Chap. II: Of the Nature of Obligations to be performed, in consequence of Credit given; and of what is meant by the term

We have already said, that all obligations contracted with a view to be performed in future time, consist in doing or giving something in consideration of something done or given.

When actions only are stipulated in contracts, credit (in a strict acceptation of the term) is little concerned; because no adequate security can be given for performing an action: such contracts stand wholly upon the willingness and capacity of acting, which depend more upon the person than upon the faculties of the debtor. To supply this defect, we see penalties usually stipulated in such cases; which reduce those contracts to an alternative obligation of either doing or giving.

We shall therefore throw out the consideration of the first altogether, as being foreign to our purpose; and adhere to the later, which is the true object of credit. Again:

In all obligations to give any particular thing, there is constantly implied an alternative also; to wit, either the thing stipulated, or the value (id quod interest, according to the lawyers): this must be relative to money; which is the common price of all things in commerce among men.

Thus we have brought credit to the object under which we are to consider it, viz. the obligation to pay money, either for value received, or for some consideration relative to the parties, which may be the just ground of a contract.

Credit and debts are therefore inseparable, because they necessarily imply each other; and very properly come to be examined together in this book.

When money is to be paid at a distant period of time, the obligation may either be, for one precise sum; or for that sum with interest, during the interval between contracting and fulfilling the obligation.

The lending of money without interest, was very common before the introduction of trade and industry. Money then was considered as a barren stock, incapable of producing fruit; and whenever the quantity of it, in any country, exceeded the uses of circulation, the remainder was locked up in treasures: in which case, the exacting of interest for it appeared unreasonable.

Things are now changed: no money is ever locked up; and when borrowed, the regular payment of interest for it, is as essential to the obtaining of credit, as the confidence of being repaid the capital. These periodical payments are a constant corroboration of this confidence; so that it may be said with truth, that he who can give good security, to pay to perpetuity, a regular interest for money, will obtain credit for any sum, although it should appear evident, that he never can be in a capacity to refund the capital.

The reason of this may be gathered from the principles already deduced, and from the plan of our modern oeconomy.

We have said in the second book, that the current money of a country is always in proportion to the trade, industry, consumption, and alienation, which regularly take place in it; and when it happens that the money already in the country is not sufficient for carrying on these purposes, a part of the solid property, equal to the deficiency, may be melted down (as we have called it) and made to circulate in paper: that as soon again as this paper augments beyond this proportion, a part of what was before in circulation, must return upon the debtor in the paper, and be realized anew.

Let us now consider what is understood by realized. By this term is meant, that the regorging paper, or that quantity of currency which a nation possesses over and above what is necessary for its circulation, must be turned into some shape whereby it may produce an income; for it is now a maxim, that no money is to be suffered to remain useless to the proprietor of it.(2*)

When this regorging or stagnating paper then comes upon the debtor in it, if he should pay the value of it in hard specie, how would the condition of the creditor be improved?

We suppose the credit of the paper equal to the credit of the coin within the country. We also suppose that the paper has so stagnated in the hands of the bearer, that he can neither lend it, or purchase with it any species of solid property, within the country, capable to produce an income: for if any way of disposing it usefully can be found, this circumstance will prove that circulation is not overstocked at that time; consequently, the money does not regorge. But let us suppose that it does regorge: then he must either oblige the debtor in the paper to pay in coin, that he may lock it up in his coffer (as was the case of old); or he must send his coin to other countries, where circulation is not fully stocked, and where an income may be bought with it. This constantly happens when circulation is either overstocked, or when the quantity of circulation begins to diminish in a country.

Let me next suppose, that in a country overstocked with money, a sudden demand for it, far beyond the ordinary rate of circulation, shall occur: suppose a war to break out, which absorbs, in a short time, more money than, perhaps, all the coin and all the paper can supply. The state upon this occasion imposes a tax, which, let me suppose, may produce a sum equal to the interest of the money required. Is it not very certain, that such persons who found a difficulty in placing their regorging capitals, will be better pleased to purchase a part of this annual interest, than to lend it to any person who might pay it back in a short time; by which repayment the lender would again be thrown into the same inconvenience as before, of finding a proper out-let for it? This is a way of realizing superfluous money, more effectual than turning it into gold or silver.

When I speak, therefore, of realizing paper money, I understand either the converting of it into gold and silver, which is the money of the world; or the placing of it in such a way as to produce a perpetual fund of annual interest.

Were public borrowing, therefore, to work the effect of bringing the money in circulation below the proportion required for carrying on alienation, trade, etc. then an obligation to repay the capital would be necessary, and complaints would be heard against the state for not paying off their debts; because thereby the progress of industry would be prevented. But when the operations of credit are allowed to introduce a method of creating money anew, in proportion as trade and industry shall demand it, then the state has no occasion to pay back the capitals; because the public creditors enjoy far better conditions in their annual income, than if their capitals were refunded.

Let me illustrate this by an example.

We must take it for granted, that in every nation in Europe, there is a sum in circulation, nearly equal to the alienation, trade, etc. which goes on actually at the time. We must also take it for granted, that the amount of all debts whatsoever, public and private, paying interest to the class of creditors, is every where a very great sum: now let us suppose, that the class of debtors should be enabled (no matter by what means) to pay off what they owe, in coin newly acquired; would not, by the supposition, a sum of the old currency nearly equal to this coin newly acquired, immediately fall into stagnation, and would it not be impossible to draw any income from this stagnated coin? This was exactly the case of old. The coin far exceeded the uses of circulation, and stagnated in treasures. Wars brought it out; because then circulation augmented; peace again cutting off these extraordinary demands, the coin stagnated again, and returned to the treasures.

What is the case at present?

Money and coin are never found to surpass the uses of circulation in commercial countries. When war comes, which demands an extraordinary supply, recourse is had to borrowing upon interest; not to treasures: and the desire of purchasing this interest, which we call an annuity, draws treasures even from the enemies of those nations who have the best credit. Again, at the end of a war, in place of an empty treasury, as was the case of old, we find a huge sum of public debts. As oeconomy filled the treasury then, so oeconomy must pay off the debts now.

From what has been said, it plainly appears, that interest is now become so absolutely essential to credit, that it may be considered as the principal requisite and basis on which the whole fabric stands: we shall therefore begin by examining the origin and nature of interest, and also the principles which influence the rate, and regulate the fluctuations of it.