!

------------------------------------------------------------------------

CHAP. XII.

_Miscellaneous Questions relating to Taxes._

The subjects of credit, debts, and taxes, have been so extensively

treated of in the two last books, that I hope no question I now can

propose will serve for any purpose, but to suggest the solution of it,

so far as it comes under the principles we have been deducing.

QUEST. 1. What is the most proper method for imposing a land tax?

I answer, that according to equity and justice, all impositions

whatsoever ought to fall equally and proportionally on every one,

according to his superfluity; but in land-taxes this equality is not so

essential as in most others. The great hurt arising from inequality in

taxation proceeds from the inequality occasioned thereby in the

competition between the classes of the industrious. When the same tax

affects people of the same class differently, those who bear the

heaviest load gain less, though their industry be equal. But in

land-taxes the case is different: the tax there only diminishes an

income already made, and in fact diminishes the value of the property;

so that were land-taxes made perpetual deductions, the whole loss of the

tax would fall at once upon the actual possessors at the time it is

imposed. Every subsequent purchaser, by deducting the land-tax out of

the rent, would calculate the value of the remainder only; and the

consequence of the tax would be, virtually, to transfer a part of the

land-property to the state.

The consequences of such a change upon property may produce a variety of

new combinations. The state may then sell this portion of their

property; they may with the price received pay off part of their debts;

they may acquire certain districts of the country, where, being both

sovereign and proprietor, they may abolish taxes, which would then in a

great measure affect themselves only, and establish manufactures for

foreign exportation.

Although an absolute equality in this tax is not so very requisite,

still the inequality ought to be ascertained, and every income intended

to be affected by the tax should be specified in one way or other. For

this purpose, the best method seems to be, to make the regulation of any

one year a rule for the subsequent years, until it be judged proper to

make a new general valuation of every part. This is a consequence of

what has been said: a fluctuating annual valuation, which is the case in

France, produces numberless inconveniences; and upon the whole, they are

far greater than those which it is intended to avoid.

I agree that the same land may be worth more one year than another; but

it is impossible by a fluctuating valuation to ascertain that difference

over a whole country, to the satisfaction of every one; and although, by

fixing it at one rate upon every possession, inequalities must take

place, yet fixing it from rising in proportion to improvement, will

prove an encouragement to industry, which will greatly overbalance such

an inequality. Every one then will be in the way of acquiring an

addition to his income, free of land-tax; and if this be thought too

great an encouragement to improvement, let the regulation be only fixed

for a determinate time; suppose a century. This is no more than giving

every one a lease as it were of their land-tax for a hundred years; and

experience shews, that without granting long leases it is impossible

that lands should ever be improved.

Were innovations practicable, according as right reason and plain

principles direct, it is very certain that a land-tax might be imposed

in a better way than I have here suggested. But to what purpose would it

be to lay down schemes beyond the power of execution, when the

principles already deduced so plainly point them out?

QUEST. 2. Which is the best method of levying taxes; by farm, or by the

management of commissioners appointed by the state?

The best way to answer this question, is to shew the inconveniences and

advantages of both. The arguments against farming are,

1_mo_, The great fortunes made by the farmers occasion jealousy, and

expose to the eyes of the people a set of men who are become rich at

their expence; hence envy arises, and hatred against government.

2_do_, In years of scarcity, war, or public calamity, deductions of the

rent, or annual sums paid by the farmers, are demanded, and can hardly

be refused, and the farmers always overvalue their loss; here therefore

is an unequal bargain: the farmer _must_ gain, the state _may_ lose.

3_tio_, The people pay less willingly to the farmers than to the King;

magistrates in general support the raising of duties with more

unwillingness, and severities upon delinquents are less easily born.

These inconveniences are avoided in the management. There men of the

best abilities may be entrusted with that employment; experience shews

that many branches of taxation have been carried to great perfection

under management, and men of probity and capacity will act with as great

zeal for the public as for themselves.

The principal arguments for farming are; the advantage of having a fixed

and certain revenue to depend on at regular terms; that the farmers act

with more zeal for themselves, and with greater impartiality in

employing under-officers, as well as more frugality, and therefore can

afford to give a higher rent, with considerable profit to themselves,

than can be made effectual under the best management: besides, every one

judges himself capable to administer the King’s affairs, because he

finds profit in it; but people think twice before they undertake to be

farmers of a revenue they do not well understand.

In the administration of taxes, it ought to be the object of a

statesman’s attention and care to profit of every advantage attending

the different modes of levying them. It is not sufficient to inquire

into the general consequences of the two modes of administration, the

management and the farming of taxes: those of the cumulative kind

especially, affecting the lower classes, would be very improper objects

of a farm; because it would be in a manner delivering over the greater

part of a people to the rapacity of tax-gatherers.

On the other hand, the farming of proportional taxes is not liable to so

many inconveniences. The farmers there are principally employed in

watching over those who _advance_ the taxes, and who are themselves, as

has been said, in reality the tax-gatherers over the people.

When therefore circumstances permit, without inconvenience, the

fabrication of exciseable goods to be incorporated with the farm, this

of all others is the best method of levying taxes. Examples of this are

familiar almost every where. The farmers of the salt and of the tobacco

in France are in this situation. In retailing those commodities, they

collect the price they pay for the composition; that is, for the farm of

them. It is not the same of the aids in France. There the farmer

superintends the immediate tax-gatherer, to wit, the retailer of

spirituous liquors, or of other things subject to the tax. The

circumscribing the number of places where exciseable commodities are

fabricated, and the shutting them up within inclosures, would greatly

facilitate the levying of all excises, whether by farm or by management.

In order therefore to decide whether the preference ought to be given to

the management or to the farm, circumstances are to be weighed. When a

tax is new, or has been ill managed, or has fallen, without any visible

cause, below what it formerly produced, or ought to have done; when the

amount is unknown, by being of an extensive collection: in such cases,

short farms, and even several subdivisions of them in a country, may be

of use. But when a tax is well understood, and a good plan of levying it

laid down, it may be well raised, and perhaps better improved, under a

management; as also, when it is of a nature to be easily understood, and

when the very exercise of levying it points out all the frauds possible

to be committed.

Davenant, who well understood this question, in his 4th Discourse upon

revenues, recommends farms which are not _absolute_, but _limited_, as

the best. By limited, he understands, that the farm should first be

given for a fixed sum; that the farmers should carry on an open

administration, liable to the government’s inspection in every

particular; that in case the profits of the farm should exceed the rent

stipulated, a certain sum should be ascertained for the charge of

management, and the surplus should belong to the King, allowing a

certain poundage to the farmers to animate their diligence[52].

Footnote 52:

This plan of Davenant’s was carried into execution in France by

Monsieur Silhouëtte, in 1759.

He very justly observes, that a tax, when farmed, in order to be

improved, will naturally draw, at first, a less rent than the sum

liquidated as a free profit by the former management; because the

farmers will be willing to secure to themselves a good profit; and next,

because they will be obliged to make a considerable advance, as a

security for fulfilling their engagement, which must also be considered

as a deduction out of the produce of the tax.

All the advantage therefore in farming must be looked for after the

expiration of the lease; for which reason, the shorter the term is, the

better: three years, it seems, was the common term in England, in

Davenant’s time.

All new imposed taxes ought to be raised with the greatest lenity, not

to revolt the minds of the people: the first year’s deficiency is well

bestowed, if government can but discover the different ways which may be

fallen upon to defraud the tax, and form a good judgment how far the

amount of it may go in time, when the management is brought to

perfection. As long therefore as a management continues to improve a tax

newly laid on, I should not think of farming it: but when, either from

the extent of the imposition, or the nature of it, frauds begin to

multiply, and management begins to become more and more difficult, then

is the time immediately to put it into farm, either for different

districts of a country, or in sub-farms. If this be delayed, frauds will

daily increase; and the difficulty of preventing them will carry

government to the expedient of imposing penalties, severe in proportion

to the frequency of the crime. Commissioners will constantly put these

in execution with reluctance; the management will become slack; or if

penalties are rigorously exacted, they will become a handle for

oppression; and even though justice be done, and none but delinquents be

punished, yet still the people will be ill affected with the punishment

of an action which in itself they are too apt not to consider as a

crime: whereas in farming, frauds will be prevented by vigilance more

than by fear of punishment; and this is by far the better expedient.

Thus instead of feuds daily increasing, they will daily diminish, and

the tax will improve yearly.

Here Davenant well observes, that _nothing but divine wisdom can at

first create perfect order; but in all human affairs it must be the work

of time, and the result of much labour and application_.

One good reason for managing a tax before it be farmed, is to learn the

nature of it, and of the frauds it is liable to. When these are not

rightly known, the farmer can more easily surprize the government, and

obtain from it new regulations, under the pretext of preventing frauds;

which regulations they may abuse, and turn to other purposes than those

intended.

Davenant has a very good remark, p. 154. That a new tax, imposed upon

consumption, and ill levied, equally raises the price upon the

consumers, and the whole profit centers in the hands of those who

retail. That when an old excise becomes ill levied, the profit is

divided between the inferior officers (who collect it) and the

retailers. The reason is, that a branch which is well understood, is not

so liable to _frauds_ as to _collusion_. This shews that in every case,

such a duty should never be imposed without exerting every endeavour to

have it rightly collected. The state should also keep a watchful eye

upon the augmentations made in the price of exciseable commodities, in

order to keep the augmentation justly proportioned to the duty. If this

be neglected, the overcharge hurts consumption, diminishes the produce

of the tax, and enriches the retailers only. Here competition is

necessary to be introduced: the public may even erect a manufacture

which may regulate prices, and so soon as they are properly ascertained,

the selling price may be fixed by an assize.

An ill levied imposition is attended with this additional inconvenience,

that it establishes inequality among the industrious of the same class;

consequently, an unequal competition. This happens when particular

officers are diligent and exact in doing their duty, while others are

remiss. The profits of retailers are _high_ in proportion to the

_negligence_ of the officers of the revenue; and their extraordinary

profits, enable them to undersell and to ruin those who are exactly

looked after: the consequence of this is, to diminish the number of

retailers; to introduce hurtful monopolies; and in general, to hurt the

whole branch of the manufacture. All remissness, therefore, in

collecting an excise, draws along with it a prejudice to the Prince and

his people: and the relative profit, which balances this loss, falls

into the pockets of the fraudulent manufacturer, and the corrupt and

negligent collector. This is not all: the deficiency must be made up in

another way; for taxes must produce the sums wanted. Thus the remissness

in collection occasions a new additional burden to be laid on the

people.

QUEST. 3. What is meant by _income_, when applied to individuals, and to

a state, and what is the nature of the _expence_ which must diminish it,

when it is considered as the object of taxation?

The great intricacy of this question proceeds from hence, that what is

really an expence to one is the income of the other: so that without

applying our reasoning to every particular fact, no general explanation

can be rendred intelligible. My reason for proposing it in this place,

is, that in commenting upon some passages of Davenant, in his discourses

upon the revenues of England, I may have an opportunity of illustrating

some things which have been already examined.

Davenant was an admirable writer; he had a remarkable genius for

political theory, and his sentiments upon many things are very generally

adopted. My intention here is not to refute opinions, but to avail

myself of his combinations, in order to explain my own ideas.

In his first discourse upon revenues, we find the following passage.

"The number of the people leads us to know what the yearly _income_ may

be from land, and what from mines, houses, and homesteads, rivers,

lakes, meers, ponds, and what from trade, labour, industry, arts and

sciences: for where a nation contains so many acres of arable land, so

many of pasture and meadow, such a quantity of wood and coppices,

forrests, parks and commons, heaths, moors, mountains, roads, ways, and

barren and waste land; and where the different value of this is

computed, by proper mediums, it is rational to conclude, that such a

part of the people’s expence is maintained from land, &c. and such a

part from mines, houses, &c. and that such a part is maintained from

trade, labour, &c. and the poor exceeding so much the rich in numbers,

the common people are the proper medium by which we may judge of this

expence.

“There is a certain sum requisite to every one for food, raiment, and

other necessaries; as for example, between 7 and 8_l._ _per annum_; but

some expending less, and some more, it may not be improper to compute,

that the mass of mankind, in England, expend, one with another, near

8_l._ _per annum_: from whence it may be concluded, that an _annual

income of so many millions_ is needful for the nourishment of such and

such a number of people.”

The reasoning here takes a wrong turn. It is of no consequence to

compute the value of things consumed without alienation. It is of no use

to know that the value of the physical-necessary of an Englishman is

8_l._ a year; because if this sum is supposed to be an exact quantity of

income, no one farthing of tax can be imposed upon it. So that imposing,

for example, 5 _per cent._ upon this article would only be raising the

physical-necessary to 8_l._ 8_s._ which 8s. must be paid, not by the

physical-necessarian, but by some body having superfluity who employs

him: and if there was not superfluity enough in England to answer to

8_s._ a head, such a tax could not be levied.

He afterwards supposes that the income of this class may amount to about

twenty millions a year, which at 8_l._ each, answers to two millions and

a half of people. He states the income of lands at fourteen millions,

and the income of trade at ten millions, in all at forty four millions a

year: and hence he concludes, that taxes ought to be imposed in some

proportion to this total.

Now if he supposes the first article of twenty millions, arising from

the income of those who are employed in arts and manufactures, according

to the former calculation of 8_l._ a head, to be as ready a fund for

taxation as the land-rents, we must examine, by the principles we have

deduced, whether there be any ground for such a supposition.

Let me suppose one of this great class to work a whole day for his

victuals only. Here is an alienation of work for food. It is impossible,

however, to raise a tax in money upon this alienation; because it may

easily be supposed that neither party has a farthing. The only method

therefore, in such a case, to impose a tax, would be, either to oblige

the workman to set apart a portion of his day’s work for one who would

pay the public for the value of it, or to oblige the person who gives

him his food, to pay the public for the privilege of employing him in

his service. The one and the other are examples of proportional taxes.

But this method of taxation is absolutely unknown. In this example there

is an alienation, which, I have said, constantly implies a superfluity

of one kind or other. The labour of the person working is, here,

superfluous to himself; therefore a part of it may be applied towards

the public. But the bread he receives is in no part superfluous, and

therefore cannot be laid under taxation _as to him_. But then the bread

given for the labour is superfluous to the person who gives it; and as

this implies that he has a superfluity of bread, the state may demand a

share of that superfluity.

By this exposition of the matter it appears, that in order to raise a

tax, in whatever way it be done, some kind of superfluity must be

supposed. It also points out how it should be laid on: for if by

mistaking the proper object, a part of the _bread_ should be taken from

the _workman_, instead of being taken from the _man who employs him_,

the tax would affect the physical-necessary of the labourer, instead of

affecting the superfluity of the employer.

Let us next suppose a workman able to do no more than what is requisite

to dig the ground for roots to eat, instead of digging it to procure

bread from a man who has bread to spare; still there will be no

alienation; consequently, no possibility of establishing a tax: for if

you either take a part of his labour, or of his food, you deprive him

equally of his physical-necessary. Yet the work of this man, and his

food, may be valued at so much money; and thus may enter, in one sense,

into Davenant’s general article of income or expence; but it does not

follow that any tax can be raised upon such an income.

To estimate, therefore, the total value, in any nation, of what is the

object of taxation, we must go another way to work. The first article

must be the _annual income_ of all _funds_. By funds, here, I understand

the capital wealth already made, in opposition to the produce of

industry, which may be considered as the materials of which such funds

are composed. The fund therefore is the accumulation of savings, which,

not having been spent by the industrious, form a capital of a nature to

produce an income, either from land, or from any other valuable thing.

Thus land-rents, annuities, interest of money, emoluments of offices,

salaries, even wages of servants, in short, every fixed income, I range

in this first article, which I call _annual income_, produced from a

capital already formed, either real or supposed.

This may be laid under taxation by a pound-rate, or otherwise, and forms

that kind of tax which I call cumulative and arbitrary; because a man

who has any sort of visible revenue, comes under this general rate, let

him have ever so many necessary deductions out of it, ever so many debts

and incumbrances. From such circumstances, cumulative taxes frequently

turn out extremely burdensome.

The second object of taxation is upon alienations made for money.

Whenever we come to dispose of money in the purchase of any thing, the

state has an opportunity of exacting a part of it as a tax; but while it

remains hid, it can neither be come at, or laid under contribution,

without extortion or violence.

All branches of expence may be laid under taxation by excises, which I

call _proportional taxes_; because a man is never subjected to them, but

in proportion to his expence; and his expence ought naturally to proceed

from his income.

As for trade, I do not clearly see how the profits of it can be

regularly taxed. In France, indeed, they are taxed under the first head,

and are considered as an income. Such an imposition is not well judged;

because _there_ the materials for making the fund are taxed as if they

were the income of a fund already made. It is only the savings out of

the profits upon trade, placed so as to produce a permanent revenue,

which properly can be considered as a fund: the _income_ therefore of

these savings, and not the savings themselves, should come under that

branch of taxation.

Customs are improperly called taxes upon trade. If ill imposed they stop

trade, or render it less profitable, by diminishing the demand for the

goods so taxed; but they take nothing from the profits already made.

In a trading nation, the great branches of commerce produce a certain

determinate profit, subject, I allow, to augmentations and diminutions,

from accidents and circumstances impossible to be foreseen: and the

customs imposed upon exportation and importation differ from excises

more in the method of levying them than in any thing else.

Davenant, in my opinion, would have given a better idea of the sum which

taxes might have been supposed capable of producing in England, had he

examined the amount of all the branches of revenue, and of all the

species of sale, than in the manner he has done. These two points known,

it would be expedient next to inquire, in what manner the several

articles could be made subject to either cumulative, or proportional

taxes.

I must now take notice of another passage of Davenant, where he explains

himself upon the question before us: it is in his fifth discourse upon

revenues, where he says,

"By annual income, we mean the whole that arises in any country from

land and its product, from foreign trade, and domestic business, as

arts, manufactures, &c. and by annual expence we understand what is

_of necessity_ consumed to cloath and feed the people, or what is

_necessary_ for their defence in time of war, or for their ornament in

time of peace: and where the annual income exceeds the expence there

is superlucration arising, which may be called wealth or national

stock.

“The revenue of a government is part of this annual income, as

likewise a part of its expence, and where it bears too large a

proportion with the whole, as in France, the common people must be

miserable and burdened with heavy taxes.”

I must comment a little upon this passage.

I have no objection to this exposition of the matter; the ideas are

intelligible and clear: but I object against the application of his

doctrine to taxes; because it would lead to error. Here are my reasons:

1_mo_, Income is called the whole of the earth’s productions: this I may

admit to be just, except when we consider income as an object of

taxation. But if we retain the same definition to express the income of

one, for example, who labours the soil for his own subsistence, as well

as of another who labours it as a trade, the difference in paying their

taxes out of it will be very great. He who draws nothing from the ground

but his physical-necessary, can be laid under no taxation; because he

has no superfluity. And if he be obliged either to give a part of his

crop in tax, or to sell any part of it for money to be paid to the

public, this diminishes his physical-necessary, and forces him to

starve: whereas the other who exercises labour as a trade, may be

obliged to pay a part of his surplus by way of tax or rent; and still

his physical-necessary may remain untouched.

It is for this reason, that in treating of these matters, I am always at

the greatest pains to point out, that nothing can be the object of

taxation, except what is over and above the physical-necessary of every

one.

In all countries where a _land-tax_, _steuer_, _taille_, or by whatever

name it goes, is established, care must be taken to prevent the

husbandmen from confining their labour to such a small spot of ground as

is barely sufficient to produce their own physical-necessary, unless

when they have a trade to assist them in paying what the public demands

of them.

From this circumstance, and this only, it happens, that the land-tax in

England is so little burdensome, comparatively to what it is in many

nations of Europe. Lands in England are let in large portions: no body

will let a farm so small as to be proportioned to the supplying of the

mere physical wants of the farmer. But in other countries, where the

oeconomy is different; where inheritances in land are constantly

divided, as moveables, among all the children; the lots become so small,

that the proprietor can draw no more from them than his own subsistence;

and then when a land-tax is imposed, this poor little portion being

valued in proportion to what it can produce, as well as the greatest

estate in land, the husbandman is starved, although the tax demanded of

him be laid on in the exact proportion to the produce of his land, while

he that has a surplus is quite easy.

I would therefore recommend, in countries where this minute subdivision

of lands has taken place, that for the future none under a certain

extent or value should be suffered to be divided among the children, but

ordered to be sold, and the price divided among them; and that the same

regulation should be observed upon the death of such proprietors whose

lands are not sufficient to produce three times the physical-necessary

of the labourers. This would engage a people to exercise agriculture as

a trade, and to give over that trifling husbandry which produces no

surplus, and which involves so many poor people in the oppression of

land-taxes. This plan can never be recommended as a plan to be executed

all at once: it must be done by degrees, and in proportion to the

progress of industry. The principle is so evident, that I never found

any one who did not immediately agree to the justness of my observation;

although in imposing land-taxes I have nowhere found it attended to[53].

Footnote 53:

Some small attention is paid to the poorer sort of landholders in

England: for, by the annual act for a land-tax, no poor person shall

be liable to the pound-rate, whose lands, &c. are not worth 20_s._

_per annum_ value.

Here then is the use of theory; it directs us in practice to avoid

difficulties, which might otherwise be judged unsurmountable.

2_do_, I farther observe, that it is a more hurtful error still to

mistake the produce of industry for the taxable income arising from it,

than to mistake the gross produce of land for the rent: because the

profits upon industry bear a smaller proportion to its produce, than the

rents of lands do to their full fruits.

The best method of raising money upon the lower classes of the

industrious, is rightly to lay their consumption under proportional

taxes, which they may easily draw back; because they will raise the

price of their work proportionally.

From this we may conclude, contrary to the common opinion, that the test

of well imposed taxes is to raise prices in proportion. When they are

rightly imposed, every one who sells a commodity which has paid a tax,

will draw it back, whether he be industrious or not. If he consumes it,

he cannot draw it back, but by raising the price of his work, which

again he cannot do, unless the tax be made so general as to affect all

his competitors; and unless the consumption he has made be unavoidable

to every one of them.

When we reflect upon the large quantities of exciseable goods which are

consumed as superfluities, we must conclude that the rise of prices,

daily complained of, proceeds more from our manners than from the taxes

we pay.

3_tio_, The expence of a people is not merely what is sufficient to

subsist them; but what they consume, either in fruits, of manufactures.

Had indeed Davenant computed the value of this necessary quantity, and

deducted it from the income, according to his acceptation of income; the

remainder would have been a tolerable good representation of what I mean

by income, or taxable fund; because whatever a people consume beyond the

necessary, I consider as a superfluity which may be laid under taxation.

4_to_, I must also differ from him in his idea concerning

superlucration, wealth, or national stock.

According to him, this is the quantity of income remaining after the

following deductions: 1_mo_, What is _necessary_ to clothe and feed the

people, 2_do_, What is _necessary_ for their defence in time of war, and

ornament in time of peace. But according to my notions, I must also

deduct all that is consumed in superfluities; for what is consumed,

whether _necessarily_ or _superfluously_, never can make an article of

superlucration, wealth, or national stock.

The superlucration then of a nation consists in the augmentations made

upon her stock of every kind, capable of producing a proportional

income: it is the converting into something durable the well employed

time of the inhabitants. In this sense the new pavement of London, the

roads, buildings, ships, &c. in England, are all articles of

superlucration, as well as the improvement of the lands, and

consolidation of the balance of her trade, which has created that part

of the public funds belonging to natives.

QUEST. 4. Is it possible to convert a land-tax into one of the

proportional kind?

This is a curious speculation; and as it is a short exercise upon

several principles of this science, it comes in properly at the

conclusion of our work.

To make a land-tax proportional, the proprietors of land should be

enabled to draw back the burden, in the sale of the earth’s productions.

This they cannot do, as matters stand. The farmers who pay no land-tax

undersell them; because they have no tax to draw back.

Since the tax, therefore, cannot be drawn back directly, let us apply

our principles to discover a method how this might be done indirectly.

Let nothing but lands be subject to this imposition.

Let every part of them be valued, and recorded in a general register.

Let bread, butchers-meat, and subsistence of all kinds, be laid under an

excise, _in all markets_, and nowhere else, at a rate sufficient to

raise the tax intended to be laid upon the lands; and let the amount of

this tax be drawn back by the landlords, in proportion to the valuation

by which they have paid the land-tax.

That this is a reasonable imposition, appears from the whole plan of

this work. We have seen, in the first book, how the great body of the

people is divided into labourers and free hands; that the free hands are

the inhabitants of towns, who go to market for subsistence, and consume

what corresponds to the land-rents; consequently the landlords, who at

present pay a cumulative tax, which they cannot draw back in any shape,

are justly intitled to the amount of this proportional tax, laid upon

the great articles which produce their land-rents, and which are

consumed by the inhabitants not employed in agriculture.

Every one who has writ concerning taxes has endeavoured to contract the

object of them as much as possible: more, I imagine, with a view to ease

the public than the people. I have followed another course. I have been

for multiplying the objects of taxation as much as possible, and for

making them more in proportion to expence than to property or income.

But that I may conform myself in some measure to the ideas of those who

have examined the same subject, I shall propose a tax, which would fill

up the place of every other; and could it be levied, would be the best

perhaps ever thought of.

It is a tax, at so much _per cent._ upon the sale of every commodity.

------------------------------------------------------------------------

CHAP. XIII.

_Recapitulation of the Fourth Book._

PART I. _Of the Interest of Money._

[Sidenote: INTROD.]

I introduce the subject of credit and debts, by giving a general idea of

its extent. It comprehends the method of establishing a solid security

for money borrowed; of extending the object of such security in

proportion to circumstances; of supporting the credit of the borrowers,

when over-stretched; and of preventing, as far as possible, the fatal

consequences of a bankruptcy, when it can be no longer supported.

I shew how all mysteries relating to credit proceed from our ignorance

only of its true nature; which is confidence established upon a visible

and palpable fund of payment. I observe how delicate a thing credit is,

and how gently it must be dealt with; how incompatible the forms of

common law are with the discussion of questions which arise between

merchants; how necessary it is to form a jurisprudence peculiar to

trade, and to support it by manners more than by authority; and when

credit is once set upon its true basis, how all aerial schemes, bubbles,

and public bankruptcies will be avoided.

CHAP. I. Here I shew how impossible it is to establish credit by

authority; how inseparably it is connected with liberty and

independence; and still how compatible it may be with that supreme power

which is vested in every government.

CHAP. II. The object of credit is money lent; the basis of loan is the

payment of interest. If money be wanting, credit will die; consequently,

there must be a method found for augmenting and diminishing the quantity

of money in proportion to the demand for it. It is augmented, by

converting land into paper-money; it is diminished, by relieving the

land of the engagement upon it, and extinguishing the paper-money. This

is no more than a contrivance for turning into a _circulating value_,

which is the principal characteristic of _money_, the obligations of

private men, which in all countries are considered to be of an equal

value with any coin.

I here explain what is meant by money _stagnated_, and by money

_realized_. Money, while it is employed in circulation, can carry no

interest; the moment it lies idle to one man, were it but for a day, it

may be worth interest to another, who willingly pays for the use of it,

when he has occasion either to buy what he wants, or to pay what he

owes. If no body be found who wants it, then it is said to _stagnate_ in

the hands of the proprietors. This denotes that circulation is full. He

therefore desires to _realize_ it; that is, to purchase with it some

kind of income. For this purpose, if it be coin, he sends it to some

place where coin is wanted. If it be paper, he demands of the debtor in

the paper either to give him an interest for it, or to convert it into

coin, which is the money of the world. Both are called realizing; and in

proportion as money is realized, circulation diminishes.

Hence I conclude, that as the use of circulating money is to carry on

alienation, so the use of stagnated money is to produce an interest;

consequently, a perpetual interest is better than money, when it is not

wanted for the use of circulation. If therefore, by the policy of a

country, the capital of every perpetual interest can be immediately

converted into money for the use of circulation, the inconvenience of

capitals not demandable is removed; because although you cannot make the

debtor pay, you can sell what he owes you to another, who will; and this

equally suits your convenience.

CHAP. III. The simplicity of manners among the primitive christians,

circumscribing very much the uses for money in circulation, a great

quantity of the coin was consequently locked up. Paper money _then_ was

superfluous; because even coin itself so far exceeded all the uses of

their circulation, that it was considered in the light of jewels and

plate with us.

Taking interest for it, when lent, appeared to them as unreasonable, as

if a lady, in these times, were to ask a price for lending her jewels to

a friend.

However, as money was necessary on many occasions to those who had none

locked up, the Jews, who have always despised land-property, made a

trade of lending; and this drew an odium upon the practice. I can

ascribe it to no other cause. Our manners are totally changed; and

Christians lend money at interest as well as Jews. Neither trade,

industry, or credit, can subsist without it; and as money cannot be

lent, without allowing interest to be taken, interest is become the

basis of the whole system of credit, and comes to be examined in the

following chapters.

CHAP. IV. Before industry was established, the calls for money to borrow

were few, and chiefly confined to Princes in time of war, and prodigal

proprietors of land in time of peace. Their demands were urgent, and the

interest they paid was in proportion. The lenders possessed but a small

part of the coin of the country; because the bulk of the people locked

up all they could. Those who hoarded, would not lend; and this greatly

diminished the fund of borrowing: besides, Princes and prodigals had no

sooner spent the money borrowed, than it fell again into the hands of

those who hoarded; and the lenders found, no doubt, great difficulties

in procuring fresh supplies.

When industry and trade brought money out of its repositories, when the

necessity of permitting interest appeared evident to the church, the

coin then began to make its appearance, and was ready to be lent. This

opened a market for money. The price of money is the rate of interest.

At this market, the borrowers and lenders appear in competition among

themselves, according to circumstances. If more money is demanded to be

borrowed than is offered to be lent, the competition takes place among

the borrowers, and interest rises. If more is offered to be lent than is

demanded to be borrowed, interest falls. Those who borrow money may be

divided into two classes, viz. those who intend to spend it, and those

who intend to trade with it.

When more money is to be lent than the first class demands, the rate of

interest will be regulated by what merchants _can_ give for it: when

there is less, it will rise to what the prodigals _will_ give for it.

But this first class must have good credit, or their borrowing will be

cut off. When therefore a statesman finds, that the borrowing of such

people hurts the commercial interest of his country, by keeping interest

high, he should weaken their credit, by tying up their lands by entails.

When their borrowing becomes necessary for the encouragement of

industry, and for bringing all the money there is into circulation, then

their credit should be enlarged, by promoting an expeditious sale of

every branch of their property.

CHAP. V. Thus, without the aid of law, the interest of money is

regulated by demand. But a state must not totally overlook the interest

of the class who spend more than their incomes. It would be inhuman to

throw them into the jaws of usurers. Statutes therefore prevent interest

from rising above a certain rate. This preserves them, and renders the

dissipation of their fortunes more gradual.

But although a statesman has it in his power to guard his people against

the oppression of usury, by preventing the rate of money from rising

above the ordinary standard of demand, he cannot equally force it down

below this standard, even although the interests of trade should require

it: because if the monied men can lend their capitals abroad, at a

higher interest than they can procure for them at home, they will

distress the landed interest, by demanding what they owe, and all the

money will be sent abroad, as was the case in Scotland in 1762.

This was not the case a hundred years ago. No money then could be lent

abroad by Englishmen; because those who would give high interest had no

credit. Thus government could bring it down at will; monied men were

forced to consent; and the price of land rose in proportion as interest

fell.

As it is the extravagance of men of property which raises the rate of

money above what is consistent with the interest of trade, the

expedients to bring it down, are, 1. To circumscribe borrowing by the

prodigal: 2. To suspend borrowing by the state: and 3. To throw as much

public money as possible into the market, by paying off debts. When a

statesman has by such measures brought the rate of money considerably

below the legal price, he may, by a new statute, prevent its rising

again so high as formerly; but still he must keep in his eye the rate of

money, and state of credit in rival nations, in order to avoid the

inconveniences already mentioned.

CHAP. VI. If Great Britain were to regulate the rate of money below what

the fluctuations of demand are commonly found to carry it, then in time

of war, as soon as demand, which can be subject to no statute, got up to

the high standard, the whole landed interest would be torn to pieces by

their creditors: for the debtors could not borrow from one to pay

another, because no man would give them credit. This would put an end to

all their expence; the funds which supply it at present (the land-rents)

would be carried off by creditors; and all the industrious who serve

such proprietors of land would suffer considerably for want of

employment. The conclusion which the generality of people would draw

from this phænomenon would be, that high interest, instead of being

hurtful, is advantageous to trade.

CHAP. VII. Hence we may conclude, that low interest is principally

advantageous for carrying on foreign commerce, and that the best method

to keep it low, is to keep circulation full, by facilitating the melting

down of property.

This expedient has been contrived by merchants in the establishment of

banks upon mortgage; and there is a possibility that landed men, some

centuries hence, may find out that they may imitate the example of

traders, and contrive the means of borrowing cheaper than they can do at

present.

Were a particular nation to carry such expedients into execution with

success, it would have the effect of bringing down the rate of money

every where. This would sink the general average of the whole, but never

would prevent the operation of those principles by which it had been

brought down; and the most intelligent nations would still have the same

advantages as before, of keeping their interest low relatively to their

neighbours, which is the great _desideratum_ for the support of public

credit, as well as of foreign trade.

CHAP. VIII. But although it is of very great advantage to trade to have

interest low, we cannot judge of the prosperity of trade from this

circumstance alone.

That nation gains the most upon her trade who draws the greatest balance

from the rest of the world. Now the balance cannot be judged of by the

rate of interest; because this depends more upon manners and policy than

upon the state of industry. Industry must be supported by superior

dexterity, natural advantages, and promptitude of payments, as well as

by low interest. Prompt payment alone, is of more consequence to the

industrious populace, than a small difference upon the rate of interest.

That encourages the whole class of manufacturers. Low interest is

principally an advantage to the merchants who are obliged to employ

credit for collecting their work; and merchants themselves who trade

upon credit, often gain more by quick returns than what will compensate

a considerable difference in the rate of interest. Low interest may more

properly be called the barometer of public credit than of foreign

commerce.

CHAP. IX. From what has been said, I conclude, that the rate of interest

does not sink as wealth increases; because it is influenced by many

circumstances, which do not depend upon opulence. It depends upon the

spirit and manners of a people, and will fluctuate with them.

------------------------------------------------------------------------

PART II. _Of Banks._

CHAP. I. Having deduced the principles which regulate the rate of

interest, I proceed to investigate those which influence domestic

circulation; and as banks are the great engine by which circulation is

carried on, in tracing the nature of banks we shall fully understand its

policy and principles.

Banks either circulate notes, or transfer credit written in their books:

the first are called banks of circulation; the latter banks of deposit.

All banks are founded on credit, and according to the nature of their

institution, I may divide the credit they are built on into three kinds,

viz. private, mercantile, and public.

Private credit is when the ground of confidence is real property,

pledged for the security of the loan.

Mercantile credit is when the cause of confidence is in the trading

stock, abilities, integrity, and good fortune of the person who obtains

it.

Public credit every one understands. It is when the ground of confidence

is a fund secured by public faith, in favour of the creditors, for the

interest and capital due, which last however is never exigible from the

state.

Private credit is the most solid of the three; mercantile credit is the

most precarious; and public credit depends entirely upon the maxims of

every government with regard to public faith.

It is the object of confidence, not the quality of the person obtaining

credit, which determines the nature of the credit. A merchant may grant

bond on the credit of his lands; a landed man’s bill, as member of a

mercantile company, may only affect his stock in trade, and a Prince may

pledge a province for a sum of money.

The debts of a state, and the bills of merchants, are more easily

transferred than private securities.

Public and mercantile credit stand upon a more precarious bottom than

private security. A suspicion of insolvency will shake the two former;

real insolvency only will destroy the latter.

These are some of the peculiarities which characterize the differences

between the three kinds of credit. The justness of the distinctions I

have made appear from them, and from other circumstances mentioned in

this chapter; and the utility of such distinctions will appear from

their application as we proceed.

CHAP. II. To establish private credit, on the most solid and extensive

bottom, the effects of debtors should be rendred of a ready conversion

into money; the sale of lands should be rendred easy and expeditious; no

entails or cloggs by mortgage and the like, should be allowed; debts

upon possessions ought to be registred, and those due to banks (the

great public debtors) should always be considered in a most favourable

light.

CHAP. III. Banks of circulation upon private credit, are of great use in

the infancy of industry. In countries where it is only taking root, the

greatest obstruction it meets with is a scarcity of money. When money is

scarce, payments are ill made; and when the uses for money increase, if

money be not made to augment in proportion, alienation will cease to go

on, and payments will daily be more precarious. This is so evident that

I shall not insist upon it.

Now as every individual in a state does, less or more, support industry

by consuming its produce, money must be provided for every one in

proportion to the value of his property. This opens at once the

principle of banks upon private credit.

He who has money will, every where, willingly lend to every one who can

give good security for it; and the obligation granted by the borrower is

considered by the lender as better to him than the money he lends.

Before the establishment of banks, such loans were made in coin; but as

people discovered that a good obligation was as good as coin, they

discovered also, that when obligations could be made to circulate, they

might supply its place.

For this purpose, banks found out an expedient of dividing obligations

secured upon property into small parts of the capital sum; and by

delivering them back to the borrower, with an obligation to pay them in

coin to the bearer on demand, they constituted themselves debtors to the

public for every note. The consequence of this was, that the coin of the

country became less useful in circulation; and as the banks demanded it,

and even gave premiums for obtaining it, it came into their hands, and

served the purpose of changing notes; that is, of subdividing the sums

mentioned in them, into the lowest denominations of the money of the

country.

There is not a nation in Europe so ignorant as not to feel the use of

this policy; but there are few who have discovered how to establish the

confidence of the public in this general debtor, the bank. The reason

is, that people imagine a bank should at all times be able to turn all

their paper into coin. Were this possible to be done, where would be the

use of banks? How could they multiply money?

From this short exposition, we may understand the difference between

banks upon private, mercantile, and public credit. The first lend upon

the security of possessions; the second, upon bills of exchange, which

is called discounting; the third, upon the security of the public funds.

CHAP. IV. A scarcity of money only being found to stop the progress of

industry, and thereby to circumscribe the gains of merchants who supply

consumption; and they perceiving that men of property become bad

customers, more from the impossibility of making payments than for want

of an inclination to consume, joined together, and formed a considerable

stock which they exposed to the eyes of the public. This gave them

credit, and every one who had money to lend was fond of placing it in

their hands. Other people who wanted to borrow, applied to them for

money. Their answer was, we have no coin; but if you want money for any

purpose, we can assist you in credit, if you will give us security upon

your estate. Here is, said they, a note of ours, which any body will

take from you as payment for what you want. This was the same thing to

the man who wanted money for a particular use, as if they had given him

coin; and as such demands became frequent, the notes were printed, and

insensibly banking was established.

States perceiving the abuse which might follow, were every one allowed

to issue paper in this manner, judged it proper to erect companies, who

lent them considerable sums as a security for their faith to the public;

and the superior credit of such companies drew the confidence of the

public, and circumscribed the dealings of individuals. Thus the trade of

Lombards, who had formerly supported circulation by their bills of

exchange payable to order, received a farther extension by the

establishment of banks, who, by issuing notes payable to bearer, rendred

them, in all commercial countries, every bit as useful as any coin.

Banks once established, regulations became necessary; and of these the

first and fundamental one, was, to issue no notes but upon good

security. If it be asked, what security should be taken? The answer is,

the best those who want credit can give. In a country where trade and

industry are little known, but where a taste for refinement is taking

place, demand must be encouraged, in order to augment the supply. And as

this demand for consumption should, naturally, come from men of landed

property; the bank, therefore, should first resolve to issue notes upon

the security of that kind of property.

When industry becomes more extended, and when trade becomes more secure,

from the solidity of mercantile funds, banks may then begin to discount

bills of exchange, and as this branch of credit enlarges, the bank will

by degrees participate of the nature of those secured upon mercantile

credit.

When public credit, again, is well established, they will lend upon

government securities, pledged in their hands, and thus become founded

upon public credit.

According therefore to the principal object of their trade, they are

said to stand upon private, mercantile, or public credit.

When a proprietor of lands gives his bond to a bank, it should be

understood, that as long as he regularly pays the interest of the money

borrowed, the bank is not to demand the capital.

For this bond they give notes, which are considered as ready money, and

therefore carry no interest. So the profit of the bank is to receive

interest for what they lend, and to pay none for what they owe.

What they owe is the paper they issue. They owe this to the public; and

the security which the public has, is the security which the bank

received from the person who borrowed from them.

Hence the solidity of banks upon mortgage. Their notes become money, and

this money is secured upon the whole stock of the bank, and the whole

property engaged to them.

But as the stock of the bank is of a determinate value, and as the notes

they issue may very far exceed it, the credit of a bank will be

precarious, unless the value of the securities upon which they lend, be

equal to all the notes in circulation. It will also be precarious in

proportion as the securities themselves are so. Hence the interest the

public has to take care that banks give credit upon nothing but the best

security.

CHAP. V. A bank, therefore, which lays down a rule to lend upon the

mortgage of solid property only, would destroy confidence, if it should

launch out in giving credit to those who have no solid property to

pledge.

CHAP. VI. The use of all banks is to support domestic circulation: this

is two-fold; that carried on by consumers, and that carried on by

traders and manufacturers, who supply consumption.

The circulation carried on among the first is in proportion to their

income, and their credit should be in proportion to the funds which

produce it. The circulation carried on by the last is in proportion to

the demand for their industry.

If a bank be established on the credit of solid funds, it is very plain

that they cannot support the circulation of manufacturers and dealers

upon the same terms, or in the same way they do that of proprietors.

They may indeed discount bills; but they cannot give a permanent credit

upon a security which is not founded upon property. This opens a new

combination.

Trade and industry are dispersed through many hands, and if the stock of

those who carry them on be compared with what is necessary for that

purpose, it will appear very small. What is deficient in stock must be

made up to them in credit; and this will be in proportion to their

integrity, capacity, and good fortune. A frail security for paper, which

is to become the money of a nation! Such securities must either be

rejected by every bank whatever, or the whole fabric will tumble into

ruin. But this subaltern class of dealers may have recourse to

merchants, whose wealth and funds are solid and extensive. To these a

bank may give credit, and they again, in their dealings with the other

class, may indemnify themselves of all the risk they run, by profits in

proportion to it.

This class of merchants I call _exchangers_; because they deal

principally by bills of exchange in the credits they give, which are of

the greatest advantage to an infant trade and a growing industry.

CHAP. VII. When banks were first established, there was no money known

but coin, and many there still are, who do not clearly see how money can

possibly be made of any thing but metal. The scarcity of coin raised the

rate of interest, and when banks began to lend their paper, they exacted

the same interest as if they had been lending coin. Hence they were

obliged to promise payment of their notes, in coin, upon demand. In

consequence of this, the policy of circulation proceeds upon the

supposition, that bank notes are equal to coin in every respect; and

when any interruption happens in the ready exchanging them at the bank,

all runs into confusion. I shall afterwards shew how this might be

prevented.

While a country has a balance of trade, either at par or in her favour,

no body has occasion for coin, except to reduce bank notes to their

lowest denomination of money. But when a balance is due to other nations

which must be paid in gold and silver, every one who wants coin for that

purpose, runs to the banks, which are obliged to pay in it, and then

they are thrown into distress. Hence we may conclude, that a bank taking

upon itself the obligation of paying in coin, without carrying its

policy farther than the banking trade, cannot stand its ground in a

country which owes, upon an average, a balance to other nations. This

opens a new and a most curious combination.

CHAP. VIII. In the mechanical operations of trade, when they are not

combined upon principles, and directed by a superior policy, every

balance due from one nation to another upon the whole of their

reciprocal payments, that is, in consequence of their debts and expences

abroad, as well as in the course of their mercantile operations, must be

paid in the metals.

For transacting this balance, there is a set of merchants who deal in

the business of exchange. Every debtor to another country is supposed to

have value in his hands for it, which he converts into bank-paper; with

this he buys a bill of exchange, drawn upon the place where he is

debtor, and the exchanger who sells it, demands coin of the bank, which

he sends off for payment of his bills. If during this operation the bank

should stand with its hands across, and only think of expedients to

provide coin, it is evident, that if specie should totally fail in the

country, trade must be at an end, and the credit of the bank would be

undone: for no body will enter into every combination necessary to

discover the impossibility of converting the whole paper currency of a

nation into gold and silver. Thus a bank which cannot pay in coin, will

be supposed to be ruined, though in reality it may be worth half the

property of the state.

Is it not then of great consequence to banks, and to a nation, that the

principles of their trade, and the security of their paper, should be

well understood? And is it not wonderful, that they themselves have not

made evident a thing which they must understand far better than any one

who has not had their experience?

CHAP. IX. When a country gentleman owes money in town, beyond what his

rents can pay, does he not borrow from some body who has money? Does not

this borrowing prevent his lands and his houses from being torn to

pieces by those who have a right to demand money of him? Would he not be

laughed at, if he were to delay pledging a part of his property, in

order to secure the whole?

The case is just the same with banks. They owe a sum of coin equal to

all the paper they have in circulation. In this they represent the

country gentleman. Foreign nations demand payment from them in coin;

because it is the same thing whether this demand be made directly on the

bank, or on those who can demand it of the bank. Such nations represent

the town. Must not then the bank borrow upon the credit of the

securities pledged at the time they issued their notes, and which to

them represent the gentleman’s lands? And can they borrow from any but

those who have money? Their own country can have none to lend, while

they owe a balance; they must therefore borrow from other nations, and

transfer what they borrow to their creditors abroad.

Hence I conclude, that as nations which have coin pay what they owe with

it, and thereby diminish its quantity; so nations whose money is their

land, must pay in land, to the diminution of that species of property:

and as a man who owes a thousand pounds upon his estate is only

proprietor of it for the remaining value; in like manner, a country

which pays an annual interest to other nations, is only proprietor of

what remains.

CHAP. X. If the country gentleman, who is pushed by his creditors for

money, which he cannot expect to draw from his rents as they become due,

should borrow, for a few weeks, from one who, after that time, will have

occasion for his money himself, he will be put to all the expence of

giving security for it, and at the end of that short time, he will be at

as great a loss as ever to find money to reimburse the man who had lent

it him. This represents the expedient used by banks to obtain temporary

credits, instead of a permanent loan upon a regular interest.

CHAP. XI. When trade goes on well, and produces a regular balance in

favour of a country, the trade of banking is easy, and few employments

require less capacity. But when the balance begins to be unfavourable,

and when, in self-defence, they are obliged to deal in exchange, the

case is different.

Whatever balance is due abroad must be paid by the banks, as has been

said, either in coin or in credit. As long as they pay in coin, the

business of paying the balance is left to exchangers, who conduct the

operation. But whenever banks borrow abroad, upon a permanent loan, and

thereby acquire a fund to draw upon, the business of exchange falls

naturally into their hands, and they may profit of it according to

circumstances. In this case, not one shilling of coin can go out of the

country, in the way of payment; because there will be a loss to any one

who sends it away, when he can pay cheaper by a bill.

CHAP. XII. But the most complicated combinations arise from the

consequences of a wrong balance on the state of domestic circulation. I

hope this matter will be more easily comprehended, from the short

recapitulation I am now to give of it, after all that has been said upon

the doctrine of taxes, and of the difficulty of paying them, when money

is sent abroad.

Money is the instrument of alienation; and when this instrument is taken

away, alienation must cease. Now, it is a matter of indifference as to

circulation, whether money be rendered scarce by being sent out of the

country by the state in time of war, or by the subjects who owe it to

strangers in time of peace. A determinate quantity of money is requisite

for domestic circulation. In whatever way this comes to be diminished,

it is the duty and interest of banks to fill up the void as fast as

possible, by readily furnishing credit at all times to those who can

give security for what they demand. If banks, by paying balances, shall

have exhausted their fund of coin, the fault is their own. Why did they

not in time provide the necessary funds abroad? But in whatever manner

they pay the balance, the consequence is, to take a sum of money equal

to it out of domestic circulation; and this cannot be replaced but by

more money lent by them upon new securities. If an ill grounded fear

should at such a time engage them to refuse credit, when demanded, the

country will be in a worse situation than if banks had never been

established, from the sudden diminution of money, which, without that

establishment, never could have happened.

But if banks would consider the whole foreign balance as immediately

their own debt (and it is so, when they are obliged to pay it) they

would provide the easiest method of acquitting it: since none of the

expence incurred can fall upon them, in any proportion to the gain they

make, in receiving interest for all they lend, and in paying none for

what they owe within the sphere of their own circulation.

CHAP. XIII. Whatever contracts circulation, hurts a bank, and offers no

relief to it with respect to the payment of balances. If they borrow

money at home, they cut off the branch they stand upon, unless they

continue at the same time to give credit to all who demand to borrow

upon good security. This last combination was omitted in the chapter I

am now recapitulating; because of the multiplicity of those I was

obliged to introduce, in order to demonstrate how hurtful it is for

banks voluntarily to diminish the circulation of the country where they

are established. I shall therefore bring it in here, and refer to the

chapter for the other combinations which cannot be abridged.

Did banks, upon mortgage, make it a rule to borrow all the money offered

to them, at a small deduction from the common interest, while at the

same time they continued to lend as formerly to every person of good

credit; the consequence in a little time would be, that they would

become the absolute center of all borrowing and lending, and the

greatest part of the expence of drawing securities would be saved.

Every person who had money to lend, would lend it to the bank; and every

one who had money to borrow, would borrow it of the bank. Upon these two

operations, the difference of interest paid, and received, would more

than balance the additional expence of so great a detail. But then

indeed some new law would be necessary to facilitate securities. The

clogs laid upon solid property oblige the bank to insist upon

conditions, which put it out of the power of many persons of good credit

to borrow from them. But I do not propose plans: my aim is confined to

principles; and from those I have mentioned a new clause in bank notes

would arise, viz. to pay in coin, or by a transfer of interest at a

determinate rate, at the option of the bearer, not of the bank.

CHAP. XIV. This would be an optional clause, very different from that

lately introduced into Scotland, where the option of paying interest was

left to the bank. This has since been wisely suppressed; because it

proved a heavy clog upon circulation, and enabled the bank to avoid

doing what their own interest, and that of the nation, required of them,

viz. the ready payment of all balances against the country. But in

suppressing optional clauses, government should facilitate the means of

paying balances, and of providing coin. This is done by establishing and

supporting the credit of the banks, in proportion to the solidity and

extent of their funds. An example of this nature occurred in Ireland, in

April 1760, when the parliament interested itself directly in the

support of the credit of some private bankers. A mint also is necessary;

or if this should be judged improper or superfluous, some assistance at

least should be given in conveying coin from the place of its

fabrication.

CHAP. XV. All branches of policy are brought to perfection by degrees,

when, instead of being established at once on sound principles, they

introduce themselves mechanically, by custom and practice only. When

therefore a national bank is not found to answer all the purposes

expected from it, private people imitate their plan, and fill up the

void. Thus in Scotland, when the banks of Edinburgh did not sufficiently

support circulation in the more distant parts of the country, private

banking companies were erected, and degenerated into a great abuse.

Every one issued notes payable to bearer. Thus the public was filled

with paper money, the credit of which was quite unknown to many, who

were however forced to receive it.

Whatever is payable to bearer, is payable to the public; and no doubt

the public has a good right to prevent the issuing of notes by any but

such as it has confidence in. When a note is payable to order, every one

who circulates it is responsible for the value; but when it is payable

to bearer, there is no recourse upon any but the first grantor of the

obligation. Such regulations therefore should be made in this respect as

may give a solidity to the paper, facilitate a general circulation, and

prevent the establishment of a currency confined to particular districts

within the same country, which tends to introduce a course of exchange

from one town to another. This would be the case, were the circulation

of every county carried on by the county bank. A communication,

therefore, of interest between the banks of a country is requisite, or

else the obligation to pay should not be confined to the place where the

bank is established.

CHAP. XVI. Here I resume the principles I have deduced, in a short

sketch of a general plan of regulations for a bank of circulation.

CHAP. XVII. If proper regulations upon the banking trade should be found

inconsistent with the laws and manners of a people, which require a more

extensive liberty to every one to carry on what commerce he thinks fit,

I think it is reasonable that every company of merchants who issue

paper, payable to bearer, without the sanction of government, should be

obliged to subject their books to some kind of public inspection, that

it might be seen whether the credit they grant to individuals be of a

sufficient solidity to answer for the notes they circulate.

CHAP. XVIII. The numberless distresses of the Scots banks at the end of

last war, made it necessary to show, in a particular chapter, what the

consequences might have been, had the banks at that time totally

withdrawn their credits, and given up business. This step would, 1_mo_,

have cut off their whole profits of banking. 2_do_, It would have ruined

the whole class of exchangers; and with them, 3_tio_, the whole trade

and manufactures of Scotland.

CHAP. XIX. Here I take a farther step into those intricate combinations.

I now shew how the whole obligation, both of paying in coin, and

discharging foreign balances, may be taken off from those who administer

a national bank. Their notes are proposed to be paid by a proportional

transfer of interest. All interest due by banks on that account, and to

banks for credit given, is proposed to be paid in coin at certain terms.

Those who have occasion for coin are to buy it at the mint: but this

coin is entirely calculated for domestic circulation; and therefore a

very moderate quantity of it will be necessary. And for the payment of

all sums due to foreign nations, I lay it upon government, according to

the plan proposed in the 5th chapter, upon exchange.

Thus the whole policy of circulation is divided into three distinct

branches:

1_mo_, The melting down of property, and keeping circulation full at all

times. This is the business of banks.

2_do_, The providing of coin is the business of mints.

3_tio_, The granting bills on foreign parts, for value in the national

currency, is the business of the state.

CHAP. XX. The objection to this doctrine is, that if notes are not

payable in coin, they cease to be of value. The answer is short. The use

of paper money is to keep reckonings of value between people who have

property; the use of coin is to avoid giving credit to people who have

none.

The value of the paper in the country is ascertained by the value of the

interest which is paid for it in coin; and by not paying the capitals in

coin, you prevent its being carried off without necessity, whenever a

balance becomes due; which balance might be paid by the means of credit.

CHAP. XXI. I shew, by many arguments, (afterwards employed in the 10th

chapter, upon public credit, and which render this combination more

simple than I should otherwise have been able to make it in this place)

that the return of a favourable balance of trade will clear the bank of

all the foreign debts contracted by it, for the relief of the country;

as a like favourable balance on the trade of Great Britain has the

effect of setting that nation free from a proportional part of the money

due to strangers. In this case, the favourable balance is incorporated

in the public funds due to natives: in the other case, it is

incorporated with the stock of the bank securities, and enables them to

relieve that part of them which was engaged for the interest paid out of

the country.

CHAP. XXII. The constitution of the bank of England differs essentially

in some particulars from that of banks upon mortgage, and private

credit. It is not so much calculated for multiplying the currency, by

melting down private property, as for facilitating the circulation of

the trade of London, and exchequer of Great Britain.

The grounds of confidence upon which the notes of this company stand are

very great.

1_mo_, A capital of eleven millions sterling, for which they are

creditors to the nation.

2_do_, A sum of credit-cash at all times in their hand, of about eleven

millions more.

3_tio_, The bills of exchange of all the great merchants of Europe,

which they discount.

4_to_, When they issue paper to government upon the faith of taxes, or

circulate exchequer bills, they have the security of the public faith

for the short advance of a few months.

This bank, I have said, is more useful for promoting circulation than

for augmenting it. It has however lent its assistance in this respect on

very critical occasions. It has circulated exchequer bills; and tallies,

which, from discredit at the time, were as ill calculated to supply the

use of money, as lands or houses are, from their unwieldy nature. The

great advantage the public reaped from such operations, abundantly shew

the utility of banks, which are calculated for that very purpose.

The principal operations of this bank are, to receive and pay away the

greatest part of all the national revenue, expences, and debts; to

discount bills of exchange payable at London, and to supply the country

with coin.

The demand of London for subsistence and manufactures from the country

of England is so great, that the whole amount of what is sent up to that

city, for taxes, and for land-rents there expended by the proprietors,

does not compensate it. From which it follows, that by the bank’s not

giving credit upon private securities, the whole of their paper is in a

manner confined to the capital; and if any part of that paper casually

goes into the country, it quickly returns, in payment of what would

otherwise be remitted in bills. So that paper circulation in the country

of England is very inconsiderable, when compared with the coin.

The intention of this chapter is to examine and compare the principles

of the two species of banking, and to point out their several

consequences as to circulation; from which I am led to think, that if

banks of circulation were to be established in the country towns of note

in England, they would greatly promote industry every where, and

occasion no inconvenience from their contrast with the national bank.

CHAP. XXIII. After deducing the principles upon which the solidity of

paper money is established, I proceed to point out the bad consequences

of issuing bank-notes upon a precarious security. The bank established

in France by Mr. Law, and the fatal catastrophe it brought upon that

nation, furnish excellent matter for illustrating the doctrine of paper

credit.

The late King of France left, at his death, a debt upon his kingdom of

142 millions sterling; the coin being at 28 livres the marc of silver.

CHAP. XXIV. In a few months after his death, the debt was reduced to 100

millions, by the turn of a wheel. The coin was put at 40 livres the

marc. But as the hundred millions sterling, _in intrinsic value_, after

the reduction, contained as many livres in _verbal denomination_, as the

hundred and forty millions did before, the greatest inconvenience

discovered by the people was confined to the necessity imposed upon them

to sell their old coin at the King’s price.

At this time Law set up his bank, and without doubt assisted people in

that respect, with very great benefit to himself.

CHAP. XXV. He divided the capital stock of the bank into 1200 shares, of

5000 livres each (the livre at this time was exactly a shilling

sterling); and the purport of the notes he issued was, that payment

should be made, at all times, in livres of the same intrinsic value.

This bank was established on the principles of the Scots banks, and lent

sums upon every species of good security. The consequence was, that in

less than three years, France, from being in the most miserable

situation for want of money, credit, consumption, and industry, was

raised, as by magic, to the greatest affluence. The reason was plain:

there wanted nothing but an instrument to set all the inhabitants to

work. This Law gave them in a moment; and their own work was the cause

of the affluence which astonished them.

This effect was produced by an inconsiderable sum of notes: they did not

exceed three millions sterling when Law gave up his bank. But credit and

confidence were established by that small sum; and the notes brought out

all the coin which had been formerly locked up. It is not a great

quantity of money, but an exact proportion of it, according to demand,

which supports trade and industry. That proportion may be sustained by

the means of banks, but by no other expedient whatever.

CHAP. XXVI. Law’s bank was no sooner established, than he sought to

enlarge his bottom. He found a trading company ruined in their affairs,

though intitled to great privileges. He found also large sums of public

state billets circulating at great discredit, from an ill paid interest.

He got a grant of the company to himself and associates. He opened a

subscription for 200,000 shares, of 500 livres each. He took payment in

those discredited obligations; and when he had got the state billets,

(given in at subscribing) he engaged the Regent to promise punctual

payment of the interest. This was no sooner done, than the discredited

paper, which was become an action, or a share, as we have called it,

only by being subscribed for to Mr. Law, rose above par. The nation

cried out, a _Miracle_! Law was a saviour, in the eyes of some, a

conjuror in the opinion of others.

His credit and his capacity for conducting the greatest undertaking

within the power of numbers and computation, being established, inspired

the Duke of Orleans with a scheme of unbounded ambition, which, in

favour of many who have never rightly comprehended the nature of it, I

have been at very great pains to trace, in the eight following chapters.

And as a recapitulation is useful to assemble ideas within a small

compass, which have been dispersed through many combinations in the work

itself, I shall here, in a few lines, give a general idea of the whole

plan.

The Regent perceiving the use of paper money, well secured on solid

property, resolved to take the bank into his own hands, in order to

issue paper sufficient to pay off the whole debt of France. Now paper

issued for paying debts is secured upon no fund at all. It is the same

as if it were issued for payment of meat and drink. The whole security

therefore was his own word.

But the difficulty was to prevent this paper from instantly returning

upon the bank; because it far exceeded all the uses of circulation, and,

consequently, could not be suspended in it.

The expedient fallen upon was to raise the value of the actions of Law’s

company, (which by the subsequent incorporation of new privileges were

multiplied beyond 600 000) to a great height, by promising great

dividends upon them. The company accordingly promised a dividend of 200

livres a year, upon a capital which was originally worth no more than

500 livres.

The great quantity of paper money dispersed had sunk the rate of

interest to 2 _per cent._ The dividend, therefore, combined with the

rate of interest, carried the market price of the action to 10 000

livres. Here was a new fund provided as an outlet for all the bank notes

paid to the creditors; and in proportion as they bought the actions from

the Regent, or the company, whom I here consider as the same, the notes

were to be cancelled.

By this operation all the debts of France were to be converted into

actions of the company of the Indies, and were to share its fate. But

then it must be remembred, that this company had in a manner the whole

revenue of France in farm; and by a recapitulation of the different

branches of their profits, their income amounted to eighty millions of

livres a year. So that if matters had been well managed, had credit been

supported by fair dealing, had no arbitrary acts of power, in tampering

with denominations of coin and money, taken place, and had the Regent

supported and encouraged the company; they in fact might have been able

to pay more than all that was required of them; and the very diminution

of the interest of the public debts, by the fall of money to 2 _per

cent._ was, in effect, cutting off one half of the capital. So that if

we suppose the total value of the 2000 millions of debt equal to 100

millions sterling, the debts of France, by this scheme, would have been

reduced to an annuity of 2 _per cent._ on a 100 millions, or two

millions sterling a year paid to the company, who then represented the

creditors of the nation.

But the project was too great; the capacity of those who were in the

management was too small, and the time was too short for bringing about

so great a revolution: thus it failed; but in a way which suggests no

reason to believe that it might not have been supported.

CHAP. XXXIV. The denomination of the paper was reduced to one half by an

act of power: a man who, for example, had a bank note for 100_l._ had it

reduced to 50_l._ This at once destroyed the whole credit of France. But

it would have stood its ground, without doubt, had the Regent called the

fifty pounds with which he paid such a note, one hundred pounds;

although, if you abstract from the interests of debtors and creditors,

which never were attended to, it was absolutely the same thing. The

altering the denomination of paper implies, however, this additional

injustice above that of altering the denomination of coin, that it

changes the value of the paper in all cases; because it contains no

other value than the denomination: whereas coin has a value independent

of that, which no law can alter.

CHAP. XXXV. The form of a bank proposed for France, in this chapter, is

pretty much the same with that mentioned in chap. 16; only here I have

not even admitted the payment of the interest in coin, for fear that an

act of power, by carrying off a few thousand louis d’ors on a present

exigency, might totally ruin the credit of such a bank, and consequently

draw ruin on the whole nation.

This bank is intended merely as an office for keeping accounts between

people of property, and thereby of greatly increasing and supporting

circulation.

CHAP. XXXVI. Having dismissed the subject of banks of circulation, I

come next to those of deposit. Here I deduce the principles upon which

the bank of Amsterdam is established.

This bank issues no paper, and grants credit upon no security but coin

locked up in their vaults. Consequently, the ground of their credit is

the faithful preservation of this coin. Were it at any time to be

diminished below the value of the credits written in their books, the

nature of the bank would be changed. Were the coin to be lent on good

security, such a bank would then immediately become a bank of

circulation upon mortgage; since it would be the same as if the credit

had been at first granted upon that security. Were the coin disposed of

for no value, the bank would be from that moment bankrupt in fact,

although the secret might be kept for a long time.

CHAP. XXXVII. The intention of establishing a bank of this nature at

Amsterdam was to fix the seat of trade in that city. The ordering all

bills of exchange to be paid to the bank in coin, and the giving to the

holders of the bills only a credit in bank for the value, was an

effectual means of obliging the proprietors of that credit to carry on

their trade in the place where their funds were established beyond a

possibility of removing them, except by transferring them to others who,

by accepting of the transfer, came under the same necessity. Were indeed

trade to become incompatible with the situation of the city, as if an

earthquake should fill up the port, then the bank would either be

removed elsewhere, or the credit writ in their books would become of no

more value than gold in an inaccessible mine. This regulation also

prevented the circulation of bad coin; because when payment of bills was

made to the bank, they took care that nothing but good coin should be

received.

From these regulations it appears that money cannot be multiplied by

banks of deposit; but on the other hand, it cannot be diminished by

exportation, without the act of the bank; and the transfer of credit

answers every use of coin in trade, and prevents also its waste in

circulation.

CHAP. XXXVIII. Coin is liable to constant vicissitudes. Its denomination

may be changed by an act of power, and its real weight may be diminished

in circulation. But when it is locked up, all these inconveniences are

prevented. Bank money, therefore, being the value of the coin locked up,

is constantly the same: whereas all coin which circulates is liable to

variations; consequently, these variations are relative to the coin

which circulates, and not to the bank-money. The difference between the

one and the other is called _agio_.

CHAP. XXXIX. Many have imagined the treasure of the bank of Amsterdam to

be immense; because no body can ever take any thing from it, and that it

is constantly receiving new augmentations: but the policy of the bank

itself destroys this supposition, and shews plainly, that the sum locked

up never can exceed what is absolutely necessary for circulating the

trade of the city.

It is true, no person can go to the bank and demand to have the amount

of his written credit paid him in coin. But were the written credits to

exceed the uses found for them, the value of such bank-money would

diminish; consequently, the value of the circulating coin would

increase, which is the same thing. Now as this would prove a great

discredit to the bank, they employ a set of cashiers or brokers to keep

the balance even. Their business is to buy and sell bank credit with

current coin, and to these the bank gives credit. When there is a demand

for bank credit, the cashiers sell it for coin, and both parties going

to the bank, a new credit is written, or the cashier’s credit is

transferred to the buyer. When, on the other hand, coin is demanded for

bank credit, the cashiers pay for it with coin which the bank lends

them; and for their repayment, they transfer to the bank the credit they

have bought with it. This needs a little explanation. Suppose one to

have credit in bank for a thousand gilders, which he wants to send away

in coin. He goes to the cashier and sells his thousand gilders of bank

credit: the bank lends this thousand gilders to the cashier, and the man

who sells the credit gets the coin, and makes a transfer of the credit

in favour of the cashier. But as he owes this sum to the bank, he

transfers this credit to the bank itself, in payment of the thousand

gilders borrowed; and then the bank may expunge it, if they please, from

their books; because it is due to themselves. Thus although no money can

be demanded of the bank by one who has credit, they can give the money

to a third party who does it for them.

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PART III. _Of Exchange._

CHAP. I. Foreign circulation is carried on by bills of exchange.

When reciprocal debts are contracted by different countries, the

creditors in both take payment at home for the bills they draw to the

order of those who pay; and they again indorse the bills to their

creditors abroad.

In this contract four parties concur: the domestic and foreign

creditors; the domestic and foreign debtors. This operation can extend

no farther than to the amount of reciprocal and equal debts; if there be

a balance owing upon one side, this balance must be paid in value,

either in money or merchandize. Now as a debt is much easier discharged

by compensation than by payment, merchants endeavour to profit of this

compensation; but as every one endeavours alike when there is a balance

on one side, it operates upon the whole of the exchange, and every one

must bear his share of the expence of paying it.

If London should owe a balance to the world, after compensating all that

the world owes to her, every London-debtor to the world will wish to

compensate; consequently, he will look out for one who is creditor to

the world: but this search betrays the secret, and shews that he is the

demander; upon which the other avails himself of his situation, and

refuses to compensate without profit. Hence the secrecy said to be

requisite in this branch of trade. It is requisite to the trader only,

whose interest is concerned; because whatever one set of merchants in a

place wish to conceal, another set have constantly an interest to

divulge. The interest of the state consists in preserving an equality of

profit and loss among them all; and in facilitating to them the paying

and receiving the balances due upon the total of all their transactions.

The loss of the nation is upon the balance due by the country; the

expence of paying the balance, which is the price of exchange, is only a

relative loss to some of her subjects, and a relative gain to others.

The attention, therefore, of a statesman in what regards exchange, is,

1_mo_, To take care that the true par between the value of the national

money and the money of other nations, shall be as much as possible

proportional to the quantity of metal contained in each.

2_do_, To remove domestic inconveniences in paying with the metals, or

national coin, every unavoidable balance.

3_tio_, To hinder the expence of acquitting a small balance from

occasioning a loss on the compensation of reciprocal debts.

And, 4_to_, When he finds an inconvenience in allowing the metals or

coin to go out of the country, he must assist in having the balance paid

in the way of credit.

CHAP. II. The best method for determining exactly the true and intrinsic

value of the metals, coin, or money, in which the balance due to or from

a foreign nation, is to be paid, is to compare the respective value of

fine bullion with the respective denominations of the coin in the two

places exchanging; and to state the difference only, as the price paid

for the exchange. To render this more practicable, a proposal for

rendring all mint-weights more determinate is set forth in a note.

CHAP. III. When upon the whole of a nation’s trade with the rest of the

world, a balance is due, it must be paid, either in intrinsic value,

which totally discharges it, or by giving security for it, and paying

interest until the charge can be obtained. We consider in this chapter

the methods of discharging it.

A statesman is the best judge when his people ought to pay with bullion,

and when with credit. If he approves of their paying with bullion, that

is, with gold and silver, he should render the exportation of the metals

as easy as possible. If a duty be laid upon coinage, he need not be

afraid that any one will send off the coin, as long as bullion can be

found; and when this runs short, if he does not choose that his coin

should go out, he must lend his assistance in paying with credit. If he

finds it against his interest either to pay in one way or in the other,

he must put a stop to the trade which creates the balance: for while

such trade is permitted, he will find it beyond his power to prevent the

payment of that balance in the most hurtful way possible to his country.

I here observe, that in countries unacquainted with trade, and in others

where the whole external commerce is carried on by strangers, a good

expedient for cutting off such hurtful branches of traffic is to lay all

the restraints possible on the exportation of the metals, in order to

promote the exportation of what the country can offer in return. But

when trade and industry are established, these restrictions cease to be

useful; because merchants then find a profit upon exporting domestic

productions, which they never can have upon exporting an intrinsic

value.

A statesman, therefore, should conduct his operations according to the

situation of his country. If foreign trade be unprofitable, cut it off

as much as possible, and lay every restraint upon the exportation of

coin. If it be profitable, lay no restrictions on payments; because you

are sure you will gain upon the whole. And if, in any particular case,

you incline to keep your coin at home, mortgage your country, and pay

with your credit.

If, when you are obliged to check foreign trade, and lay prohibitions on

the exportation of coin, exchange is found to rise to a great height

against you, yet will this exchange produce no national loss: it will be

paid within the country by those who consume foreign commodities, to

those who are at the trouble and expence of transacting the balance.

CHAP. IV. Here I demonstrate what before I had in a manner taken for

granted, viz. that the price of exchange is neither a national loss, or

a national gain; but whether it be favourable or unfavourable, it

produces an instability in the profits upon trade, and should therefore

be kept at par by all possible methods. I also shew how exchange is

favourable to exportation, when the balance is against a country, and

how the exchange is unfavourable in that respect in proportion as the

balance is for that country: and as whatever exchange is gained by

exporters is lost by importers, and _vice versa_, some have concluded,

that an unfavourable balance does of itself destroy its own pernicious

effects, and sets the balance even. I endeavour to disprove this

proposition, by shewing how the importers are indemnified, as to their

loss by the exchange, from the additional price they get for their

foreign commodities at home; whereas the exporters cannot raise their

prices abroad; because foreign competition will not permit them. So that

in one case the wrong balance hurts the rich consumer at home, who can

bear the loss; and in the other, the right balance hurts the poor

manufacturer, who cannot. Hence I conclude, that it is greatly for the

interest of a trading state to keep exchange, at all times, as nearly at

par as possible.

That this is a practicable scheme, I prove by a matter of fact, and by

an experiment made in France by a late minister; where, upon a certain

occasion, the exchange having risen to a great height against France, he

immediately brought it to par, by ordering bills upon Holland to be

furnished at that rate, to those who should demand them; and by taking

upon himself the expence of sending the money paid for such bills, to

the place upon which they were drawn.

I observe, however, that such operations can only be recommended to

statesmen who preside over the interests of flourishing trading nations;

because in proportion as they are benefited by facilitating the payment

of the casual balances due by them from time to time, in so far is a

prodigal nation hurt, by facilitating the dissipation of their property,

and by contriving a ready method of transferring it to foreigners.

CHAP. V. When a nation owes a balance, after all the payments they have

been able to make, either in coin, bullion, bills, or merchandize, it is

evident, that what remains can only be satisfied by obtaining credit for

it, at the expence of mortgaging the country and paying interest for the

remaining balance. When this, however, happens to be the case, it

involves the nation-debtor in a multitude of expensive operations

conducted by exchangers, who constantly find a profit in carrying them

on, though at a very great loss to individuals within the country. To

prevent this inconvenience, I propose, that the statesman should take

upon himself the obtaining of credit abroad, for the balance due by the

country he governs; and that the expence incurred by this operation

should be defrayed by the public, whereby every individual within the

state will contribute his share towards maintaining an uniformity in the

profits upon trade, and supporting the stability of commerce, from the

regularity of the course of exchange at all times. This operation

resembles very much another of which we have already spoken in treating

of banks of circulation upon mortgage. There we recommended the payment

of foreign balances as a proper branch of bank administration: here we

recommend it to a statesman to interpose voluntarily between his

subjects and their foreign creditors. This is the best method of

supporting commerce, when it happens accidentally to fall under the

discouragement of an unfavourable balance.

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PART IV. _Of Public Credit._

CHAP. I. The credit of a state resembles, in most things, that of an

individual: they differ however in this, that when a private man

contracts a debt, he himself is answerable for it. When a state

contracts a debt, those who contract the obligation in the name of the

state are not responsible for it. Hence it happens, that private people

are commonly more anxious about paying their debts than statesmen are

who administer for the public. Another difference is, that public debts

do not so much affect the prosperity of a state as private debts do that

of the debtor. The interest of a private debtor is simple and

uncompounded; that of a state is so complex, that the debts they owe,

_when due to citizens_, are, on the whole, rather advantageous than

burdensome: they produce a new branch of circulation among individuals,

but take nothing from the general patrimony.

In deducing the principles of public credit, we must suppose it the

established maxim in the state to adhere to the faith of their

engagements; and that a permanent fund is appropriated for the payment

of the interest of all the money borrowed: a liberty must be supposed,

at the same time, to redeem the obligation by adequate payment; and also

an easy transfer of the capital from hand to hand, to indemnify every

creditor for the loss of his capital, which is not demandable from the

state, as the case commonly is in private securities.

The consequence of the swelling of public debts, is, to occasion a

proportional augmentation of contributions out of private property. The

consequence of this again, is, to produce a vibration in the balance of

domestic wealth. This creates a monied interest, which swells in

proportion as public debts increase; and which may swell to so great a

height as to transfer the income of a whole nation from the nominal

proprietors to the public creditors.

A statesman, therefore, ought carefully to attend to the spirit of the

nation he governs, before he gives way to a regular and systematical

augmentation of public debts. In monarchies, the proprietors of lands

may bear for a while the temporary diminutions of their annual income,

though they will not easily be made to subscribe to a plan which

evidently tends to deprive them of all they have, and to transfer their

power and property to a set of men whom they have always considered as

their inferiors.

In monarchies, therefore, a great increase of public debts will more

probably bring on a national bankruptcy, than in governments which

participate of the republican form.

The consequences, therefore, of the swelling of public debts may be,

either, 1_mo_, To disturb the tranquillity of the state, by an attempt

to transfer the property of it from the real possessors to a new created

monied interest: or,

2_do_, If a systematical plan of borrowing upon solid security be not

laid down, it may mechanically draw on a general bankruptcy: or,

3_tio_, If debts be allowed to swell beyond due bounds, so as to hurt

the interest of the great body of the proprietors, the state may be

engaged to adopt the fatal expedient of a spunge: or,

4_to_, If the spirit of the people prove compatible with the system of

borrowing and supporting public credit to the utmost extent, then the

whole income of the nation will remain in perpetual fluctuation, passing

from one set of creditors to another, the statesman still retaining the

administration of it for their use: or,

5_to_, If the debts contracted become the property of foreigners, these

will either remove into the country where their funds are, or the income

of the whole will be converted into a foreign tribute.

CHAP. II. While public expence was defrayed from treasures, public

credit was a thing unknown. While supplied from rapine and extortion, it

never could exist. During the simplicity of ancient manners, when there

was neither industry or circulation, credit was unnecessary: the coin

was more than sufficient to serve every purpose of alienation.

When trade and industry began to make a progress in Europe, in the Hans

towns, and in the republics of Genoa and Venice, the consequences of

their credit were soon felt by Princes, who aukwardly began to imitate

their example; first, by borrowing money upon mortgages of their lands

and principalities; and afterwards, by imposing taxes and selling them

for what they could get to a most rapacious set of men, the

tax-gatherers. This spread oppression, and this again soon brought the

Prince to poverty.

Taxes, however, once established in this violent method, and upon urgent

occasions, came, in time, to be improved, and formed a large fund, which

now serves as a solid basis for public credit.

CHAP. III. While taxes were only appropriated for a time, for the

repayment of the debts contracted by a state, the attention both of the

state and of the lenders was totally fixed upon the discharge of the

capitals: but in proportion as money increased, in consequence of the

whole system of modern political oeconomy, the lenders formed to

themselves a new point of view, viz. the acquisition of a permanent

interest arising from a transferable capital.

In order to make this change of policy from borrowing with an intention

to repay the capital, to borrowing with an intention to pay a perpetual

interest, the more sensible, I have traced in this chapter the progress

of the first, by a review of the plan of public credit in England until

the end of the last century.

Here I analize briefly the sentiments of Dr. Davenant, and compare them

with those established in our days, when the latter policy has taken

place; and upon the whole I determine, that the difference in the system

of public credit then and at present, has proceeded principally from the

difference in the state of circulation, and from the expedients now

fallen upon for increasing the quantity of money, in proportion to the

uses found for it.

CHAP. IV. I then compare the state of public credit in France, during

the administration of Cardinal de Richlieu, with that of England after

the revolution. Here I endeavour to point out the influence which the

different forms of government have upon the stability of public credit,

both in contracting and in paying off public debts.

In France, the power of the Prince furnishes many expedients for paying

off capitals, which had been borrowed at an exorbitant interest in times

of public distress.

In England, the limited power of the crown, and the responsibility of

ministers for their exercise of it, is a great security to those who

lend money to the state; and consequently, proves a very great advantage

in contracting debts upon reasonable terms.

The longer the two states subsist, the greater will the advantage be

found in favour of that which adheres the most strictly to the faith of

its public engagements.

When the credit of France and England are compared together, the

difference between them is most remarkable. The strict adherence to the

faith of public engagements has established, in England, so nice and

scrupulous a credit, that the smallest deviation from its principles may

prove fatal to the whole system. The credit of France, on the other

hand, has been accustomed to a rougher usage; and the frequent acts of

power, to the prejudice of creditors, rather occasion a temporary damp

than a total destruction of their credit for the future. Such acts of

power, however, in critical circumstances, prove extremely hurtful; and

the advantage of a well established credit will, in all probability,

either open the eyes of that nation to their own interest, or bring

calamities upon them, which now appear little to be feared, in their

present situation.

CHAP. V. This chapter contains a short sketch of the plan of public

credit, as carried on in Great Britain, from the end of the last

century, to the conclusion of the peace in 1763. I here enumerate the

principal operations, calculated for enlarging the fund of British

circulation, by engaging the bank of England to turn into money the

discredited bills and tallies of the exchequer. I have pointed out the

principle which circumscribes this power in the bank within certain

limits. I have traced the progress and fluctuations of the interest of

money; which have constantly been in proportion to the demand for

borrowing or lending in the market at the time. I have mentioned the

rise of the sinking fund, and the use which has been made of it. I have

endeavoured to explain the methods of borrowing by _premium_, and have

pointed out the inconvenience attending that plan, as long as the

principal view of diminishing a nation’s debt is confined to expedients

for lowering the interest of the capital. I have given a progressive

state of the augmentation of the debts of Great Britain at the end of

every war; to which I have subjoined a short state of the nation at the

last peace.

I conclude my chapter, by assigning reasons for the present low state of

public credit in Great Britain; which has been principally owing to the

large sums of borrowed money invested in the funds before the peace,

upon the prospect of a sudden rise in their price, on the return of

public tranquillity. This rise would, undoubtedly, have happened, had it

not been obstructed by the necessity which the nominal stockholders were

put to, of bringing their funds to market, in order to answer the

demands of those from whom they had borrowed what they had invested in

stock: and until this operation be compleated, that is, until the funds

of Great Britain become vested in the real proprietors of them, the

state of public credit will constantly be undetermined.

CHAP. VI. Having given a short sketch of the present state of public

credit in England, I endeavour, in this chapter, to extract, from the

best private authorities to which I could have access, a parallel view

of the affairs of France, so far as relates to its revenues, taxes, and

debts, at the peace 1763.

By the revenue of France, I here understand, not only what comes clear

and nett into the King’s coffers, but also what is farther levied upon

his people. The parallel therefore will not hold between the revenue of

France and that of England, as represented in the preceeding chapter,

without attending to this difference.

The nett revenue of England charged with all its debts and expence of

government, we have said to amount to 10 213 000_l._ The gross revenue

of France, on the other hand, appears to amount to 24 740 834_l._

sterling.

But if from this be deducted that part which never enters the royal

treasure, and which is expended in levying the revenue, and in

appropriations for particular perpetual expences, to the amount of 6 815

111_l._ sterling, there will remain of net income, paid into the King’s

coffers, and charged with all the debts and expence of government, only

17 925 723_l._ sterling.

If from this sum we deduct the total amount of the net revenue of Great

Britain, (10 213 000_l._ sterling) the remaining sum of 7 712 723_l._

sterling, will shew the excess of the French revenue above that of

England.

An Inquiry into the Principles of Political Oeconomy (Vol. 2 of 2) Being an essay on the science of domestic policy in free nations. In which are particularly considered population, agriculture, trade, industry, money, coin, interest, circulation, banks, exchange, public credit, and taxes · 第 15 / 16 章

Most of the great estates consist of fee-farm rents. A man of three