Section II.: Of public Credit, its Basis, and the Circumstances that endanger its Solidity.

Public credit is the confidence of individuals in the engagements of the ruling power, or government. This credit is at the extreme point of elevation, when the public creditor gets no higher interest, than he would by lending on the best private securities; which is a clear proof, that the lenders require no premium of insurance to cover the extra risk they incur, and that in their estimation there is no such extra risk. Public credit never reaches this elevation, except where the government is so constituted, as to find great difficulty in breaking its engagements, and where, moreover, its resources are known to be equal to its wants; for which latter reason, public credit is never very high, unless where the financial accounts of the nation are subject to general publicity.

Where the public authority is vested in a single individual, it is next to impossible, that public credit should be very extensive: for there is no security, beyond the pleasure and good faith of the monarch. When the authority resides in the people, or its representatives, there is the further security of a personal interest in the people themselves, who are creditors in their individual, and debtors in their aggregate character; and therefore, can not receive in the former, without paying in the latter. This circumstance alone would lead us to presume, that now, when great undertakings are so costly as to be effected by borrowing alone, representative governments will acquire a marked preponderance in the scale of national power, simply on account of their superior financial resources, without reference to any other circumstance.

In one light, the obligations of government inspire more confidence than those of individuals, that is to say, by the greater solidity of its resources. The resources of the most responsible individual may fail suddenly and totally, or at least to such an extent, as to disable him from performing his engagements.

Numerous commercial failures, political or national calamities, litigation, fraud or violence, may ruin him entirely; but the supplies of a government are derived from such various quarters, that the individual calamities of its subjects can operate but partially upon the revenue of the state. There is also another thing, that facilitates the borrowing of government even more than the credit it is fairly entitled to; and that is, the great facility of transfer presented to the stockholder. Public creditors always reckon upon the possibility of withdrawing by the sale of their debentures, before the occurrence of embarrassment or bankruptcy; and, even where they contemplate such a risk, generally consider some advance of the rate of interest a sufficient premium of insurance against it.

Moreover, it is observable, that the sentiments of lenders and indeed of mankind upon all occasions, are more powerfully operated upon by the impressions of the moment, than by any other motive; experience of the past must be very recent, and the prospect of the future very near, to have any sensible effect. The monstrous breach of faith on the part of the French government in 1721, in regard to its paper-money and the Mississippi share-holders, did not prevent the ready negotiation of a loan of 200,000,000 liv. in 1759; nor did the bankrupt measures of the Abbé Terrai in 1772 prevent the negotiation of fresh loans in 1778 and every subsequent year.

In other points of view, the credit of individuals is better founded than that of the government. There is no compulsory process against the latter, for the breach of its engagements; nor do governments ever husband the national resources with nearly the care and attention of individuals. Besides, in the event of external or internal subversion, individuals may withdraw their property from the wreck much better than governments can.

Public credit affords such facilities to public prodigality, that many political writers have regarded it as fatal to national prosperity. For, say they, when governments feel themselves strong in the ability to borrow, they are too apt to intermeddle in every political arrangement, and to conceive gigantic projects, that lead sometimes to disgrace, sometimes to glory, but always to a state of financial exhaustion; to make war themselves, and stir up others to do the like; to subsidize every mercenary agent, and deal in the blood and the consciences of mankind; making capital, which should be the fruit of industry and virtue, the prize of ambition, pride, and wickedness.

A nation, which has the power to borrow, and yet is in a state of political feebleness, will be exposed to the requisitions of its more powerful neighbours. It must subsidize them in its defence; must purchase peace; must pay for the toleration of its independence, which it generally loses after all; or perhaps must lend, with the certain prospect of never being repaid.

These are by no means hypothetical cases: but the reader is left to make the application himself.

By the establishment of sinking-funds, well-ordered governments have found means to extinguish and discharge their redeemable debt. The constant operation of this contrivance contributes more than any thing else to the consolidation of public credit. The mode of proceeding is simply this:

Suppose that the state borrows 100 millions of dollars at an interest of 5 per cent.; to pay that interest, it must appropriate a portion of the national revenue to the amount of 5 millions of dollars. For this purpose, it usually imposes a tax calculated to produce this sum annually. If the tax be made to produce somewhat more, say 5,462,400 dollars, and the surplus of 462,400 dollars be thrown into a particular fund, and laid out annually, in the purchase of government debentures to that amount in the market, and if, moreover, in addition to this surplus, the interest likewise upon the debt thus extinguished, be annually employed in such purchases, the whole principal debt will be extinguished at the end of fifty years. This is the mode in which a sinking-fund operates. The efficacy of this expedient depends upon the progressive power of compound interest; that is to say, the gradual augmentation of the interest of capital, by the addition of interest upon the arrears of interest, reckoned from certain stated periods.

It is obvious, that, by an annual instalment of not more than 10 per cent. upon its own interest, the principal of a debt bearing an interest of 5 per cent. may be extinguished in less than 50 years. However, the sale of the debentures being voluntary, if the holders will not sell at par, that is to say, at 20 years purchase, the redemption, in this way, will take somewhat longer time; but this very state of the market will be a convincing proof of the high ratio of national credit. On the other hand, if the credit decline, so that the same sum will purchase a larger amount of debentures, the extinction of the debt will be effected in a shorter period. So that the lower public credit falls, the more powerful is the operation of a sinking-fund to revive it; and that fund grows less efficient, exactly in proportion as it becomes less requisite.

To the establishment of such a fund, has the long-continued public credit of Great Britain been attributed, and her ability still to go on borrowing, in spite of a debt of more than 800 millions sterling. And doubtless this it is, that has made Smith declare sinking-funds, which were contrived expressly to reduce national debt, the main instruments of their increase. Had not governments the happy knack of abusing resources of every kind, they would soon grow too rich and powerful.

A sinking-fund is a complete delusion, whenever a government continues borrowing on one hand, as much as it redeems on the other; and à fortiori, when it borrows more than it redeems, as England has constantly done, since the year 1793 to the present time. Whencesoever the amount of the sinking-fund be derived, whether it be merely the product of a fresh tax, or that product, augmented by the interest on the extinguished debt, if the government borrow a million for every million of debt that it pays off, it creates an annual charge of precisely the same amount as that extinguished: it is precisely the same thing, as lending to itself the million devoted to the purpose of redemption. Indeed, the latter course would save the expense of the operation. This position has been fully established in an excellent work, by professor Hamilton, which is quite conclusive upon the subject. The enormous burthens of the people of England, the scandalous abuse its government has made of the power of borrowing, and her substitution of paper-money in place of specie, will have produced some benefit at least; inasmuch as they have assisted the solution of many problems, highly interesting to the happiness of nations, and given warning to all future generations, to beware of the like excesses.

It must be evident, that the grand requisite to the efficiency of a sinking-fund is, the punctual and inviolable application of the sums appropriated to the purpose of redemption. Yet this has never been rigidly adhered to, even in England, where consistency and good faith to the creditors are a point of honour with the government. So that English writers put no faith in the extinction of the debt by the operation of the sinking-fund: nay, Smith makes no scruple of declaring, that national debts have never been extinguished except by national bankruptcy.

It has been sometimes a matter of speculation, to inquire into the effect of a national bankruptcy upon the relative condition of individuals, and the internal economy of the nation. In ordinary cases, when a government commits an act of bankruptcy, it adds to the revenues of the tax-payers the whole amount that it discontinues paying to the public creditors.—Nay, it goes somewhat further: for it remits likewise the charges of collection and management of the revenue and the debt. A nation burthened with 100 millions of annual interest on its debt, whereon the charges above mentioned should amount to 30 per cent. more, might by a bankruptcy remit to the tax-payers 130 millions, while it stript its creditors of 100 millions only.

In England the effect would be more complicated; because she does not pay the dividends on her debt wholly out of the annual proceeds of taxation; at least, not at the moment of my writing; but annually borrows a sum nearly equal to the interest of her debt. Were she to commit an act of bankruptcy, the annual loans of 40 millions sterling, more or less, would be withdrawn from unproductive consumption by the public creditors, and be applicable to the purposes of re-productive consumption: for it may fairly be supposed, that the capitalists who accumulate and lend to the state, would look out for some profitable investment. In this point of view, the operation would tend vastly to the increase of the national capital and revenue: but the execution would be attended with very disastrous immediate consequences: for this annual amount of 40 millions would be withdrawn from the class of consumers, who have no other means of subsistence, and would be utterly unable to make good their losses in any other way, for want of both personal industry, and of the command of capital.

A bankruptcy would probably obviate the necessity of fresh loans; but would not release an atom of the former taxation, where the interest of the debt is habitually paid, not with the proceeds of taxation, but with new loans. Thus, the burthens of the people would not be alleviated, nor the charges of production reduced: consequently there would be no sensible reduction in the price of commodities; nor would British products find a readier market either at home or abroad.

The classes liable to taxation would be diminished in numerical strength, by the whole of the suppressed stockholders; and taxation less productive, although not lower in ratio. The 40 millions of revenue, withdrawn from the public creditors, would pay taxes only upon the annual profit or revenue, they might yield in the character of productive capital. The ruin of the public creditors would be attended with abundance of collateral distress; with private failures and insolvency without end; with the loss of employment to all their tradesmen and servants, and the utter destitution of all their dependants.

On the other hand, if she persevere in borrowing to pay the interest of the former loans, that interest and with it taxation also, must go on increasing to infinity. It is impossible to avoid a precipice, when one follows a road that leads nowhere else.

The potentates of Asia, and all sovereigns, who have no hopes of establishing a credit, have recourse to the accumulation of treasure. Treasure is the reserve of past, whereas a loan is the anticipation of future revenue. They are both serviceable expedients in case of emergency.

A treasure does not always contribute to the political security of its possessors. It rather invites attack, and very seldom is faithfully applied to the purpose for which it was destined. The accumulation of Charles V. of France fell into the hands of his brother, the duke of Anjou; those which pope Paul II. destined to oppose the Turkish arms, and drive them out of Europe, supplied the extravagancies of Sixtus IV. and his nephews. The treasures amassed by Henry IV., for the humiliation of the house of Austria, were lavished upon the favourites of the queen-mother: and, at a later period, we have seen the political power of Prussia brought into imminent hazard by those very savings, which were destined by Frederick III. to its consolidation.

The command of a large sum is a dangerous temptation to a national administration. Though accumulated at their expense, the people rarely, if ever profit by it: yet in point of fact, all value, and consequently, all wealth, originates with the people.