Chap. X: Methods of contracting and paying off public Debts

We are now to collect together, in one view, the several methods of contracting and paying off the debts of a nation. Such methods may be deduced, either from principles, or from what practice has pointed out.

The foundation upon which public credit is built, is the existence of a sure and sufficient fund for performing the engagements contracted.

When, in the early times of public credit, the repayment of the capital was an express condition of the loan, a much more extensive public fund was necessary than at present, when no more is required than the payment of the interest. As such funds never can be formed but from taxes, or general contributions from the people, the greater they are, the larger must the contribution be. Whenever therefore there is occasion to contact debt, the chief object of a statesman's care should be, to model the spirit of his people so as to dispose them to concur in the proper resolutions to render the plan proposed as easy as possible in the execution.

In the first place, the body of the people must be made sensible that the consequence of contacting debts must imply a diminution upon the income of some individuals; but that the fewer the obstacles thrown in the way of the loan are, the less will this diminution be.

In the second place, he must gain the confidence of his people, so far as to impress them with a firm belief that he will consult their good, and nothing else, in what he undertakes.

And in the last place, he must gain the confidence of those from whom he is to borrow; and convince them that all covenants between the public and them will be religiously performed.

In a limited and free government, these three requisites are essential to the firm establishment of public credit.

Where the power of the statesman is unlimited, he may substitute his authority over the people who are to pay, instead of confidence; but with respect to those who are to lend, he will find no room for any such substitution: confidence here is the only expedient.

All therefore that is required of the statesman with respect to the people, is to enable them to do what he requires of them.

For this purpose he must establish credit with them, for finding the contributions he is to exact of them; because they will have as much occasion for credit, in paying what is demanded of them by authority, as he himself has in paying what he is obliged to pay, in consequence of his engagements.

If this general plan be not followed, the consequence will be, that the produce of taxes will fail on one hand, and public credit on the other.

If all this operation cannot be previously concerted, the plan of borrowing must be circumscribed to funds previously established.

When money is borrowed before the fund be prepared, every obstacle which occurs in establishing it, becomes a drawback upon the confidence of those who lend, and renders the conditions less favourable to the state which borrows.

In the contract of loan, the first article to be agreed upon is the rate of interest. We have, in the beginning of this book, examined the causes of its rise and fall; and have in general determined, that when the demand is for borrowing, interest rises; when for lending, interest falls.

As the object of the borrower is to have interest low, the statesman who intends to borrow, must use all possible means to increase the quantity of money in circulation.

But if coin alone be used as money, and if this coin be sent out of the country, when borrowed, and if what is sent away cannot be replaced at will, the scheme of augmenting money becomes impracticable: it will daily become more scarce, more difficult to procure, and interest must rise higher every day. Symbolical or paper money, that is credit, must then be established at home, upon the firmest basis: this will enable every one to pay what he owes; consequently, the taxes will be paid, the creditors will receive what is due to them regularly, money will every year augment in proportion as debts are contracted; and if borrowing do not augment beyond this proportion, interest will not rise; and if borrowing should fall below this proportion, interest will sink.

Is not this whole doctrine verified in the strongest manner by the operation of the Missisippi? At the death of the late King of France, money had disappeared. Some years before, he had, for seven millions in coin, engaged his kingdom for thirty-two millions; upon a distant fund indeed, but still it became a debt to be paid. Paper money had not been introduced three years, when interest fell to 2 per cent. The paper indeed was actually a bubble; but we have shewn that it became so from bad management only.

By the augmentation of money, capitals cease to be so valuable. By the melting down of property, the very capital, though in the hands of the state, may be turned into money by the creditor, whenever he has occasion for it; in the same way as the coin which is buried in the vaults of the town-house of Amsterdam, is constantly performing all the uses of circulation.

The method, therefore, of borrowing money to the best advantage, is previously to establish a fund of credit, arising from annual taxes; to provide the people who are to pay them, with credit or money in proportion to their property or industry; and to prevent the latter from ever failing for want of the medium, money, for caring it on.

If in time of peace interest shall stand high, relatively to other states with which you are at war, throw as much money as possible into the hands of your creditors, in payment of the debts already contracted; because the more you throw in there, the more you will draw out, if you have occasion to borrow more; and if you have no occasion to borrow more, the lower you will reduce the rate of interest, by augmenting the fund of money to be lent.

From these principles I conclude, that every nation which sets out by contracting debts with its own citizens, must begin by borrowing upon condition of repaying the capital in a short term of years. This is also the best method to engage the people to contribute largely without murmuring. The reason is, that when taxes begin to be imposed, the mass of circulation becomes proportionally augmented; and the paying back of considerable sums to the creditors, prevents, on the one hand, the debts from increasing so fast, and supplies circulation and facilitates new borrowings on the other. While this plan of augmenting circulation is carrying on, the statesman must prevent his expence abroad from diminishing circulation proportionally at home. This is to be accomplished by opening loans for foreign expence in foreign countries, and by paying the interest only of such loans, with the greatest punctuality.

The difficulty of performing this, is no argument against it. It must either be done, or credit will be hurt; because without obtaining credit abroad, it is impossible to defray any expence incurred abroad, beyond what the metals of your country and the exports from it can pay: that is, in other words, beyond the quantity of metals exported, and general balance in your favour upon all reciprocal payments with the world.

If it be said, that nations never pay the interest of their debts any where but at home, I answer, that it is so much the worse for them; because wherever the debts or interest is to be paid, the lender always states his account as if the payment were made in his own house. All the expence to him of sending his money to the place of subscription, and of drawing back his returns, are compared with the interest offered by the borrower; and if upon the whole the lender find his account in the bargain, he subscribes; otherwise not. Since therefore the money borrowed must in this case be sent abroad, it is an advantage for the borrower to be under an obligation to provide a method of sending it; and by this means he will borrow cheaper than he can do, when he refunds to every lender all his expence and trouble in getting his interest remitted to him.

I am now deducing principles, and therefore shall not enter into a discussion of the many objections which occur against this plan, from foreign considerations; such as the facility it might procure to a statesman in defrauding his foreign creditors, and several others which might be formed: all I say is, that this is a cheaper and more systematical way of borrowing, and it has this good effect, that it constantly points out the state of the external debt, from which alone a bankruptcy is to be feared.

Were a favourable balance to return after an expensive war, the payment of this foreign debt would be the consequence then, as much as now when the payment is made at home, and rather more so; because who ever owed a balance (to England, I suppose) would then pay his debts at London, with money due by England, payable at Antwerp, for example; consequently, he would remit at discount; and when he remitted in favour of an Englishman, the debts might be considered as discharged upon the foreign fund, and stated a-new upon the funds payable in London. Could the payment of the interest of the public debts be rendered susceptible of such transfers upon all occasions, it would, I imagine, have a remarkable effect in favour of public credit.

This thought suggested itself, while I was considering the situation of a country where borrowing is in its infancy; and it occurred as an expedient for preventing foreign expence from draining the country of the money necessary for circulation at home. This, in every combination of circumstances, is the most important object of a statesman's care, while he is engaged in wars abroad.

Now whether the money of a country be paper or coin, it is equally taken out of circulation, by every foreign payment. When it is coin, it goes out of the country, as well as out of circulation: when it is paper, it does not go out of the country, certainly, but by coming upon the debtor in it for payment, it is equally taken out of circulation; and what the debtor gives for it (viz. a bill of exchange upon another country) goes out of the country. And unless this bill of exchange can be paid with value exported in merchandize, it will remain a debt upon the country, contracted in favour of some other nation.

This I hope will be sufficient to recall to mind what has been so fully explained in the 13th chapter upon banks; where the same question was stated with regard to the payments Scotland was obliged to make to England, towards the end of the last war. The same principles operate in the case before us, and may be applied to every circumstance of it; with this difference only, that here the statesman's interest is supposed to be more closely connected with that of his banks than was the case during the distress in Scotland: because if he do not support them by a systematical chain of conduct, he will drain the fund of circulation by his remittances; his credit will fail; his taxes will no more be paid; and his people will be oppressed. But if he pursue his plan systematically, circulation will be kept full; his credit will be supported; his taxes will be paid; his people will be easy: because no check will be put either to their industry or consumption for want of money; a great part of the solid property will be melted down into money; whatever part of this money is lent to the state will be, by that operation, consolidated into a new species of property, the public funds; and if, after the borrowing scheme is over (that is, when peace is restored) circulation should be contracted, a part of the money will then stagnate in the hands of individuals, and will, in their favour, be realized in that part of the solid property which was formerly melted down in order to produce it. That is, lands will be sold by the former proprietors, and will be acquired by those who have money not realized in stock; and for which money, circulation has no farther demand. This is the reason why, at the end of every war which has run the nation in debt, lands have constantly risen in their value, even when considerable quantities of them have been offered to sale.

If it be said that the stock-holders are those whom we commonly see buying the lands, and not those who have sums not realized:

I shall, in answer, observe, that the stock-holders cannot buy lands unless they sell their stock, to those who have money not realized; so it is still the money not realized which is employed in buying every article of solid property: and even after this operation, the same money will still remain in circulation as before; because it is impossible to realize even paper money itself, except when the creditor in it becomes proprietor of the property upon which it is secured; and if the money be coin, it is plain that this cannot be realized any farther than it is by nature. When therefore we say, that a man realizes his money, we do not mean any thing farther, than that he gives his money to another in exchange for solid property. Thus when an estate is bought in a country where banks upon mortgage are established, a part of the price is commonly taken out of circulation altogether; because in consequence of the price paid, the bank is refunded what it had melted down of the land sold; consequently, this paper becomes consolidated a-new, as it were, with the lands which are relieved of the mortgage.

But when lands are sold in a country where there is no paper, the price remains in circulation as before; and if the quantity of coin in circulation should exceed the uses for it, a case which seldom happens in these days, it would be exported, and realized abroad.

When this complicated and systematical scheme of credit is not established, the fallible consequence is, that money disappears: consequently, interest rises. The taxes formerly imposed cannot be paid: consequently, it is in vain to seek to augment them; because in proportion as they are augmented, they become less productive. If money be borrowed upon remote funds, engaged for other debts previously contracted, and if public faith be at all events to be preserved, the consequence must then be, that the public will be eat up by usurers.

This was the case in England during the wars of Queen Anne.

So early as 1706, government, as has been said, began to borrow at 6 per cent upon funds already engaged. What was the consequence? The exchequer having no money to pay the interest as it fell due, paid with tallies; these fell to great discount, and had they remained long in that discredited situation, lending would have stopt, or interest would have risen, as in France, so high as to lose the name of interest altogether. This was the case, in the example above cited, when seven millions ready money, borrowed by the late king of France, became a debt of thirty-two millions on the state.

Upon the occasion above mentioned, government availed themselves of the bank of England, as I say every private citizen should have a power to do, on every occasion, when his credit is good, though money should fail him. They engaged the bank to discount all tallies issued for the interest of debts; that is, in other words, to turn those sticks into money: but as public credit was so low that money could not be found to discharge even the interest of the advance made by the bank, the government consented, that all advances of that kind should bear compound interest quarterly, at 6 per cent. What a monstrous profit to the bank! what a charge upon the state! Had a bank of circulation upon mortgages been established at that time, money would have come in at a moderate simple interest to individuals, who would have availed themselves of them, for the payment of all public burdens. Instead of which, industry was made to, suffer the public money did not come in; taxation stopt; expences went on, and deficiencies were paid by the public at this monstrous charge.

On the other hand, had it not been for the assistance the bank then gave the state, in circulating those exchequer tallies, bills, &c. it is very certain that credit would have failed as totally in England as it had done in France in 1708, when Desmaretz undertook the finances. This minister had no bank to avail himself of, and accordingly he run France in debt at the rate of two hundred millions of livres per annum, during seven campaigns; of which, I am persuaded, he did not receive one half, or near it, in effective value.

What I have said will, I hope, be sufficient to shew that the only way for any state to borrow, is previously to provide a fund for making good what is agreed upon with the lenders; and that all expedients to supply the want of it will in the end bring great expence upon the people, either by involving them in an excessive burden of debts, in case public engagements should be held sacred, as has constantly been the case in Great Britain; or by driving the state to a bankruptcy, as was the case in France upon the death of the late King. I call it a bankruptcy, because all that was owing was not paid. A man who pays no more than 19s. 11 3/4d. in the pound, is a bankrupt, as well as he who cannot pay one farthing.

I come next to the methods of paying off debts when already contracted.

Public debts may be divided into two classes, redeemable and irredeemable. Redeemable debts may be paid off in several ways, which we shall briefly enumerate before we compare their several advantages.

First then, such debts may be paid off at once, by refunding to the creditors the whole capital, with all arrears of interest.

Secondly, They may be paid off yearly, according to a certain rule to determine the preference, and order of payment: for this purpose, a determinate sum must be set apart as a sinking fund for discharging the capital and interest.

Thirdly, They may be paid off cumulatively and proportionally every year, by incorporating the sinking fund into the money appropriated for discharging the interest, and by placing all that is paid beyond the interest, as payment in part of the capital.

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

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

Sixthly, And lastly, they may be paid off below the value of the capitals, by the means of lotteries; where the state may gain what the creditors choose to lose from a desire of gaming.

To one or other of these methods, may be reduced all the fair and honest expedients which a state may employ to get rid of its debts, without any breach of public faith, or without proceeding to the extremity of prescribing conditions of payment, which the creditors are forced to accept against their will.

As for the irredeemable debts, I apprehend, that, without consent of the creditors, no change upon the condition of loan can justly be made.

I shall next point out the advantages and disadvantages of the several methods of discharging debts, as they may affect the separate, or cumulative interest of a state.

Were large debts which have subsisted for a long time to be paid off all at once, it would occasion a sudden and a violent revolution, which is always attended with inconveniences.

Were, for example, the proprietors of lands to consent to sell off a part of their estates for the payment of the public debts, the quantity of land brought to market, would sink the price of it very considerably; from which would arise a great detriment to landlords. I shall not here inquire from whence such a sum of money could come; that it may be produced is very possible, from what happened in France in the year 1720.

Could a treasure be brought from India (let me suppose) sufficient at once to discharge the debts of Great Britain, circulation would become so glutted with money, that interest would fall to nothing. This would be a temporary loss to all the former creditors, until they had time to lend to the other states of Europe; who would, in consequence of this circumstance, sink the rate of interest upon their own debts. Something like this was the consequence of paying off all the debts of France with bank notes in 1720, upon which interest fell, as we have observed above, to 2 per cent.

When, in the second place, debts are paid off partially every year, according to a certain rule, it is expedient to have the capitals reduced into shares of a determinate value, as is the practice in France, that they may be drawn out as in a lottery. The lots drawn may then be paid, and no detriment will follow to any particular creditor, more than to another. because if by being paid there be either profit or loss to the creditor, it will affect the value of the whole stock in proportion. If, upon the establishment of such a plan, the stock be found to rise, it will be a proof that either the interest formerly paid was below the common rate, or that the credit of the state was looked upon as precarious: if it should sink, contrary conclusions may safely be drawn.

This is a common method of paying off debts in France, where funds are more commonly divided into shares than in Great Britain.

In 1759, the King opened a subscription for seventy-two millions of livres upon the general farms: this sum was divided into seventy-two thousand actions, bearing 5 per cent and it was stipulated, that upon the renewal of the farms in 1762, twelve thousand actions should be drawn by lot, and paid off monthly; so that in six months the whole debt was to be discharged. The third method of applying what is annually paid above the interest, in extinction of the capital, is the measure proposed by Cardinal de Richlieu for discharging the debts of Frances. only the Cardinal went to work in a very arbitrary way, both in determining the interest, and in fixing a value upon the capital, equally detrimental to the creditors.

To apply this to an example. Had England at the time government first established a sinking fund, arising out of the savings which were made upon reducing the rate of interest, from time to time, continued to pay to the creditors the same annual sums as formerly; and thereby applied what was paid beyond the interest, to the payment of the capital, there could not have been any misapplication of the sinking fund; and the debts by this time would have been greatly diminished. Whereas by applying the sinking fund to the service of the year, for the ease of the people and advantage to the creditors, the consequences may prove exceedingly inconvenient.

The fourth method of reducing debts is that adopted by Great Britain, viz. by reducing the interest paid upon them. From this we discover the reason why taxes, even in time of war, are seldom augmented in this kingdom much above the proportion of the interest of the money borrowed.

We have, in the second chapter of the first book, boldly declared this to be against principles, and the authors of such a scheme were there stigmatized as men of no foresight: we now see how much people may be mistaken in their conclusions in political matters, when they are formed upon too narrow combinations.

Were capitals intended ever to be paid, no doubt the conclusion would be just; but if it be resolved, that capitals shall never be considered as the object of attention, and that the interest alone shall be looked upon as the real burden, then all payment of capitals is unnecessary, except so far as by paying a part of them, it may serve to reduce the interest upon the rest, by making money regorge in the market beyond the uses found for it.

This plan cannot be carried on while a nation is engaged in an expensive war, which absorbs all the money to be lent: but it becomes the object of a statesman's care, after peace is restored, and when trade begins to bring in a balance upon exportations.

We have seen how this balance tends every year to diminish the capitals due to strangers, and to keep money at home. Then is the time to extend taxation beyond the uses found for money to pay the interest. Two or three millions extraordinary, raised at the close of a war, and thrown into the hands of the creditors of Great Britain, in extinction of their capitals, would soon engage them to cry for mercy. They would find no outlet but France for such sums; and it is precisely after a war, that France is busy in playing off the arbitrary operations on her debts, which reduces her credit too low for any one to trust her with money. Let peace continue for a tract of years, confidence will there advance apace, and then it will become more difficult to make money regorge in England.

To say that taxes are already beyond all bounds, is, in other words, to say the nation is no more in a state of defence: because, should Britain be again involved in an unavoidable war, the consequence will be, either to render more taxes indispensable, or to oblige the nation to submit to any terms demanded by her enemies.

If it be therefore true, that taxes may still be augmented, the most proper time for augmenting them, is, at the very close of a war; because then every circumstance favours the scheme, as we shall now explain.

We have said above, and experience proves the truth of it, that at the end of a war circulation becomes too full for domestic uses; and that the superfluity of money is realized upon property. This is the consequence of a sudden stop in national expence. Were taxes at such a time augmented, part of this regorging money would find a vent by the augmentation upon domestic circulation which taxes would occasion; which augmentation would circulate into the exchequer, instead of becoming consolidated with property, as has been said, and coming into the hands of government, would be poured into those of the creditors, in payment of part of their capitals. There it would regorge anew; because it is observed, in general, that those who have property in the funds are not apt to squander money when unexpectedly thrown into their hands; on the contrary, they are commonly found to live very much within their income.

But suppose it should not immediately regorge, it would then increase expence and consumption; consequently, would advance industry, and render every branch of excise more productive. In every supposition we can make, public opulence would be augmented: money would regorge at last; and then the creditors would come with their application to government to suspend the reimbursement of capitals, and to accept, in lieu of that, a diminution upon the interest.

This is the golden opportunity for diminishing the public burden occasioned by debts; and this method of compassing so desirable an end, is far preferable to that of compelling creditors to submit to a diminution, by offering a sudden reimbursement, which was put in practice in Britain in the year 1749, as has been observed. Had the public waited with patience one year longer, and then thrown in a few millions more than they did into the hands of the creditors, the proposal of reducing the interest would have come from the other quarter; which in all bargains with creditors is of the greatest consequence to the debtor.

The sum of interest thus diminished, upon an obligation to suspend the reimbursements of capitals for a limited time, three questions will naturally occur: 1. Whether the taxes should be diminished in proportion: or 2. If they should be allowed to subsist with a view to apply the overplus of them to national purposes: or 3. Whether it may not be most adviseable to turn such a part of the debts into annuities for lives, as may absorb the saving upon the former interest paid. The first two questions I reserve for the following book, where they will be fully examined; the last is the fifth expedient already proposed for acquitting the public debts. As the nature of it is abundantly evident, I shall repeat only what I formerly observed, namely, that this method of establishing a sinking fund, has the advantage of being less exposed to misapplications than any other.

The last expedient of paying off capitals, below the original value, by the means of lotteries, should take place only after the interest of money is brought so low as to cut off any near prospect of reducing it still farther.

I shall not pretend to guess at the lowest point to which the rate of interest may be brought, by the expedients of increasing money at will, by the means of banks upon mortgage. I have in the seventh chapter of the first part of this book, thrown out a hint of a land-bank, which opens a very wide field of speculation; but in this place, it would be unnecessary to enlarge upon that subject.

Let me suppose the rate of interest brought lower in Britain than any where else, it will nevertheless be subject to periodical risings, on many occasions.

Upon every such emergency, capitals will sink in the market below par.

It is then only that a state can have recourse to this last expedient of opening lotteries, and taking in subscriptions at the market price of the funds subscribed into them. And although the annuities to be paid upon the lottery fund be regulated by the rate of interest at the time, and consequently above the standard of the other debts; yet the same methods of reducing it afterwards will constantly produce their effects, and thereby diminish the capital by degrees.

In like manner, in time of war, when the public funds fall greatly in their price, government may open new subscriptions, and receive payment for them in their own paper at the market price, allowing a small premium in the rate of interest. If the creditors willingly subscribe upon these conditions, no violation of public faith can be alleged. By this operation, the capitals will be diminished, and the advanced rate of interest paid during the war, will return upon the peace to where it was: then the new subscriptions may be paid off, or subscribed for again at a lower rate than before.

Suppose it then resolved, that in time of war, the nation's creditors should be allowed, at certain times, to subscribe their capitals in books opened at the bank for that purpose, one quarter per cent. above the selling price. Would not this have the good effect of supporting the price of stocks on one hand, and of reducing the capital of the national debt upon the other? Example:

Let me suppose that in time of war, the 3 per cents. sell at 74 3/4, might not government receive them at 75, and constitute the new subscription at 4 per cent? What interest could any one have not to subscribe, who at such a time intends to sell his stock? His 3 per cent sold to government at 75, and turned into a 4 per cent. would afterwards, when sold in the market, produce 1/4 per cent more than if it had not been subscribed into the new fund.

Perhaps in Change Alley, where calculation is carried to the utmost pitch of refinement, even this eventual advantage to government might sink the value of the new 4 per cents. Let this be allowed. The answer is, that when people compute with such nicety, and comprehend in their calculations every circumstance the most minute, it is, I think, the interest of a state (whose views should extend far beyond the period of human life) to grant a premium upon such subscriptions more than sufficient to indenmify the subscribers, according to the most rigid calculation concerning their present advantage.

The smallest profit to be discovered by the nicest pen will engage the monied man to subscribe; consequently, the capitals of debts may be diminished, at a loss to the public almost imperceptible. And for this imperceptible loss in the mean time, the greatest national advantage may be obtained at a distant period.

It is now full time to close this book, which has swelled far beyond its due proportion. The subject of credit and debts is so connected with many questions relating to taxes, and to the application of their amount, that the unity of the subject would have suffered little in blending them together. But as I find it to be a great relief to the memory to interpose, now and then, a pause; and as taxes were intended to be treated of by themselves, according to the plan I at first proposed, I shall make no alteration in it.

At the end of the first and second books, I subjoined a chapter of recapitulation; in the third book, this was supplied by a very full table of contents; here, because of the intimate connection of the subject of this and the following book, I shall refer the reader to the end of the volume, for a full recapitulation of both.