Chap. I: What Credit is, and on what founded

Credit is the reasonable expectation; entertained by him who fulfils his side of any contract, that the other contracting party will reciprocally make good his engagements.

To illustrate this, we may say with the lawyers, that as all contracts may be reduced under one of the following heads, Do ut des, do ut facias; facio ut des, facio ut facias: so he who actually gives or performs his part, is the creditor, or the person who gives credit; and he who promises only to give or to perform, is the debtor, or the person who receives it.

Credit, therefore, is no more than a well established confidence between men, in what relates to the fulfilling of their engagements. This confidence must be supported by laws, and established by manners. By laws, the execution of formal contracts may be enforced: manners, alone, can introduce that entire confidence which is requisite to form the spirit of a trading nation.

Credit, in its fancy, must be supported by statutes, and enforced by penalties; but when it is once well established, every recourse had to law, is found to wound the delicacy of its constitution. For this reason we see, that in certain nations,(1*) the legislator wisely excludes the ordinary courts of justice from extending their rigid jurisdiction over mercantile engagements: they leave to the prudence and good faith of men versed in commerce, to solve the difficulties which result from such transactions; because they are to be interpreted more according to the constant fluctuation of manners, than to the more permanent institutions of positive law.

The more the jurisdiction of the statesman is limited; or, in other words, the less the power of any sovereign is restrained, by the laws and constitution of the state he governs, the more it behoves him to avoid every step of administration which can make his authority be felt in cases where credit is concerned. If he should happen, for example, to be a debtor himself, he must take good care never to appear in any other light to his creditor. The moment he puts on the sovereign, the same moment all confidence is lost. For these reasons, we have hitherto had few examples (I might perhaps have said none at all) where credit has been found permanently solid, under a pure monarchy.

But we must observe, at the same time, that the stability of credit is not incompatible with this form of government. At certain times, we have seen credit make a surprising progress in France; and it has never suffered any check in that state, but from acts of power, which I think have proceeded more from inadvertency, and want of knowledge, than from a formed design of defrauding creditors. These may be looked on as blunders in administration; because they have constantly disappointed the purpose for which they were intended. Let me prove this by some examples.

The arret of 21 May 1720, (of which we shall give an account hereafter), destroyed in one day the whole fabric of credit, which had been erected in France during the course of three years; and which in so short a time had mounted to a height hardly credible. I say, that in one day this inadvertent step (for no real injury was intended) destroyed the credit of 2,697,048,000 livres of bank notes, (above 120 millions sterling) and of 624,000 actions of the East India company, which (reckoned at 5000 livres apiece, the price at which the company had last sold them) amount to 3,120,000,000 livres, or above 140 millions sterling. Thus at one blow, and in one day, 260 millions sterling of paper currency, payable to bearers, were struck out of the circulation of France; by an useless and inadvertent act of power, which ruined the nation, and withered the hand which struck it: an event too little understood, and too little remembered in that kingdom.

This plainly appears from their late conduct; for in the end of 1759, at a time when the credit of France was in so flourishing a situation as to have enabled her to borrow, that very year, near 200 millions of livres; and when there was a prospect of being able to borrow, in the year following, a far greater sum, the shutting up what they called their caisse d'amortissement, for the sake of withholding 32 millions of livres interest due to the creditors, struck all credit with foreigners dead in one instant.

These examples shew what fatal consequences follow a misjudged exercise of power in matters of credit.

On the other hand, the rapid progress of credit in France before the Missisippi, and the stability of it from 1726 to the year 1759, abundantly proves, that no two things are more compatible than monarchy and confidence. All that is wanting is the establishment of one maxim in government; to wit, that the King's power is never to extend so far, as to alter the smallest article of such contracts as have been made with those who have lent money for the service of the state.

Maxims in government bind the monarch and the legislature, as laws bind subjects and subordinate magistrates: the one and the other ought to be held inviolable, so far as they regard credit; or confidence will be precarious.

What has supported the credit of Great Britain, but the maxim constantly adhered to, that the public faith pledged to her creditors is to be inviolable?

Does any one doubt, but the legislature of this nation may spunge out the public debts, with as much ease as a King of France? But in the one kingdom, the whole nation must be consulted as to the propriety of such a step; in the other, it may be done at the instigation of a single person, ignorant of the consequences: but I hope to make it appear, before the conclusion of this book, that it is impossible to form a supposition, by which a state can be benefitted by deliberately departing, for one moment, from the faith of her engagements. A national bankruptcy may no doubt happen, and become irreparable; but this must be when the state is emerging from a signal calamity, after having been involved in ruin and confusion.

Confidence, then, is the soul and essence of credit; and in every modification of it, we shall constantly find it built on this basis: but this confidence must have for its object a willingness and a capacity in the debtor to fulfil his obligations.