An Inquiry into the Principles of Political Economy. 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. by Sir James Steuart

Sir James Steuart (1767)


An Inquiry into the Principles of Political Economy


Book IV


Of Credit and Debts


Part I: Of the Interest of Money


I come now to inquire into the principles of credit; a subject already introduced in the the 27th chapter of the second book, where I examined nature of circulation, and pointed out the principles, which direct a statesman when and how to retard or accelerate its activity, according as the political interests of his people may require.

In that chapter the object was, when and how either to extend or restrain the use of credit, according to political circumstances. The inquiry now comes to be, what this credit is; upon what it is founded; what the various species of it are; what are the methods of establishing and extending it, while it is in its infancy and vigour; how to sustain it when it is overstretched; and last of all, how to let it fall as gently as possible, when by no human prudence it can be longer supported.

Many political writers in treating of credit, represent it as being of a very mysterious nature; owing its establishment to a confidence not easily accounted for, and disappearing from the slightest unfavourable circumstances.

That credit, in its fancy, is of a very delicate nature, I willingly allow. as also that we have many examples which confirm the sentiments, of those who believe it to contain, in itself, something very mysterious: but this proves no more, than that, in such cases, credit (as I consider it, and as it will appear really to be) has not been properly established. The cause of confidence has had nothing in it but opinion, and when this is the case, credit is but a shadow; and like a thin vapour, it may be dissipated by the smallest breath of wind.

They all agree that credit is no more than confidence, but they do not examine how this confidence is to be established on a solid foundation.

The operations of credit are incompatible with the involved contracts of the law, and with the spirit of intricate land-securities. The policy of such contracts was analogous to the manners of the times which gave them birth. Trade is a late refinement, in most nations of Europe, and industry is still a later: the beginnings of both are slow, imperceptible, and obscure. The instruments by which they are promoted, are the lower classes of a people; the interest of the individuals who compose them, may appear to some, to be below the attention of a statesman; and yet it is by the accumulation of their industry only, that this huge fabric is erected.

To establish that credit, which is necessary for carrying on so great a work, a statesman must lend his hand. He must give a validity to mercantile obligations, which have no name in his law-books: he must support the weak against the strong: he must reform the unwieldy procedure of courts of justice: he must facilitate the sale of property: he must establish the credibility of merchants' books regularly kept: he must discourage frauds, and support fair dealing.

When such a plan is once established, confidence will find a basis in the property of every individual who profits by it. When it is not established, credit will appear like a meteor: intelligent and crafty men will avail themselves of it, and thereby dazzle the eyes of the public, with gilded schemes of opulence and prosperity: mankind will fly to industry, confidence will be established; but as there will be no method of determining the bounds of this confidence, the promoters of the scheme will profit of the delusion: confidence will vanish; and the whole will appear to have been a mystery, a dream. Is not this a representation of many projects set on foot since the beginning of this century? What were the South Sea's and Mississippi's, but an abuse of confidence? Had ever the cause of confidence been examined into, would ever such extravagant ideas have arrived at the height they did?

Credit therefore must have a real, not an imaginary object to support it; and although I allow that in all operations of mercantile credit, there must be something left to chance and accident; yet this chance must bear a due proportion to the extraordinary profits reasonably to be expected from the undertaking.

From this it appears, what an useful speculation it is to inquire properly into the nature of credit; to deduce with accuracy the principles upon which it is founded; to banish mystery from plain reason; to shew how every the most surprizing effect of credit, whether tending to the advantage, or to the hurt of society, may easily be accounted for; and, which is the most useful of all, to point out how such effects may be foreseen, so as either to be improved or prevented.

In going through so extensive a subject, as a deduction of the principles of credit, method is very necessary; and when a detail is long, subdivisions are very convenient. I have, upon this account, divided this book into four parts.

The first shall be set apart for deducing the principles which regulate the rate of interest; because this is the basis of the whole.

The second, for the principles of banking; under which I shall have an opportunity to unfold the whole doctrine of domestic circulation.

The third, for those of exchange. which is equally well calculated for carrying on foreign circulation; and as to what regards debts, and the borrowing of money, with all the consequences which they draw along with them, these important objects will furnish ample matter for

The fourth and last part, which shall treat of the principles of public credit.

These things premised, I proceed to the definition of credit.

Chapter 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 Mississippi, 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.

Chapter II: Of the Nature of Obligations to be performed, in consequence of Credit given; and of what is meant by the terms regorging and stagnating of money

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 economy.

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 economy filled the treasury then, so economy 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.

Chapter III: Of the Interest of Money

I shall leave it to divines and causists to determine how far the exacting of interest for money is lawful, according to the principles of our religion.

It was forbidden to the Jews, by the laws of Moses, to lend at interest to their brethren, but it was permitted to lend to strangers. Dueteronomy. Chapter xxiii, ver. 19, 20. This is one of the wisest political institutions to be met with in so remote antiquity, as we shall hereafter explain.

In the primitive ages of christianity, the lending of money at interest was certainly reputed to be unlawful on most occasions. That spirit of charity to all who were in want, was so worked in with the doctrine of our religion, that a borrower was constantly considered to be in that situation. Trade was little known; trading men were generally ill looked upon; and those who debated so far from the spirit of the times, as to think of accumulating wealth by the use of their money, commonly degenerated into usurers.

In the middle centuries, when a mistaken zeal animated christianity with a most ungodly thirst for the blood of infidels, the Jews were, in every nation in Europe, almost the only money-lenders. This circumstance still more engaged the church to dart her thunder against this practice; and the loan upon interest never took root among christians, until a spirit of trade and industry sprung up in Italy in the time of the Lombards, and from thence spread itself, through the channel of the Hans-towns, over several nations.

Then the church began to open her eyes and saw the expediency of introducing many modifications, in order to limit the general anathema which she had denounced against the whole class of money-lenders. At one time it was declared lawful to lend at interest, when the capital shared any risque in the hands of the borrower; at another, it was found allowable, when the capital was not demandable from the debtor, while he paid the interest; again, it was permitted, when the debtor was declared by sentence of a judge, to be in mora in acquitting his obligation: at last, it was permitted on bills of exchange. In short, in most Roman catholic countries, interest is now permitted in every interest for case almost, except in obligations including a stipulation of sums demandable at any time after the term of payment; and it is as yet no where considered to be so essential to loan, as to be due on all debts whatsoever; not even upon obligations payable on demand.

Expediency and the good of society (politically speaking) are the only rule for judging, when the loan upon interest should be permitted, when forbidden. While people borrowed in order only to procure a circulating equivalent for providing their necessaries, until they could have time to dispose of their effects; and while there was seldom any certain profit to be made by the use of the money borrowed, as now, by turning it into trade, it was very natural to consider the lender in an unfavourable light; because it was supposed that his money, had it not been lent, must have remained locked up in his coffers. But at present, when we see so many people employed in providing stores of necessaries for others, which, without money, cannot be done; were the loan upon interest forbidden, it would have the effect of locking up the very instrument (money) which is necessary for supplying the wants of the society. The loan, therefore, upon interest, as society now stands composed, is established, not in favour of the lenders, but of the whole community; and taking the matter in this light, no one, I suppose, will pretend that what is beneficial to a whole society should be forbidden, because of its being proportionably advantageous to some particular members of it.

If it be then allowed, that the loan upon interest is a good political institution, relatively to the present situation of European societies, the next question is, to determine a proper standard for it, so as to avoid the oppression of usurers, on one hand, and on the other, to allow such a reasonable profit to the lender, as may engage him to throw his money into circulation for the common advantage.

This question leads us directly to the examination of the principles which regulate the rate of interest; and if we can discover a certain rule, arising from the nature of things, and from the principles of commerce, which may direct a statesman how to establish a proper regulation in this matter, we may conclude with certainty concerning the exact limits, between unlawful and pinching usury, exacted by a vicious set of men, who profit of the distress of individuals; and that reasonable equivalent which men have a right to expect for the use of their money, lent for carrying on the circulation of trade, and the employment of the lower classes of a people who must subsist by their industry or labour.

Chapter IV: Of the Principles which regulate the Rate of Interest

We must now recall to mind the principles of demand and competition, so fully deduced in the second book, in order to answer the following question, viz.

What is the principle which regulates, at all times, the just and adequate rate of interest for money, in any particular state?

I answer, That at all times, there is in every state a certain number of persons who have occasion to borrow money, and a certain number of persons who desire to lend: there is also a certain sum of money demanded by the borrowers, and a certain sum offered to be lent. The borrowers desire to fix the interest as low as they can; the lenders seek, from a like principle of self-interest, to carry the rate of it as high as they can.

From this combination of interests arises a double competition, which fluctuates between the two parties. If more be demanded to be borrowed, than there is found to be lent, the competition will take place among the borrowers. Such among them as have the most pressing occasion for money, will offer the highest interest, and will be preferred. If, on the contrary, the money to be lent exceed the demand of the borrowers, the competition will be upon the other side. Such of the lenders, as have the most pressing occasion to draw an interest for their money, will offer it at the lowest interest, and this offer will be accepted.

I need not launch out into a repetition of what has been said concerning the influence of double competition, in fixing the price of commodities; as I suppose these principles to be now well understood, and well retained, by those who read this chapter; I shall therefore confine myself here to what is peculiar to the demand for money.

The price of commodities is extremely fluctuating: they are every one calculated for particular uses; money serves every purpose. Commodities, though of the same kind, differ in goodness: money is all, or ought to be all of the same value, relatively to its denominations. Hence the price of money (which is what we express by the term interest) is susceptible of a far greater stability and uniformity, than the price of any other thing.

We have shewn in the 28th chapter of the second book, in examining the principles which regulate the price of subsistence, that the only thing which can fix a standard for it, is frequent and familiar alienation. The same holds true of money. Were we to suppose a state, where borrowing and lending are not common, and where the laws fix no determinate interest for money, it would hardly be possible to ascertain the rate of it at any time. This was the case of old.

Before the reign of Henry VIII of England, in 1545, there was no statute regulating the rate of interest, in that kingdom. The reason is very plain. In those days there was little circulation, and the borrowing of money upon interest was considered as a mortal sin. The consequence of this was, that usurers, having nothing but conscience to restrain them, carried the price of their money to a level with the pressing occasion of spendthrifts, while others, from friendship, lent for no interest at all. Henry fixed the rate of interest at 10 per cent and his contemporary, Francis I of France, in 1522, (who was the first who borrowed money in a regular manner upon the townhouse of Paris) fixed the interest at the 12th penny, that is, at 8 1/3 per cent.

In those days, it was impossible for a statesman to determine any just rate for interest; and accordingly we find history filled with the extortion of usurers, on one hand, and the violence and injustice of princes and ministers towards those who had lent them money, on the other: was it then any wonder, that lending at interest was universally cried out against? It really produced very little good, and was the cause of manifold calamities to a state. When the Prince borrowed, it was in the most urgent distress: those who had money, foresaw the danger of being plundered if they refused to lend it to him, and of being defrauded as soon as the public distress was over: for this reason they exacted the most exorbitant interest: the consequence was, that the people were loaded with the most grievous taxes, and the tax-gatherers were the Prince's creditors, to whom such taxes were assigned.

In our days, trade, industry, and a call for money, enable the borrower to enrich himself, to supply the wants of the state, and to pay his interest regularly.

If we compare the two situations, we shall find every disadvantage attending the former, and every advantage connected with the latter.

Without good faith their can be no credit; without credit there can be no borrowing of money, no trade, no industry, no circulation, no bread for the lower classes, no luxury, not even the conveniences of life, for the rich. Under these circumstances, there can be no rule for the rate of interest; because borrowing cannot be frequent and familiar.

In proportion, therefore, as borrowing becomes frequent and familiar, the rule for fixing the rate of a legal interest becomes more practicable to a statesman. Let me make a step farther.

We have said, that it is the fluctuation of the double competition between borrowers and lenders, which occasions the rise and fall of the rate of interest; I must now point out the principles which occasion this fluctuation.

Were the interests of trade and industry so exactly established, as to produce the same profit on every branch of them, the money borrowed for carrying them on, would naturally be taken at the same rate; but this is not the case: some branches afford more, some less profit. In proportion, therefore, to the advantages to be reaped from borrowed money, the borrowers may offer more or less for the use of it.

Besides the class of men who borrow in order to profit by the loan, there is another class, who borrow in order to dissipate. The first class never can offer an interest which exceeds the proportion of their gains: the second class, finding nothing but want of credit to limit their expence, become a prey to usurers. Were it not then upon account of these last, there would be no occasion for a statute to regulate the rate of interest. The profits on trade would strike an average among the industrious classes; and this average would fall and rise, in proportion to the flourishing or decay of commerce.

Let us next examine the principles which prevent the monied men from committing extortions, and which oblige them to lend their money for that rate of interest which is in proportion to the profits upon trade and industry.

In every country there is found a sum of money (that is, of circulating value, no matter whether coin or paper) proportioned to the trade and industry of it. How this sum is determined, and how it is made to augment and diminish in proportion to industry, we have already explained in the 26th chapter of the second book: we are now to examine some of the consequences which result from the accidental stagnation of any part of it to the prejudice of alienation; and we must shew how the loan upon interest is the means of throwing it again into circulation.

There are in every state some who spend more, and some who spend less than their income. What is not spent must stagnate; or must be lent to those who spend more than the produce of their own funds. Were the first class found so to preponderate, as to require more money to borrow than all that is to be lent, the consequence would be, to prevent the borrowing of merchants; to raise interest so high as to extinguish trade; and to destroy industry; and these resources coming to fail, foreign commodities would be brought in, while exportation would be stopped, money would disappear, and all would fall into decay.

This, I believe, is a case which seldom happens; because the rise of interest (as states are now formed) has so much the effect of depreciating the value of every species of solid property, that spendthrifts are quickly stripped of it, by the growing accumulation of that canker worm, interest; their ruin terrifies many from following so hurtful an example, and their property falling into the hands of the other class, who spend less than their income; these new possessors introduce, by their example, a more frugal set of manners. This may be the case in countries where trade and industry have been introduced; and where the operations of credit have been able to draw into circulation a large quantity of solid property, according to the principles deduced in the chapter above referred to. But in nations of idleness, who circulate their coin only, and who are deprived of the resource of credit; high interest prevents them from emerging out of their sloth, and the little trade they have, continues to produce great profits, which are incompatible with foreign commerce: this may, indeed, make the coin they have to circulate for home-consumption, but it can bring no augmentation of wealth from abroad.

On the other hand, when trade and industry flourish, and when a monied interest is formed, in consequence of the melting down of solid property, and still more in consequence of a State's contracting great debts; were the money-lenders to attempt to raise the rate of interest to the standard of the spendthrift, the demands of trade, etc, would soon be cut off: the stagnation would then swell so fast in their hands, that it would in a manner choak them, and in a little time interest would fall to nothing. Whereas by contenting themselves with the standard of trade, the largest supplies (provided for the borrowers) easily find a vent, without raising the rate of interest so high as to be hurtful to any interest within the state.

Add to this, that the advantage of realizing, into lands, so unstable a property as money, must naturally throw the proprietors of the money into a competition for the lands which dissipation brings to market; thus, by rising the value of lands, the monied men, with their own hands, defeat the consequences of the dissipation of spendthrifts, and hurt their own interest, to wit, the rise of the price of money. From a combination of these circumstances, lenders become obliged to part with their money at that rate of interest which is the most consistent with that good of commerce.

We have hitherto preserved our combinations as simple as possible. We have suggested no extrinsic obstacle to borrowing and lending. If money be to be lent, and if people be found who incline to borrow, we have taken it for granted, that circulation will go on; and that the stagnations in the hands of the lenders, will find a ready vent by the dissipation of the other class: we must now make still a step farther.

The spendthrifts must have credit; that is, they must have it in their power to repay with interest what they have borrowed: any impediment to credit, will have the effect either of diminishing the demand for money, and consequently of lowering the rate of interest, or of introducing unlawful usury. If we suppose the rate of interest well determined, and usury prevented by a regular execution of good laws, it is very certain, that a statesman by hurting the credit of extravagant people, will keep the rate of interest within due bounds.

If, therefore, the laws of any country, in our days, appear defective, as to the regulation of securities for money lent upon the mortgage of solid property, while the rate of interest stands higher than is consistent with the good of trade, and with public credit; we should be slow in finding fault with such a defect. The motives of statesmen lie very deep; and it is not always proper to explain them. An example of such defects are entails upon lands, and the want of proper registers for mortgages.

Did the dissipation of landed men tend to promote foreign trade, such clogs would be pernicious: but if the tendency of dissipation be to promote domestic luxury only, and thereby to raise the price of labour and industry, the case is widely different. This observation is merely incidental: our object at present extends no farther than to shew, that the dissipation of landed men, and the credit they have to borrow money, influence, not a little, the rate of interest in every modern state.

These are the general principles which, arising from things themselves, without the interposition of a statesman, tend to regulate the rate of interest in commercial nations.

Chapter V: Of the Regulation of Interest by Statute

From the principles deduced the preceding chapter, we have seen how, without the aid of any law, the interest of money, in a trading nation, becomes determined, from natural causes, and from the irresistible effects of competition.

But as there is no country in the world so entirely given to commerce, as not to contain great numbers of people, who are totally unacquainted with it, some regulation with respect to the rate of interest becomes necessary in order to restrain, on one hand, the frenzy of those, who, listening to nothing but the violence of their passions, are willing to procure money at any rate for the gratification of them, let the political consequences of their dissipation prove ever so hurtful to the state; and on the other, to protect those who, from necessity, may be obliged to submit to the heavy oppression of their usurious creditors.

Laws restraining usury, are directly calculated for the sake of those two classes, not engaged in commerce, and indirectly calculated for commerce itself; which otherwise might receive a wound through their sides.

In entering upon the subject mentioned in the title of this chapter, I think we may agree in this, that hitherto all regulations made concerning interest, have been calculated either for bringing it down, or for preventing its rise. The distress which may come upon a state, by its falling too low, is a phaenomenon which has not yet manifested itself in any modern state, by any symptom I can at present recollect.

Now if it be true, as I think it has been proved, that the operations of demand and competition work irresistible effects in determining the rate of interest in commercial states; the statesman who is about to make a regulation, must keep these principles constantly in his eye.

If we examine the writings of those who have treated of this subject with intelligence (among whom, I think, Sir Josiah Child has a right to stand in the foremost rank), we shall find very little attention bestowed upon that most necessary and ruling principle, competition.

He lays it down as an axiom, that low interest is the soul of trade, in which he is certainly right; but he seems to think, that it is in the power of a legislature, by statute, to bring interest down to that level which is most advantageous to trade; and in this I differ from him. I must do him the justice to say, that he no where directly affirms this proposition; but by suggesting none of the inconveniences which may follow upon an arbitrary reduction of interest by statute, he leaves his reader at liberty to suppose, that the lowering of it is solely in the hands of a statesman.

It is very plain, from the history he has given us of the successive rates of interest in England, from 10 to 6 per cent that without the interposition of statutes, such diminutions would not, in that period, have taken place, from the principle of competition: but I am not so clear that, at this time, when trade is so well understood, and credit so generally established in many nations of Europe, that a like administration would work effects equally advantageous.

It is with great diffidence I presume to differ from Child upon this subject; and I find a sensible satisfaction in perceiving that upon the whole, my principles bring me so very near to his sentiments on this matter.

The strong arguments in favour of Child's opinion, are grounded upon facts. He says, that when interest was brought down by statute, 1625, from 10 to 8 per cent instead of producing any bad effect, it had that of bringing it still lower immediately afterwards; and the same thing happened, anno 1650, when it was reduced a second time by statute, from 8 to 6 per cent, at which rate it stood at the time he wrote. These facts I give credit to, and shall now account for them, from the consequences of sudden revolutions.

When a law is made for the reduction of interest, all debtors immediately profit by it. Upon this, the creditors must either submit, or call in their capitals. If they submit, land immediately rises in its value. If they call in their capitals, they must have an outlet for lending them again, beyond the limits of the jurisdiction of the legislature. Now this outlet was not then to be found; because credit was no where well established, except in Holland, where interest was still lower.

They were, therefore, obliged to submit, and thus interest was violently brought down by statute; and a great advantage resulted from it to the commercial interests of England.

The subsequent fall of interest, in the natural way, is thus easily accounted for.

The consequence of lowering the interest, was, that the price of land rose several years in purchase: the landed men, who had long groaned under the heavy interest of 10 per cent finding their lands rise from 12 years' purchase to 15, upon reducing the interest to 8 per cent sold off part of their lands, and cleared themselves. The natural consequence of this was, to make money regorge in the hands of the monied men; to diminish the number of borrowers; and consequently, to bring the rate of interest still lower.

One sudden revolution produces another. When interest is brought down by statute, the price of land must rise by a jerk; and landed men will suddenly profit of the change in their favour. When it falls gently, by a natural revolution in the state of demand, the effects are more insensible; the sharper sighted only profit of it; others, from expectation of a still greater rise in the price of their lands, neglect to sell in the proper point of time; and may perhaps be disappointed from a new fluctuation in favour of money. This is at present actually the case in Great Britain, since the peace of 1762. I write in 1764.

These facts speak strongly in favour of Child's opinion, namely, that it is expedient to have recourse directly to the statute, whenever there is a prospect of advancing the interests of trade by a reduction of interest.

It is impossible to reply to matters of fact: all, therefore, I have to allege in favour of my own opinion, is, that it is more consistent with the very principles in which both Child and I agree; it implies no sudden revolution, and will, in a short time, operate the same effect.

The method of proceeding, according to my principles, is shortly this:

Since it is agreed on all hands, that low interest is the soul of trade, and the firmest basis of public credit; that it rises in proportion to the demand of borrowers, and sinks in proportion as money is made to regorge in the hands of the monied interest;

The statesman should set out by such steps of administration as will discourage borrowing in those who employ their money in prodigality and dissipation, as far as may be consistent with the interest of the lower classes employed in supplying home consumption, according to the principles laid down in the second book. He should abstain from borrowing himself, and even from creating new outlets for money, except from the most cogent motives. By this he will, in a short time, gently reduce the rate of interest. Then by statute he may bring it down a little, but not so very low as the foregoing operations may have reduced it; contenting himself with having farther restricted the extent of the ordinary fluctuations.

As for example: let us suppose interest limited by law to 5 per cent. and that by good management the state may be enabled to borrow easily at 3 per cent. I believe there would result a notable advantage, in reducing the legal rate to 4 per cent and were it brought down to 3 per cent there might follow a very great inconvenience to landed men, in case a war should suddenly occasion a revolution in favour of money.

The difference then between Child and me, is, that I am more scrupulous than he, in introducing restraint into political economy; and my only reason against applying the statute, as he proposes, is for fear of the immediate bad effects which might follow (in many ways impossible to be foreseen) upon a sudden and violent revolution, in a point so excessively delicate as public credit.

In his days, credit was not so well established, nor was it stretched as at present: it was more accustomed to violent shocks, and could bear a rougher treatment. But in order to come the better to a thorough knowledge of this matter, let us examine what might be the consequence, if Great Britain should, at this time, bring down, by statute, the rate of interest below the level of the stocks, which I take to be the best rule for determining the present value of money; and this is also the best method of examining the expediency of Child's method of reducing interest, under the present state of all our political circumstances.

Chapter VI : What would be the Consequence of reducing, by a British Statue, the legal Interest of Money below the present level of the Stocks?

When Great Britain borrows money upon the public faith, the rate of interest is always stipulated, and these stipulations must be religiously fulfilled, or credit will be at an end.

The regulations then proposed to be made, must refer to contracts of loan entered into by private parties only.

The current value of money, I think, is best to be determined by the price of stocks. If a 4 per cent sells at par, money may be said to be then at 4 per cent. If the same stock fall to 89, then the value of money rises to near 4 1/2: if the same stock rise to 114, then the value of money falls to about 3 1/2; and so in proportion.

According, therefore, as stock is found to rise, the price of money falls, and vice versa.

Suppose, then, the price of money to be at 4 per cent and that government should pass a law, forbidding any man to lend at above 3 per cent what would be the consequence? This is exactly the expedient proposed by Child: money then was at 6 per cent and he proposes, by a law, to bring it, all at once, to 4 per cent without alleging that money was then commonly got by private convention at so low a rate.

Would not the consequence be, that the creditors of private people would demand their money, in order to get 4 per cent in buying stock, and would not this additional demand for stocks make them rise? I answer in the affirmative, unless money could be employed abroad, so as to produce at least 4 per cent to the lenders, free of all charge of commission, etc. If it could not, I have little doubt, but that money would soon fall to the legal interest of 3 per cent land would rise to 40 years purchase; and landed men would profit of the rise, as Child says was the case in his time. The whole inconvenience would be limited to the immediate effects of the sudden revolution; which would occasion so great a demand upon the landed interest for the capitals due by them as to reduce them to an utter incapacity of answering it. This might be, in some measure, prevented, by a clause in the act, allowing a certain time for the liquidation of their debts. But who will pretend to foretell the immediate consequences of so great a stagnation of credit, and borrowing on land security? The purses of all monied people, would, for some time at least, be fast shut against their demand. What a shock again, would this be to all inland trade, what a discouragement to all the manufacturing interest, what distress upon all creditors for accounts furnished, and upon those who supply daily wants! I think, that although in a year or two, the first effects might come to disappear, and a notable advantage result, in the main, to the commercial interest of Great Britain, yet the distress in the interval might prove so hurtful, as to render it quite intolerable. The common people who live by the luxury of the rich, in the city of London, and who are constantly actuated by the immediate feelings of present inconveniences, might lose all patience; and being blown into a ferment, by the address of the monied interest (whose condition would be made to suffer by the scheme) might throw the state into confusion, and even impress the nation with a belief, that high interest for money, instead of being hurtful, was essential to their prosperity.

I have said above, that if we suppose that the money drawn from debtors, could not be placed abroad, free of all deductions, at a rate equal to the then value of money (supposed for the sake of an example, to be at 4 per cent), then money would fall to 3 per cent and the stocks would rise in proportion.

But let us suppose (what perhaps is the matter of fact) that the extensive operations of trade and credit, do actually fix an average for the price of stocks, from the value of money in other nations in Europe. Would not then the consequence of bringing down the rate of legal interest, below this level, be, to send out of the kingdom all the money now circulating on private security, real and personal? Would not this destroy all private credit at one blow? Would it not have the effect of preventing, among individuals, the loan upon interest altogether? What would become of the bank of England, and all other banks, whose paper in circulation is all in the hands of private people? Is not every man who has a bank note, a creditor on the bank? And would not the same interest which moved other creditors to exact their debts, under such circumstances, also move many holders of bank notes to demand payment of them? Would not a run of this nature, for a few weeks only, throw the whole nation into the most dreadful distress? May we not even suppose, that upon such an occasion, the monied interest (from a certainty of disappointing the intention of government in making the law) might form a concert among themselves to lock up their money, even although it should remain dead in their hands for a few months? What would then become of the improvement of land? Is there an industrious farmer any where to be met with, who does not borrow money, which he can so profitably turn to account upon his farm, even though he receive it at the highest legal interest? These and many more inconveniences might manifest themselves, were government to force down the value of money, beyond the ordinary operations of demand and competition: and to what purpose have recourse to authority, when it is most certain, that without any such expedient the same end may be compassed?

If it be true, as I believe it is, that the funds, or public debts of a state where credit is well established, are commonly negotiated abroad; there must, from such negotiations result an average for the value of money, by the operations of credit over the commercial world: and if it be true, that no law can be framed so as to restrain mercantile people, and those who trade in money, from turning it to the best account; then all that should be proposed by government, is, to preserve the value of it at home, within this standard. For which purpose, nothing more is necessary than to prevent the competition of the dissipating class of inhabitants, from disturbing the rate which commerce may establish from time to time. This is accomplished by the methods above hinted at, and which in the next chapter shall be more largely insisted on. If, by prudent management, the conventional rate of interest, can thus be brought below the legal, then there may be no harm in diminishing the latter by statue, not however quite so low as the conventional standard; but so as to leave a reasonable latitude for gentle fluctuations above it. From what I have said, I still think I had reason to object to Child's plan for forcing down the interest of money by statute: and had he lived to the present time, I am persuaded he would have come into this opinion.

Chapter VII : Methods of bringing down the Rate of Interest, in Consequence of the Principles of Demand and Competition

I hope the arguments used in the foregoing chapter will not be construed as an apology for the high interest of money.

I entirely agree with Sir Josiah Child, that low interest is the soul of trade; the most active principle for promoting industry, and the improvement of land; and a requisite, without which it is hardly possible that foreign commerce can long be supported.

This proposition I take to be at this time universally admitted to be true; and did there remain, concerning it, the least doubt in the mind of any one, the writings of many, much better qualified than I can pretend to be, and among the rest those of the author just now cited, are sufficiently capable to remove it. I shall not therefore trouble my reader with a chapter upon this head, but only observe, that the terms high and low are constantly relative. Here the relation must be understood to regard other states, because when we speak of a rate of interest, we are supposed to mean something general in the country we are speaking of: accordingly, if we could suppose that, within the same state, the rate of interest should be lower in one city than any where else, this circumstance would give an advantage to such a city in all its mercantile operations.

I must farther observe, for the sake of connecting this part of our subject with our general plan, that the low interest for money is most essential to such states as carry on the most extensive foreign commerce.

In the infancy of industry, and before trade comes to be established, it is very natural that the coin of the country should be found in a great measure locked up in treasures: high interest tends to bring it forth, and in this respect works a good effect.

In proportion as alienation augments, money may be multiplied, by the melting down of solid property, as has been explained; and then the business of a statesman will be to contrive expedients for bringing the rate of it as low as possible, in order to support foreign trade, and to rival all neighbouring nations, where interest is higher. When foreign trade again comes to decline, from the multiplication of abuses introduced by luxury, low interest still continues to be useful, for supporting public credit, so necessary for defending a nation against her enemies.

If money consisted merely in the precious metals, which are not to be found in every country, but must be purchased with the produce of industry, and brought from far; and if no other expedient could be fallen upon to supply their place for the uses of circulation; then the possessors of these metals would in a manner be masters to establish for the use of them what rate of interest they thought fit.

But if this be not the case, and if money can be made of paper, to the value of all the solid property of a nation, (as far as occasion is found for it, by the owners of that property,) the use of the metals will be in a manner reduced to that of serving as a standard, for ascertaining the value of the denominations of money of accompt; perhaps for facilitating the circulation of small sums, and for paying a balance of trade to other nations.

When this comes to be the case, a statesman has it in his power to increase or diminish the extent of credit and paper money in circulation, by various expedients, which greatly influence the rate of interest.

The progress of credit has been very rapid since the beginning of this century. This has been almost entirely owing to the mechanical contrivances of trading men. Lawgivers have hitherto had but imperfect notions concerning the nature of it; and there still remains, in the womb of nature, some mighty genius, born to govern a commercial nation, who alone will be able to set it on its true principles. Let us in the mean time speculate concerning them.

We have said, and every one feels, that interest falls in proportion to the redundancy of money to be lent.

Now what is this money but property, of one kind or other, thrown into circulation? I speak of trading nations, who are not confined to the quantity of their specie alone.

When a man of property wants money, may he not go to a bank, which lends upon mortgage, and by pledging his security, receive money, which is in the same instant created for his use? Do not those notes circulate as long as they are found necessary for carrying on the affairs of the nation? that is to say, the accompts of debtors and creditors of all denominations; and as soon as the quantity of them exceeds this proportion, they stagnate, and return on the debtors in them, (the bank,) who is enabled to realize them, because the original security is still in their hands, which was at first pledged when the notes were issued. This realization is commonly made in the metals; because they are the money of the world: they are real and true riches, as much as land; and they have this advantage over land, that they are transportable everywhere.

Now, does it not appear evident, that what we have been describing is a round-about operation, which it is possible to shorten?

I beg of my reader, to attend to one thing; namely, that I am not here treating of, or proposing a plan, but labouring to deduce principles in an intricate subject.

I say, when landed men go to such a bank, and receive paper for a land security, that this operation may be shortened.

Do not the notes he gets stand (though this be not expressed) upon the security of his land? Now, can any man assign any other reason but custom, why his own notes, caring expressly in their bosom the same security, might not be issued, without his being obliged to interpose the bank between the public and himself: And for what does he pay this interest? Not because he has gratuitously received any value from the bank, since in his obligation he has given a full equivalent for the notes; but the obligation he has given carries interest, and the notes carry none. Why? Because the one circulates like money, the other does not. For this advantage, therefore, of circulation, not for any additional value, does the landed man pay interest to the bank.

Had landed men, and not merchants, invented this method of turning their property into circulation, and had they been all assembled in one body, with a legislative authority, I imagine they would have had wit enough to find out that a land bank was a thing practicable in its nature.

Suppose they should agree that all their lands should be let by the acre, and that land property should be esteemed at a certain number of years purchase, in proportion to the rate of interest at the time, where would be the great difficulty in paying in lands?

This is merely a hint, to which a thousand objections may be made, as matters stand: all I say, is, that there is nothing here against principles; and though inconveniences might result to the landed interest, in every way such a plan could be laid down; yet still these inconveniences would hardly counterbalance that of landed men's being obliged to pay interest for every penny they borrow.

It is demanded, what advantage would result to the nation from such a regulation?

I answer, that by it all the borrowings of landed men would be struck out of the competition at the money-market. The monied interest alone would borrow among themselves for the purposes of trade, (for monied men do not borrow to squander,) and landed men would consequently pay with their own paper, in every case, where now they borrow in order to pay. Thus interest would be regulated by the demands of trade, and the rate of it would not be disturbed by the competition of spendthrifts.

Who can say how far the consequences of such a scheme might reach? Might not landed men begin in time to issue notes by way of loan, at a very inconsiderable interest? But I am not disposed to carry my speculations farther: perhaps what has been said may appear sufficiently aerial.

If a statesman shall find every modification of this idea impracticable; either from his own want of power, or of skill, or, which is more probable, from the opposition of the monied interest; he must take other measures for striking out, as much as possible, the competition of spendthrifts in the money-market. Entails, and lame securities, are good expedients; though they are productive of many inconveniences. His own frugal economy in state affairs will go much farther than any such trifling expedients.

Did a nation enjoying peace, although indebted perhaps 140 millions sterling, begin by paying off but 2 per cent of their capital yearly, besides the current interest; while no neighbouring state was borrowing any; what would interest fall to in a short time! It may be answered, that the consequence would be, to enrich other nations; because the money regorging at home, would be sent abroad. To which I reply, by asking how any state can be enriched by their borrowing? And in what does such lending to foreigners differ from the nation's paying off their foreign creditors? Will not the return of interest from abroad compensate, pro tanto, the sums sent out for the like purpose?

But if it be said, that the consequence will be to enable other nations to bring down their own rate of interest; I allow it to be so; and so much the better, as long as it remains proportionally lower with us; which it must do, as long as we can lend abroad. We have said, and I believe with truth, that as credit is now extended, a general average is struck every where upon the value of money well secured, consequently, the lower that interest is reduced abroad, the lower still will it remain at home, as long as merchants and exchangers do subsist.

From this circumstance of the average on the rate of interest, the Dutch must, I think, have lost the great advantage they formerly enjoyed, from the low rate of it in Holland, relatively to other nations.

In Child's time, the Dutch were familiarly buying up sugars in London, above the price paid by English sugar-bakers; and, notwithstanding the additional freight and charges, they grew rich by their trade, while the others were hardly making any profit. This he accounts for from the low rate of their interest. He supposes both Dutch and English to have carried on this trade with borrowed money; for which the first paid 3 per cent and the other 6 per cent.

But at present, were it possible to get 6 per cent for money in London, what Dutchman would lend his father a shilling at 3 per cent? The English stocks are as currently bought and sold, nay, all the stockjobbing tricks are practised with the same subtlety at Amsterdam as in Change-Alley: from which I conclude, that a great part of the advantage of low interest is now lost to that nation; and I conclude farther, that it is the common interest of all trading nations to bring interest as low as possible every where.

Another cause of high interest proceeds from certain clogs laid upon circulation, which flow merely from custom and prejudice. Of this nature is the obligation laid upon debtors to pay in the metals, nothing but coin being a legal tender.

The only reason for such a regulation was the precariousness of credit in former times. Were all the circulating paper in a nation secured by law, either upon the lands or revenue of the country appropriated for that purpose, there could be no injustice or inconvenience in making paper (so secured) a legal tender in all payments. Again, how extraordinary must it appear to any reasonable man, that the same paper which passes on one side of a river, running through the same country, should not pass on its opposite bank?

The reason of this is indeed very plain: the subaltern jurisdictions on each side are different; and the debtors in the paper are different: but if the paper of both stood upon a security equally good, what is to hinder both to be received as a legal tender in all payments over the kingdom? Should not little private objects of profit among bankers (who are the servants of the state, and who are so well paid for their service) be over-ruled, when the consequences of their disputes are found to be so hurtful? But of this more, when we come to speak of banks.

The only occasion where a large quantity of coin is necessary in the liquidation of paper, is for payment of the balance of trade with foreign nations. Of this also we shall treat more at large, when we come to the doctrine of exchange. But surely nothing can be so ill judged, as to create an imaginary balance within the same state; or rather, to permit money-jobbers to create it; at the expence of raising interest, and hurting trade, in the very places where it stands most in need of encouragement.

From these principles, and others which naturally flow from them, may a statesman steer a very certain course, towards bringing the rate of interest as low as the prosperity of trade requires, or the principles of double competition between borrowers and lenders will permit.

Chapter VIII: Is the Rate of Interest the certain measure of the State of Commerce?

Some political writers are fond of every expedient to reduce within a narrow compass many questions, which being involved in combinations, cannot be reduced to one principle. This throws them into what I call systems; of which we have an example in the question now before us.

There is nothing more difficult than to determine how far commerce runs favourably, and how far unfavourably for a nation. This would not be the case, were the rate of interest the certain measure of it. I have found it however advanced, that nothing more is necessary to be known, in order to estimate the relative profits upon the foreign trade of two nations, than to compare the common rate of interest in both, and to decide the preference in favour of that nation where it is found to be lowest.

We may say concerning this proposition, as concerning the course of exchange; that the lowness of interest and of the price of exchange are both exceedingly favourable to trade; but they are no adequate measure of the profits arising from it.

The best argument in favour of this opinion with regard to interest is, that the nation which sells the cheapest at foreign markets is constantly preferred; and, consequently, where the use of money is the lowest, the merchant can sell the cheapest.

I answer, that this consequence would be just, were all trade carried on with borrowed money, were the difference of the price of the materials or first matter, the ease of procuring them, the promptitude of payments, the industry of the manufacturer, and his dexterity, all reckoned for nothing. But such advantages are frequently found in these articles, as to be more than sufficient to counterbalance the additional interest which may be paid for the money employed in trade. This is so true, that we see the dexterity alone of the workman (living in an expensive capital, where the charge of living may be double of what it is in the country) enabling him to undersell his competitors every where: the same may be true with regard to the other articles. Farther, how absurd is it to say, that all trade is carried on with borrowed money? A very inconsiderable part of trade is carried on with borrowed money, in any country in Europe; and that part, which is carried on with borrowed money, is not so much clogged by the high rate of interest, as by want of punctuality in payments. A merchant who can turn his money in three months, borrows as cheaply at 6 per cent as another who turns his in six months, when he borrows at 3 per cent.

The object of trade is produce and manufacture. These are prepared for the market by farmers and tradesmen. Let us compare the value of them, when sold at market to the merchant, with the interest of the money borrowed by the farmers and tradesmen, in order to carry on their industry, and we shall find that the interest paid by them, bears hardly any proportion at all, to the value of what they produce. Example. A sheep borrows no money in order to produce wool; spinners and weavers borrow no money in order to enable them to spin and to weave. Thus the whole manufacture comes to market without any charge for interest.

Do we not see every day, that ingenious workmen, who obtain credit for very small sums, are soon enabled, by the means of their own industry, to produce a surprising value in manufactures, and not only to subsist, but to increase in riches? The interest they pay for the money borrowed is inconsiderable, when compared with the value, created (as it were) by the proper employment of their time and talents.

If it be said, that this is a vague assertion, supported by no proof; I answer, that the value of a man's work may be estimated by the proportion between the manufacture when brought to market, and the first matter. Nothing but the first matter, and the instruments of manufacture, can be considered as the objects of borrowed money; unless we go so far as to estimate the nourishment, and every expence of the manufacturer, and suppose that these are also supplied from borrowed money. To affirm this, would be turning arguments into cavil.

The object, therefore, of borrowed money for carrying on trade, is more relative to the merchant than to the manufacturer. Borrowing is necessary for collecting all this product and manufacture into the hands of merchants. This, no doubt, is very commonly the operation of credit: interest of money, here, comes in, to indemnify the giver of credit, for the use of his money: but this interest is due from the time only, when the borrower pays those from whom he collects, to the time he receives payment from those to whom he sells. This interval it is of the highest importance to the merchant to shorten. In proportion as it is long, and in proportion to the rate of interest, he must raise his profits; and in proportion as payments are quick and regular, and interest low, he may diminish them. Whether merchants do regulate their profits, in all commercial nations, according to the exact proportion of the respective rates of interest, and promptitude of payments among them; or whether these are determined by the circumstances of demand and competition in the several foreign markets where the trade is carried on, I leave to merchants to determine. All I shall remark is, that a well founded credit, and prompt payments, will do more service to trade, than any advantage trading men can reap from the different rate of interest in different countries.

It must not be concluded from this, that low interest is not a very great advantage to trade; all I contend for, is, that it is not the measure of it.

Another circumstance which puts nations, in our days, much more on a level than they were in former times, I have already hinted at. It is that general average which the great loads of national debts, and the extension of credit, through the several nations of Europe, who pay annually large sums of interest to their creditors, has established. Let me suppose the Dutch, for example, to have fixed, by placard, the rate of their interest at 3 per cent. I say, that as soon as the general average of interest comes to stand above this rate, from the price of public funds in England and France, we may safely conclude, that their trade can no longer be carried on with any very considerable sum of money borrowed at 3 per cent. The consequence then must be, to send the money which regorges in the hands of the frugal Dutch, into other countries, where it can produce a better return, exclusive of all expences of remitting and drawing. What the consequences of this lending to foreigners may be to Holland, shall be afterwards examined.

To conclude; I reckon it will be found, that what had led some to believe that low interest is the measure of commerce, has been owing to this; that in some of the most commercial countries and cities interest has been found to be lower than in great kingdoms: but this, I imagine, is entirely owing to the frugality of their manners, which cuts off the borrowing of the rich for the sake of dissipation. When this is accomplished, trade alone will absorb the stagnations of the frugal, and the price of interest will fall to that rate which is the best proportioned to the profits upon commerce; but this also will be less and less the case every day, in proportion to the credit and circulation of public funds in different nations.

Chapter IX : Does not Interest fall in Proportion as Wealth increases?

I answer in the affirmative: provided it be supposed that dissipation do not increase in proportion to the wealth. Now in a general proposition, such as this which stands at the head of our chapter, this very necessary proviso is apt to be overlooked, and thus people are led to error. The manners of a people, not their external circumstances as to riches, are that which renders them frugal or extravagant. What, therefore, depends upon the spirit of a people, cannot be changed, but in consequence of a change of that spirit.

If the rate of interest be high, from a taste of dissipation, let foreign trade throw in what loads of money it may, interest will stand high, until manners do change. Every class of a people has their peculiar spirit. The frugal merchant will accumulate wealth, and the prodigal lord will borrow it. In this situation, internal circulation will be rapid, and lands will shift hands. If this revolution should prove a corrective to dissipation, by vesting property in those who have contracted a firm habit of frugality, then an augmentation of wealth may sink the rate of interest. But if, on the contrary, the laws and manners of the country do distinguish classes by their manner of living, and mode of expence, it is ten to one but the industrious and frugal merchant will put on the prodigal gentleman, the moment he gets into a fine country seat, and hears himself called your Honour. In certain countries, the memory of past industry carries a dreg along with it, which nothing but expensive living has power to purge away.

Let this suffice at present upon the subject of interest: it is so connected with the doctrine of credit, that it will recur again at almost every step as we go along.


1. In France particularly. 2. The terms regorging and stagnating, are the best I can fall upon to express the idea here defined; and therefore I shall take the liberty to use them in this sense wherever I shall have occasion to speak concerning a superfluity of coin or of money.

Part II: Of Banks

Chapter I: Of the various Kinds of Credit

We have already pointed out the nature of credit, which is confidence; and we have deduced the principles which influence the rate of interest, the essential requisite for its support.

We come now to treat of domestic circulation; where we are to deduce the principles of banking. This is the great engine calculated for carrying it on.

That I may, with order, investigate the many combinations we shall here meet with, I must point out wherein banks differ from one another in point of policy, as well as in the principle upon which their credit is built.

If they be considered relatively to their policy, they may be divided into banks of circulation, and banks of deposit.

If they be considered relatively to the principles upon which their credit is built, they may be divided into banks upon private credit, banks upon mercantile credit, and banks upon public credit.

It is to this last division only I must attend, in the distribution of what is to follow; and therefore it is proper to set out by explaining what I understand by the terms I have here introduced.

First, private credit. This is established upon a security, real or personal, of value sufficient to make good the obligation of repayment both of capital and interest. This is the most solid of all.

Secondly, mercantile credit. This is established upon the confidence the lender has, that the borrower, from his integrity and knowledge in trade, may be able to replace the capital advanced, and the interest due during the advance, in terms of the agreement. This is the most precarious of all.

Thirdly, public credit. This is established upon the confidence reposed in a state, or body politic, who borrow money upon condition that the capital shall not be demandable; but that a certain proportional part of the sum shall be annually paid, either in lieu of interest, or in extinction of part of the capital; for the security of which, a permanent annual fund is appropriated, with a liberty, however, to the state to free itself at pleasure, upon repaying the whole; when nothing to the contrary is stipulated.

The solidity of this species of credit depends upon circumstances.

The difference between the three kinds of credit lies more in the object of the confidence, and the nature of the security, than in the condition of the borrower. Either a private man, a merchant, or a state, may pledge, for the security of a loan, a real or a moveable security, with an obligation to refund the capital. In this case, the obligation stands upon the solid basis of private credit.

Either a private man, a merchant, or a state, may strike out projects which carry a favourable appearance of success, and thereupon borrow considerable sums of money, repayable with interest. In this case, the obligation stands upon a mercantile credit.

Either a private man, a merchant, or a state, may pledge (for the security of money borrowed) a perpetual annual income, the fund of which is not their property, without any obligation to refund the capital: such obligations stand upon the principles of public credit.

I allow there is a great resemblance between the three species of credit here enumerated: there are however some characteristic differences between them.

First, in the difficulty of establishing and supporting them.

Private credit is inseparable, in some degree, from human society. We find it subsisting in all ages: the security is palpable, and the principles on which it is built are simple and easy to be comprehended. Public credit is but a late invention: it is the infant of commerce, and of extensive circulation. It has supplied the place of the treasures of old, which were constant and ready resources to statesmen in cases of public distress: the security is not palpable, nor readily understood, by the multitude; because it rests upon the stability of certain fundamental maxims of government. Mercantile credit is still more difficult to be established; because the security is the most precarious of any; it depends upon opinion and speculation, more than upon a determinate fund provided for repayment of either capital or interest.

Secondly, they differ in the nature of the security and object of confidence.

Private credit has a determinate object of confidence, viz. the real existence of a value in the hands of the debtor, sufficient to acquit both capital and interest. Public credit has the visible security of a fund appropriated for the perpetual payment of the interest. Mercantile credit depends wholly upon the integrity, capacity, and good fortune of the debtor.

The third difference is with regard to the ease of transfer.

All public debts stand generally on the same bottom. No part of the same fund is better than another: the price of them is publicly known, and the securities are laid in the most convenient way for transfer, that is, for circulation, without consent of the debtor. This is far from being the case in private securities. Nor is it the case in the mercantile, except in bills payable to order or to bearer; in which cases alone, the creditor can effectually transfer without the consent of the debtor.

The fourth difference is discovered in the stability of the confidence.

Nothing can shake private credit, but an appearance of insolvency in the very debtor. But the bankruptcy of one considerable merchant, may give a shock to mercantile credit all over Europe: and nothing will hurt public credit, as long as the stipulated interest continues regularly to be paid, and as long as the funds appropriated for this payment remain entire.

From what has been said, I hope the three species of credit have been sufficiently explained; and, from what is to follow, we shall feel the utility of this distribution.

Chapter II : Of private Credit

Private credit is either real, personal, or mixed.

Real security, every body understands. It is the object of law, not of politics, to give an enumeration of its different branches. By this term, we understand no more than the pledging an immoveable subject for the payment of a debt. As by a personal security we understand the engagement of the debtor's whole effects for the relief of his creditor. The mixed, I have found it necessary to superadd, in order to explain with more facility, the security of one species of banks. The notes issued by banks upon private credit, stand upon a mixed security: that is, both real and personal. Personal, as far as they affect the banker, and the banking stock pledged for the security of the paper: and real, as far as they affect the real securities granted to the banker for the notes he lends, which afterwards enter into circulation.

The ruling principle in private credit, and the basis on which it rests, is the facility of converting, into money, the effects of the debtor; because the capital and interest are constantly supposed to be demandable. The proper way, therefore, to support this sort of credit to the utmost, is to contrive a ready method of appreciating every subject affectable by debts; and secondly, of melting it down into symbolical or paper money.

In former times, when circulation was inconsiderable, the scheme of melting down the property of debtors, for the payment of creditors, was impracticable; and accordingly we see that capitals secured on land property were not demandable. This formed another species of credit, different from any we have mentioned; which differed from public credit in this only, that the solid property producing the income, was really in the hands of the debtor; whereas the fund which produces the public revenue is not in the hands of the state. This subdivision we have omitted, as its basis, in both cases, rests solely upon the regular payment of the interest. Of this nature are the contracts of constitution in France, and the old investments of annual rent in Scotland. There are few nations, I believe, in Europe, where some traces, at least, of this kind of security do not remain.

In order, then, to carry private credit to its greatest extent, all entails upon lands should be dissolved; all obligations should be regularly recorded in public registers; the value of all lands should be ascertained, the moment any security is granted upon them; and the statesman should interpose between parties, to accelerate the liquidation of all debts, in the shortest time, and at the least expence possible.

Although this method of proceeding be the most effectual to secure, and to extend private credit, yet it is not, at all times, expedient to have recourse to it: this has been abundantly explained in the 27th chapter of the second book; and therefore I shall not here interrupt my subject with a needless repetition.

Chapter III : Of Banks

In deducing the principles of banks, I shall do the best I can to go through the subject systematically.

I have divided credit into three branches, private, mercantile, and public. This distribution will be of use on many occasions, and shall be followed as far as it will go, consistently with perspicuity: but, as has been often observed, subjects of a complex nature cannot be brought under the influence of a few general principles, without running into the modern vice of forming systems, by wire-drawing many relations in order to make them answer.

The great operations of domestic circulation may be better discovered by an examination into the principles upon which we find banking established, than by any other method I can contrive. It has been by inquiring into the nature of those banks which are the most remarkable in Europe, that I have gathered the little knowledge I have of the theory of domestic circulation. This induces me to think that the best way to communicate my thoughts on this subject, is to lay down the result of my inquiries relatively to the very object of them.

After comparing the operations of different banks in promoting circulation, I find I can divide them, as to their policy, into two general classes, viz. those which issue notes payable in coin to bearer; and those which only transfer the credit written down in their books from one person to another.

Those which issue notes, I call banks of circulation; those which transfer their credit, I call banks of deposit.

Both indeed may be called banks of circulation, because by their means circulation is facilitated; but, as different terms serve to distinguish ideas different in themselves, these I here employ will answer the purpose as well as any others, when once they are defined; and circulation undoubtedly reaps far greater advantages from banks which issue notes transferable every where, than from banks which only transfer their credit on the very spot where the books are kept.

I shall, according to this distribution, first explain the principles upon which the banks of circulation are constituted and conducted, before I treat of the others.

This will lead me to avail myself of the division I have made of credit, into private, mercantile, and public; because, according to the purposes for which a bank is established, the ground of confidence, that is, the credit of the bank, comes to rest upon one or other of them.

In countries where trade and industry are in their infancy, credit can be but little known; consequently, they who have solid property, must find great difficulty in turning it into money; without money, again, industry cannot be carried on, as we have abundantly explained in the 26th chapter of the second book; consequently without credit the whole plan of national improvement will be disappointed.

Under such circumstances, it is proper to establish a bank upon the principles of private credit. This bank must issue notes upon land and other securities, and the profits of it must arise from the permanent interest drawn for the money lent.

Of this nature are the banks of Scotland. To them the improvement of this country is entirely owing; and until they are generally established in other countries of Europe, where trade and industry are little known, it will be very difficult to set these great engines to work.

Although I have represented this species of banks, which I shall call banks of circulation upon mortgage, as peculiarly well adapted to countries where industry and trade are in their infancy, their usefulness to all nations, who have upon an average a favourable balance upon their trade, will sufficiently appear upon an examination of the principles upon which they are established.

It is for this reason that I have applied myself to reduce to principles the many operations of the Scotch banks, during the time they were in the greatest distress imaginable, from the heavy balance the country owed during the last years of the late war, and for some time after the peace in 1763. By this I flatter myself to do a particular service to Scotland, as well as to suggest hints which may prove useful, not to England only, but to all commercial countries, who, by imitating this establishment, will reap advantages of which they are at present deprived.

For these reasons, I hope the detail I shall enter into with regard to Scotland, will not appear tedious, both from the variety of curious combinations it will contain, as also from the lights it will cast upon the whole doctrine of circulation, which is the present object of our attention.

In countries where trade is established, industry flourishing, credit extensive, circulation copious and rapid, as is the case with England, banks upon mortgage, however useful they may prove for other purposes, would not answer the demands of the trade of London, and the service of government, so well as the bank of England.

The ruling principle of this bank, and the ground of their confidence, is mercantile credit. The bank of England does not lend upon mortgage, nor personal security: their profits arise from discounting bills; loans to government, upon the faith of taxes, to be paid within the year; and upon the credit cash of those who deal with them.

A bank such as that of England, cannot therefore be established, except in a great wealthy mercantile city, where the accumulation of the smallest profits amount, at the end of the year, to very considerable sums.

In France, under the regency of the Duke of Orleans, there was a bank erected upon the principles of public credit. The ground of confidence there, and the only security for all the paper they issued, were the funds appropriated for the payment of the interest of the public debts.

It is for the sake of order and method, that I propose to explain the principles of banking, according to this distribution. I must however confess, that although I represent each of the three kinds of banks as having a cause of confidence peculiar to itself, to wit, either private, mercantile, or public credit; yet we shall find a mixture of all the three species of credit entering into the combination of every one of them.

Banking, in the age we live, is that branch of credit which best deserves the attention of a statesman. Upon the right establishment of banks, depends the prosperity of trade, and the equable course of circulation. By them(1*) solid property may be melted down. By the means of banks, money may be constantly kept at a due proportion to alienation. If alienation increase, more property may be melted down. If it diminish, the quantity of money stagnating, wil1 be absorbed by the bank, and part of the property formerly melted down in the securities granted to them, will be, as it were, consolidated anew. Banks must pay, as agents for the country, the balance of their trade with foreign nations. Banks keep the mints at work; and it is by their means, principally, that private, mercantile, and public credit are supported. I can point out the utility of banks in no way so striking, as to recall to mind the surprising effects of Mr Law's bank, established in France, at a time when there was neither money or credit in the kingdom. The superior genius of this man produced, in two years time, the most surprising effects imaginable; he revived industry; he established confidence; and shewed to the world, that while the landed property of a nation is in the hands of the inhabitants, and while the lower classes are willing to be industrious, money never can be wanting. I must now proceed in order, towards the investigation of the principles which influence this intricate and complicated branch of my subject.

Chapter IV

Banks of circulation upon mortgage or private credit, are those which issue notes upon private security, payable to bearer on demand, in the current coin of the nation. They are constituted in the following manner.

A number of men of property join together in a contract of banking, either ratified or not by public authority, according to circumstances. For this purpose, they form a stock which may consist indifferently of any species of property. This fund is engaged to all the creditors of the company, as a security for the notes they propose to issue. So soon as confidence is established with the public, they grant credits, or cash accompts, upon good security; concerning which they make the proper regulations. In proportion to the notes issued in consequence of these credits, they provide a sum of coin, such as they judge to be sufficient to answer such notes as shall return upon them for payment. Nothing but experience can enable them to determine the proportion between the coin to be kept in their coffers, and the paper in circulation. This proportion varies even according to circumstances, as we shall afterwards observe.

The profits of the bank proceed from the interest paid upon all the money advanced by the bank, in consequence of credits given.(2*)

Out of these profits must be deducted, first, the charge of management; secondly, the loss of interest for all the coin they preserve in their coffers, as well as the expence they are put to in prodding it; and thirdly, the expence of transacting and paying all balances due to other nations.

In proportion, therefore, as the interest upon the money advanced by the bank in consequence of the securities, exceeds the loss of interest on the coin in the bank, the expence of management, and of prodding funds abroad to pay balances, in the same proportion is their profit; which they may either divide, accumulate, or employ, as they think fit.

Let it be observed, that I do not consider the original bank stock, or the interest arising from that, as any part of the profits of the bank. So far as it regards the bank, it is their original property; and so far as it regards the public, it serves for a collateral security to it, for the notes issued. It becomes a pledge, as it were, for the faithful discharge of the trust reposed in the bank: without such a pledge, the public could have no security to indemnify it, in case the bank should issue notes for no permanent value received. This would be the case, if they thought fit to issue their paper either in payment of their own private debts, or for articles of present consumption, or in a precarious trade.

When paper is issued by a bank for no value received, the security of such paper stands upon the original capital of the bank alone; whereas when it is issued for value received, that value is the security on which it immediately stands, and the bank stock is, properly speaking, only subsidiary.

I have dwelt the longer upon this circumstance, because many, who are unacquainted with the nature of banks, have a difficulty to comprehend how they should ever be at a loss for money, as they have a mint of their own, which requires nothing but paper and ink to create millions. But if they consider the principles of banking, they will find that every note issued for value consumed, instead of value received and preserved, is neither more or less, than a partial spending either of their capital, or profits on the bank. Is not this the effect of the expence of their management? Is not this expence paid in their notes? But did ever any body imagine that this expence did not diminish the profits of banking? Consequently, such expence may exhaust these profits, if carried far enough; and if carried still farther, will diminish the capital of the banking stock.

As a farther illustration of this principle, let me suppose, an honest man, intelligent, and capable to undertake a bank. I say that such a person, without one shilling of stock, may carry on a bank of domestic circulation, to as good purpose as if he had a million; and his paper will be every bit as good as that of the bank of England. Every note he issues will be secured on good private security; this security carries interest to him, in proportion to the money which has been advanced by him, and stands good for the notes he has issued. Suppose then that after having issued for a million sterling, all the notes should return upon him in one day. Is it not plain, that they will find, with the honest banker, the original securities, taken by him at the time he issued them; and is it not true, that he will have, belonging to himself, the interest received upon these securities, while his notes were in circulation, except so far as this interest has been spent in carrying on the business of his bank? Large bank stocks, therefore, serve only to establish their credit; to secure the confidence of the public, who cannot see into their administration; but who willingly believe, that men who have considerable property pledged in security of their good faith, will not probably deceive them.

This stock is the more necessary, from the obligation to pay in the metals. Coin may be wanting, upon some occasions, to men of the greatest landed property. Is this a reason to suspect their credit? Just so of banks. The bank of England may be possessed of twenty millions sterling of good effects, to wit, their capital; and the securities for all the notes they have issued; and yet that bank might be obliged to stop payment, upon a sudden demand of a few millions of coin.

Runs upon a bank well established, betray great want of confidence in the public; and this want of confidence proceeds from the ignorance the greatest part of men are in, with regard to the state of their affairs, and to the principles upon which their trade is carried on.

From what has been said, we may conclude, that the solidity of a bank which lends upon private security, does not so much depend upon the extent of their original capital, as upon the good regulations they observe in granting credit. In this the public is nearly interested; because the bank securities are really taken for the public, who are creditors upon them in virtue of the notes which circulate through their hands.

Chapter V : Such Banks ought to issue their Notes on private, not mercantile Credit

Let me, therefore, reason upon the example of two bankers; one issues his notes upon the best real or personal security; another gives credit to merchants and manufacturers, upon the principles of mercantile credit, which we have explained above; the notes of the one and of the other enter into circulation, and the question comes to be, which are the best? If we judge by the regularity of the payment of notes on presentation, perhaps the notes of the one are as readily paid as those of the other. If we judge by the stock of the two bankers, perhaps they may be equal, both in value and solidity; but it is not upon either of these circumstances that the question depends. The notes in circulation may far exceed the amount of the largest bank stock; and therefore, it is not on the original stock; but on the securities taken at issuing the notes, that the solidity of the two currencies is to be estimated. Those secured on private credit, are as solid as lands and personal estates; they stand upon the principles of private credit. Those secured on the obligations of merchants and manufacturers, depending upon the success of their trade, are good or bad in proportion to such success. Every bankruptcy of one of their debtors, involves the bank, and carries off either a part of their profits, or of their stock. Which way, therefore, can the public judge of the affairs of bankers, except by attending to the nature of the securities upon which they give credit.

Chapter VI : Use of subaltern Bankers and Exchangers

Here it may be urged, that the great use of banks is to multiply circulation, and to furnish the industrious with the means of carrying on their traffic: that if banks insist upon the most solid sureties before they give credit, the great utility of them must cease; because merchants and manufacturers are never in a situation to obtain credit upon such terms.

This argument proves only, that banks are not, alone, sufficient for carrying on every branch of circulation. A truth which nobody will controvert. But as they are of use in carrying on the great branches of circulation, it is proper to prevent them from engaging in schemes which may destroy their credit altogether.

I have observed above, that this method of issuing notes upon private security, was peculiarly well adapted to countries like Scotland, where trade and industry are in their infancy.

Merchants and manufacturers there, have constant occasion for money or credit; and at the same time, they cannot be supposed to have either real or personal estates to pledge, in order to obtain a loan directly from the banks, who ought to lend upon no other security.

To remove this difficulty, we find a set of merchants, men of substance, who obtain from the banks very extensive credits upon the joint real and personal security of themselves and friends. With this assistance from the bank, and with money borrowed from private people, repayable on demand, something below the common rate of interest, they support the trade of Scotland, by giving credit to the merchants and manufacturers.

To this set of men, therefore, are banks of circulation upon mortgage to leave this particular branch of business. It is their duty, it is the interest of the country, and no less that of banks, that they be supported in so useful a trade; a trade which animates all the commerce and manufactures of Scotland, and which consequently promotes the circulation of those very notes upon which the profits of the banks do arise.

These merchants are settled in all the most considerable towns: they are well acquainted with the stock, capacity, industry, and integrity of all the dealers in their district: they are, many. and by this are able to go through all the detail which their business requires; and their profits, as we shall see presently, are greater than those of banks, who lend at a stated interest.

The common denomination by which they are called in Scotland, is that of bankers; but, to avoid their being confounded with the bankers in England (whose business is very different) we shall, while we are treating of the doctrine of banks, call them by the name of exchangers, since their trade is principally carried on by bills of exchange.

As often as these exchangers give credit to dealers in any way, they constantly state a commission of 1/2 per cent or more, according to circumstances, over and above the interest of their advance; these are profits, which greatly surpass those of any bank. One thousand pounds credit given by a bank, may not produce ten pounds in a year for interest: whereas were a like credit given by a banker, to a merchant, who draws it out, and replaces it forty times in a year, there will arise upon it a commission of 20 per cent or 200 l.

This set of men are exposed to risks and losses, which they bear without complaint, because of their great profits; but it implies a detail, which no bank can descend to.

These exchangers break from time to time; and no essential hurt is thereby occasioned to national credit. The loss falls upon those who lend to them, or trust them with their money, upon precarious security; and upon merchants, who make allowances for such risks. In a word, they are a kind of insurers, and draw premiums in proportion to their risks.

To this set of men, therefore, it should be left to give credit to merchants, as the credit they give is purely mercantile; and to banks alone, who give credit on good private security, it should be left to conduct the great national circulation, which ought to stand upon the solid principles of private credit.

From this example we may discover the justness of the distinction I have made between private and mercantile credit: had I not found it necessary, I should not have introduced it.

Chapter VII : Concerning the Obligation to pay in Coin, and the Consequences thereof

In all banks of circulation upon mortgage, the obligation in the note is to pay in coin, upon demand: and in the famous bank of Mr Law, there was a very necessary clause added to the note; to wit, that the coin was to be of the same weight, fineness and denomination, as at the date of the note. This was done, in order to prevent the inconveniences which might result to either party, by the king's arbitrarily raising or sinking the denominations of the coin; a practice then very familiar in France.

This obligation to pay in coin, owes its origin to the low state of credit in Europe at the time when banks first began to be introduced; and it is not likely that any other expedient will soon be fallen upon to remove the inconveniences which result from it in domestic circulation, as long as some persons of the most acute understanding in many things, consider all money, except, coin to be false and fictitious.

I have already thrown out abundance of hints, from which it may be gathered, that, in my opinion, coin is not absolutely necessary for carrying on domestic circulation, and more will be said on this subject, as we go along. But I am here to examine the nature and consequences of this obligation, contracted by banks, to discharge their notes in the current coin of the country.

In the first place, it is plain, that no coin is ever (except in very particular cases) carried to a bank, in order to procure notes. The greatest part of notes issue from the banks, concerning which we are treating, either in consequence of a loan, or of a credit given by the bank, to such as can give security for it. This loan is made in their own notes; which are quickly thrown into circulation by the borrower; who borrowed them, because he had occasion to pay them away. In like manner, when a credit is given, the bank pays (in her notes) all the orders she receives from the person who has the credit: in this manner are notes commonly issued from a bank.

Coin, again, comes to a bank, in the common course of circulation, by payments made to it, either for the interest upon their loans, or when merchants and landed men throw the payments made to them into the bank, towards filling up their credits; or by way of a safe deposit for their money. These payments are made to the bank in the ordinary circulation of the country. When there is a considerable proportion of coin in circulation, then the bank receives much coin; and when there is little, they receive little. Whatever they receive is laid by to answer notes which are offered for payment; but whenever a draught is made upon them for the money thrown in as above, they pay in paper.

As we are here searching after principles, not after facts, it is out of our way to inquire what may be the real proportion of coin preserved by banks of circulation, for answering the demand for it.

Mr Megens, a very knowing man, and a very judicious author, lately dead, who has written a small treatise in the German tongue, translated into English, under the title of The Universal Merchant, delivers his sentiments concerning the proportion of coin preserved in the bank of England, which I shall here transcribe in the translator's words. Sect. 60.

'The bank of England consists of two sorts of creditors, the one of that set of men, who, in King William's time, when money was scarce and dear, lent the public 1,200,000 pounds, at 8 per cent interest, and 4000 pounds were allowed them for charges, amounting in whole to 100,000 pounds a year, an exclusive right of banking as a corporation for 13 years, under the denomination of the proprietors of the bank; and which, for obtaining prolongation of their privileges, has been since increased by farther loans to the public at a less interest, to near the sum of 11,000,000 pounds, which if we compute the interest at 3 per cent (as what they have more on some part answers incident charges) it produces 330,000 pounds a year; and as they divide annually 5 per cent to their proprietors, which is 550,000 pounds, it is evident that they make a yearly profit of 220,000 pounds, out of the money of the people who keep cash with them, and these are the other sort of creditors: and as for what money the bank lends to the government, they have for the most part but 3 per cent interest, I conclude that the credit cash they have in their hands may amount to 11,000,000 pounds, and thereout is employed in loans to the government, in the discounting of bills, and in buying gold and silver 7,333,333 1/3 pounds, which, at 3 per cent interest or profit, will amount to the above 220,000 pounds, and remains 3,666,666 2/3 pounds in cash, sufficient for circulation and current payments. And experience has evinced, that whenever any mistrust has occasioned any run upon the bank for any continuance, and the people not finding the treasure so soon exhausted as they surmised, it flowed in again faster on the one hand than it was drawn out on the other.'

This gentleman lived long in England. He was very intelligent in matters relating to commerce; and his authority may, I believe, be relied on as much as any other person's, except that of the bank itself; which, it would appear, has some interest in keeping such affairs a secret.

We see by his account, that the bank of England keeps in coin one third part of the value of all their notes in circulation. With this quantity, business is carried on with great smoothness, owing to the prosperity of that kingdom, which seldom owes any considerable balance to other nations.

But the consequence of the obligation to pay in coin, is, that when the nation comes to owe a foreign balance, the notes which the bank had issued to support domestic circulation only, come upon it for the payment of this balance; and thereby the coin which it had provided for home demand only, is drawn out.

It is this circumstance, above all others, which distresses banks of circulation. Were it not for this, the obligation to pay in coin might easily be discharged; but when in virtue of this pure obligation, a heavy national balance is demanded from the bank, which has only made provision for the current and ordinary demand at home, it requires a little combination to find out, at once, an easy remedy.

This combination we shall, in the following chapters, endeavour to unfold: it is by far the most intricate, and at the same time the most important in the whole doctrine of banks of circulation.

Another inconveniences resulting from this obligation to pay in coin, we have explained in the third book. It is, that the confusion of the English coin, and the lightness of a great part of it, obliges the bank of England to purchase the metals at a price far above that which they can draw back for them after they are coined. We have there shewn the great profit that might be made in melting down and exporting the heavy species. This profit turns out a real loss to the bank of England, which is constantly obliged to provide new coin, in proportion as it is wanted. This inconvenience is not directly felt by banks, in countries where there is no mint established.

Here then is another bad consequence of this obligation to pay in the metals, which a proper regulation of the coin would immediately remove. In countries which abound in coin, banking is an easy trade, when once their credit is well established. It is principally when either a foreign war, or a wrong balance of trade has carried off the metals, that the weight of this obligation to pay in coin is severely felt.

Chapter VIII : How a wrong Balance of Trade affects Banks of Circulation

It is commonly said, that when there is a balance due by any nation upon the whole of their mercantile transactions with the rest of the world, such balance must be paid in coin. This we call a wrong balance. Those who transact the payment of this balance, are those who regulate the course of exchange; and we may suppose, without the least danger of being deceived, that the course is always higher than the expence of procuring and transporting the metals; because the overcharge is profit to the exchanger, who without this profit could not carry on his business.

These exchangers, then, must have a command of coin; and where can they get it so easily, and so readily, as from banks who are bound to pay in it?

Every merchant who imports foreign commodities, must be supposed to have value in his hands from the sale of them; but this value must consist in the money of the country: if this be mostly in bank paper, he must give the bank paper for a bill to the exchanger, whose business it is to place funds in those parts upon which bills are demanded. The exchanger again (to support the fund which he exhausts by his draughts) must demand coin from the banks, for the notes he received from the merchant when he gave him the foreign bill.

Besides the wrong balances of trade transacted in this manner, which banks are constantly obliged to make good in coin, every other payment made to foreigners has the same effect. It is not because it is a balance of trade, but because it is a payment which cannot be made in paper currency, that a demand is made for coin. Coin we have called the money of the world, as notes may be called the money of the society. The first then must be procured when we pay a balance to foreigners; the last is full as good when we pay among ourselves.

It is proper, however, to observe, that there is a great difference between the wrong balance of trade, and the general balance of payments. The first marks the total loss of the nations when her imports exceed the value of her exports; the second comprehends three other articles, viz. 1. the expence of the natives in foreign countries; 2. the payment of all debts, principal and interest, due to foreigners; 3. the lending of money to other nations.

These three put together, make what I call the general balance of foreign payments: and these added to the wrong balance of trade may be called the grand balance with the world.

Now as long as the payment of this grand balance is negotiated by exchangers, all the coin required to make it good, must be supplied by banks, while they have one note in circulation.

How then is this coin to be procured by nations who have no mines of their own?

Chapter IX : How a grand Balance may be paid by Banks, without the assistance of Coin

Did all the circulation of a country consist in coin, this grand balance as we have called it, would be paid out of the coin, to the diminution of it.

We have said that the acquisition of coin, or of the precious metals, adds to the intrinsic value of a country, as much as if a portion of territory were added to it. The truth of this proposition will now soon appear evident.

We have also said, that the creation of symbolical money, adds no additional wealth to a country, but only provides a fund of circulation out of solid property; which enables the proprietors to consume and to pay proportionally for their consumption: and we have shewn how by this contrivance trade and industry are made to flourish.

May we not conclude, from these principles, that as nations who have coin, pay their grand balance out of their coin, to the diminution of this species of their property, so nations who have melted down their solid property into symbolical money, must pay their grand balance out of the symbolical money; that is to say, out of the solid property of which it is the symbol?

But this solid property cannot be sent abroad; and it is alleged that nothing but coin can be employed in paying this grand balance. To this I answer, that in such a case the credit of a bank may step in, without which a nation which runs short of coin, and which comes to owe a grand balance must quickly be undone.

We have said that while exchangers transact the balance, the whole load of providing coin lies upon banks. Now the whole solid property melted down, in their paper, is in their hands; because I consider the securities given them for their paper, to be the same as the property itself. Upon this property, there is a yearly interest paid to the bank: this interest, then, must be engaged to foreigners by the bank, in lieu of what is owing to them by the nation; and when once a fund is borrowed upon it abroad, the rest is easy to the bank. This shall be farther explained as we go along.

I do not pretend that the common operation of providing coin, when the grand balance is against a nation, is as simple as I have represented it. I know it is not: and I know also, that I am not in any degree capable to explain the finite combination of mercantile operations necessary to bring it about; but it is no less true, that these combinations may be shortened: because when the whole of them have been gone through, the transaction must end in what I have said; to wit, that either the grand balance must be paid out of the national stock of coin, or it must be furnished by foreigners upon a loan from them; the interest of which must be paid out of that part of the solid property of the nation which has been melted down into paper. I say farther, that were not all this solid property (so melted down) in the hands of banks, who thereby have established to themselves an enormous mercantile credit; there would be no possibility of conducting such an operation: that is to say, there would be no possibility for nations to run in debt to nations, upon the security of their respective landed property.

Chapter X : Insufficiency of temporary Credits for the Payment of a wrong Balance

I have said, that when the national stock of coin is not sufficient to provide banks with the quantity demanded of them, for the payment of the grand balance, that a loan must take place. To this it may be objected, that a credit is sufficient to procure coin, without having recourse to a formal loan. The difference I make between a loan and a credit consists in this, that by a credit we understand a temporary advance of money, which the person who gives the credit expects to have repaid in a short time, with interest for the advance, and commission for the credit; whereas by a loan we understand the lending of money for an indefinite time, with interest during non-payment.

Now I say, the credit, in this case, will not answer the purpose of supplying a deficiency of coin; unless the deficiency has been accidental, and that a return of coin, from a new favourable grand balance, be quickly expected. The credit will indeed answer the present exigency; but the moment this credit comes to be replaced, it must be replaced either by a loan, or by a supply of coin; or by a renewal of the former credit; but, by the supposition, coin is found to be wanting for paying the grand balance; consequently, nothing but a loan, made by the lenders either in coin, in the metals, or in a liberty to draw upon them, can remove the inconvenience; and if recourse be had to a new credit, instead of the loan, the same difficulty will recur, whenever this credit again comes to be made good by repayment.

Upon the whole, we may conclude, that nations who owe a balance to other nations, must pay it either with their coin, or with their solid property; consequently, the acquisition of coin is, in this particular, as advantageous as the acquisition of lands; but when coin is not to be procured, the transmission of the solid property to foreign creditors is an operation which banks must undertake; because it is they who are obliged either to do this, or to pay in coin.

Chapter XI : Of the Hurt resulting to Banks, when they leave the Payment of a wrong Balance to Exchangers

We have seen in a former chapter, how exchangers and banks are mutually assistant to one another: the exchangers by swelling and supporting circulation; the bank by supplying them with credit for this purpose. While parties are united by a common interest, all goes well: but interest divides, by the same principle that it unites.

No sooner does a nation incur a balance against itself, than exchangers set themselves to work to make a fortune, by conducting the operation of paying it. They appear then in the light of political usurers to a spendthrift heir, who has no guardian. This guardian should be the bank, who upon such occasions (and upon such only) ought to interpose between the nation and her foreign creditors. This it may do, by constituting itself at once debtor for the whole balance, and by taking foreign exchange into its hand, until such time as it shall have distributed the debt it has contracted for the nation, among those individuals who really owe it. This operation performed, exchange may be left to those who make this branch their business, because then they will find no opportunity of combining either against the interest of the bank or of individuals.

When a national bank neglects so necessary a duty, as well as so necessary a precaution, the whole class of exchangers become united by a common interest against it; and the country is torn to pieces, by the fruitless attempt it makes to support itself, without the help of the only expedient that can relieve it.

Those exchangers having the grand balance to transact with other nations, make use of their credits with the bank, and of its notes, in order to draw coin from the bank, which they export. This throws a great load upon the bank, which is constantly obliged to provide a sufficient quantity of coin for answering all demands; for we have laid it down as a principle, that whatever coin or bills are necessary to pay this grand balance, in every way it can be transacted, it must ultimately be paid by the bank; because whoever wants coin for any purpose, and has bank notes, can force the bank to pay them in coin, or stop payment.

It cannot, therefore, be said, that exchangers do wrong; nor can they be blamed for drawing from the bank whatever is wanted for the purpose of paying to foreigners what is their due; that is, what is justly owing to them. If they do more, they must hurt themselves; because whatever is sent abroad more than what is due, must constitute the rest of the world debtors to the country which sends out their coin. The consequence of this would be to turn exchange against foreigners, and to make it favourable for the nation which is creditor. In this case, were the creditors still to continue sending coin abroad, they would lose by this operation, for the same reason that they gain, by that of sending it out when they are debtors.

It is very common for banks to complain, when coin is hard to be procured, and when large demands are made upon them; they then allege unfair dealings against exchangers; they fall to work to estimate the balance of trade, and endeavour to show that it is not in reality against the country.

But alas! this is nothing to the purpose; the balance of trade may be very favourable, although the balance of payments be greatly against the country; and both must be paid, while the bank has a shilling of cash, or a note in circulation. So soon again as the grand balance is fairly paid off, it is impossible that any one can find an advantage in drawing coin from a bank; except in the single case of melting down the heavy species, in nations which give their coinage gratis. Of this we have treated at sufficient length in another place.

Banks may indeed complain, that men of property sometimes send their money out of the country, at a time when it is already drained of its coin; because this raises exchange, and hurts the trading interest.

Exchange must rise, no doubt, in proportion as the grand balance is great, and difficult to be paid: But where does the blame lie? Who ought to provide the coin, or the bills for paying this grand balance? Have we not shewn that it is the bank alone who ought to provide coin for the ready answering of their notes? Have we not said, that the method of doing this is to sacrifice a part of the interest due upon the obligations in their hands, which are secured upon the solid property of the country, and to appropriate this sum of interest for a fund to pay regularly the interest of the foreign loans, which will procure either the metals themselves, or a power to draw on those places where the nation's creditors reside?

Which of the two has most reason to complain, the bank, because the inhabitants think fit to send their effects out of the country, being either forced so to do by their creditors, or choosing so to do for their private advantage; or the creditors of the bank, and the country in general, when (from the obstructions the bank throws in the way, when required to pay its notes) exchange is forced up to an exorbitant height; the value of what private merchants owe to strangers is raised; and when, by discouraging trade in their hands, a stop is put to manufactures and credit in general?

In a word, the bank has no reason to complain, unless they can make it appear, how any person, exchanger or other, can find an advantage in sending coin out of the country, at a time when there is no demand for it; or when there is no near prospect of a demand which is the same thing? To say that a principle of public spirit should prevent a person from doing with his property what is most to his advantage, for the sake of saving some money to a bank, is supposing the bank to be the public, instead of being the servant of the public.

Another argument to prove that no profit can be made by sending out coin, except when the balance is against a country, is, that we see all runs upon banks stop, the moment exchange becomes favourable. Were there a profit to be made upon sending off coin, independently of the debts to be paid with it, which cannot be paid without it, the same trade would be profitable at all times. As this is not the case, it follows, that the principle we have laid down is just; to wit, that the balance due to foreigners must be paid by banks, while they have a note in circulation; and when once it is fairly paid by them, all extraordinary demands must cease.

We now proceed to another point, to wit, What are the consequences to circulation, when a great balance draws away a large quantity of coin from the bank, and sends it out of the country?

Chapter XII

That I may communicate my ideas with the greater precision, I must here enter into a short detail of some principles, and then reason on a supposition.

It has been said, that the consequence of credit and paper-money, secured on solid property, was to augment the mass of the circulating equivalent, in proportion to the uses found for it.

These uses may be comprehended under two general heads. The first, payment of what one owes; the second, buying what one has occasion for: the one and the other may be called by the general term of ready-money demands.

Whoever has a ready-money demand upon him, and property at the same time, ought to be furnished with money by banks which lend upon mortgage.

Now the state of trade, of manufactures, of modes of living, and of the customary expence of the inhabitants, when taken altogether, regulate and determine what we may call the mass of ready-money demands, that is, of alienation. To operate this multiplicity of payments, a certain proportion of money is necessary. This proportion again may increase or diminish according to circumstances; although the quantity of alienation should continue the same.

To make this evident, let us suppose the accounts of a whole city kept by one man; alienation may go on without any payment at all, until accounts be cleared; and then nothing will be to be paid, except general balances upon the whole. This however is only by the bye. The point in hand is to agree, that a certain sum of money is necessary for carrying on domestic alienation; that is, for satisfying ready-money demands: let us call this quantity (A).

Next, in most countries in Europe (I may say all), it is customary to circulate coin, which, for many uses, is found fitter than paper (no matter for what reason); custom has established it, and with custom even statesmen must comply.

The paper-money is generally made payable in coin; from custom also. Now, according to the manners of the country, more or less coin will be required for domestic circulation. Let it be observed, that hitherto we have not attended to foreign circulation, of which presently: and I say, that the manners of a country may make more or less coin necessary, for circulating the same quantity of paper; merchants, for instance, circulate much paper and little coin; gamesters circulate much coin and little paper: one example is sufficient.

Let this quantity of coin, necessary for circulating the paper-money, be called (B), and let the paper-money be called (C); consequently (A) will be equal to the sum of (B) and (C). Again, we have said, that all balances owing by nation to nation, must be paid either in coin, or in the metals, or in bills; and that bank paper can be of no use in such payments. Let the quantity of the metals, coin, or bills, going out or coming into the country for payment of such balance, be called (D).

These short designations premised, we may reason with more precision. (A) is the total mass of money (coin and paper) necessary at home: (A) is composed of (B) the coin, and of (C) the paper-money, and (D) stands for that mass of coin, or metal, or bills, which goes and comes according as the grand balance is favourable or unfavourable with other nations.

Now, from what has been said, we may determine that there should at all times remain in the country, or in the bank, a quantity of coin equal to (B); and if this be ever found to fall short, the bank does not discharge its. duty It is unnecessary to determine what part of (B) should be locked up in the bank, and what part should remain in circulation: banks themselves cannot determine this question: all we need to say is, that it is the profit of banks to accustom people to the use of paper-money as much as possible; and therefore they will draw to themselves as much coin as they can.

When a favourable balance of trade brings the price of exchange below par, and brings coin into the country, the consequence is, either to animate trade and industry, to augment the mass of payments, to swell (A), and still to preserve (C) in circulation; or else to make (A) regorge, so as to sink the interest of money below the bank lending price: in this case people will carry back the regorging part of (C) to the bank, and withdraw their securities; which is consolidating, as we have called it, the property which had been formerly melted down, for want of this circulating equivalent (money).

This is constantly the consequence of a stagnation of paper, from an overcharge of it, thrown into circulation. It returns upon the bank, and diminishes the mass of their securities, but never the mass of their coin.

From this we may conclude, that the circulation of a country can only absorb a determinate quantity of money (coin and paper); and that the less use they make of coin, the more use they will make of paper, and vice versa.

We may also conclude, that when trade and alienation increase, caeteris paribus, so will money; that is, more solid property will be melted down; and when trade and alienation diminish, caeteris paribus, so will money; that is, some of the solid property formerly melted down, will consolidate, as we have called it.

These vicissitudes in the mass of circulation are not peculiar to paper currency. In countries where nothing circulates but the metals, the case is the same; the operation only is more awkward and expensive. When coin becomes scarce, it is hardly possible, in remote provinces, to find any credit at all; and in the centre of circulation, the use of it (interest) must rise very considerably, and must stand high for some time, before even intelligent merchants will import bullion to the mint; which is the only bank they have to fit it for circulation. When the metal is coined, then men of property are enabled to borrow, or to sell their lands. On the other hand, when a favourable balance pours in a superfluity of coin, which at the same time cuts off the demands of trade for sending it abroad, it frequently falls into coffers; where it becomes as useless as if it were in the mine; and this clumsy circulation, as I may call it, prevents coin from coming into the hands of those who would have occasion for it, did they but know where to come at it. Paper-money, on the other hand, when banks and trade are well established, is always to be found. Thus, in an instant, paper-money either creates or extinguishes an interest equal to its value, in favour of the possessor. No part of it lies dead, not for a day, when employed in trade: it is not so of coin.

Let us now suppose a bank established in a country which owes a balance to other nations.

In this case, the bank must possess, or be able to command, a sum of coin or bills equal to (B) and (D); (B) for domestic, and (D) for foreign circulation.

Those who owe this balance (D), and who are supposed to have value for it, in the currency of the country, must, in order to pay it, either exhaust a part of (B), by sending it away, or they must carry part of (C) to the bank, to be paid for in coin. If they pick up a part of (B) in the country, then the coin in circulation, being diminished below its proportion, the possessors of (C) will come upon the bank for a supply, in order to make up (B) to its former standard. Banks complain without reason. If they carry part of (C) to be changed at the bank, for the payment of (D), they thereby diminish the quantity of (C); consequently there will be a demand upon the bank for more notes, to support domestic circulation; because those notes which have been paid in coin by the bank are returned to the bank, and have diminished the mass of (C); which therefore must be replaced by a new melting down of solid property.

Now I must here observe, that this recruit of notes, supposed to be issued by the bank, in order to fill up (C) to the level, really implies an addition made to the mass of securities formerly lodged with the bank: and represents, not improperly, that part of the landed property of a country which the bank must dispose of to foreigners, in order to procure from them the coin or bills necessary for answering the demand of (D).

When notes, therefore, are carried to the bank for payment of debts due to the bank, they then diminish the mass of solid property melted down in the securities lodged in the bank: but when notes are carried to the bank, to be converted into coin or bills, for foreign exportation, they do not diminish the mass of the securities: on the contrary, the consequence is, to pave the way for the augmentation of them; because I suppose that these notes, so given in to the bank, and taken out of the circle, are to be replaced by the bank, to domestic circulation, to which they belonged; and the bank must be at the expence of turning into coin or foreign bills, the value of these additional securities granted for this new recruit of notes.

Is not this quite consistent with reason, fact, and common sense? If a country contract debts to foreigners, are not the consequences just the same as when one man contracts a debt to another in the same society? Must not the ultimate consequence of such debts be, that they must be paid, either with the coin, with the moveables, or with the solid property of the debtor, transferred to the creditor, in lieu of the money owing?

When a nation can pay with its coin, or with its effects (that is to say, with its product and manufactures), the operation is easily and mechanically performed by the means of trade: when these objects are it, not sufficient; then land, or an annual and perpetual income out of must make up the deficiency; in which case more skill and expence is required; and this expence falling upon banks, makes their trade less lucrative than in times when commerce stands at par, or is bringing in a balance.

Were trade to run constantly against a country, the consequence would be, that the whole property of it would, by degrees, be transferred to foreigners. But in this case, banks never could neglect laying down a plan whereby to avoid a constant loss similar to what they casually sustain, when such a revolution comes suddenly or unexpectedly upon them.

The method would be, to establish an annual subscription abroad, for borrowing a sum equivalent to the grand balance; the condition being to pay the interest of the subscriptions out of the revenue of the country.

If the security offered be good, there is no fear but subscribers will be found, while there is an ounce of gold and silver in Europe.

The bank of England has an expedient of another nature, in what they call their bank circulation; which is a premium granted to certain persons, upon an obligation to pay a certain sum of coin upon demand. This is done with a view to answer upon pressing occasions. But England being a prosperous trading nation, which seldom has any considerable grand balance against her (except in time of war, when the public borrowings supply in a great measure the deficiency, as shall be afterwards explained), this bank circulation is turned into a job; the subscriptions being lucrative, are distributed among the proprietors themselves, who make no provision for the demand; and were the demand again to come upon them (as has been the case) the subscribers would, as formerly, make a call on the bank itself, by picking up their notes, and pay their subscriptions with the bank's own coin.

To obviate this inconvenience, which was severely felt in the year 1745, the bank of England should have opened a subscription for a perpetual loan in some foreign country; Holland, for example; where she might have procured large quantities of foreign coin: such a seasonable supply would have proved a real augmentation of the metals; the supply they got from their own domestic subscribers was only fictitious.(3*)

But banks in prosperous trading nations sit down with casual and temporary inconveniences; and exchangers carry on a profitable trade, whether the nation be gaining or losing all the while. For such nations, and such only, are banks advantageous. Were banks established in Spain, Portugal, or any other country which pays a constant balance from the produce of their mines, they would only help on their ruin a little faster.

In the infancy of banking, and in countries where the true principles of the trade are not well understood, we find banks taking a general alarm, whenever a wrong balance of trade occasions a run upon them. This terror drives them to expedients for supporting their credit, which we are now to examine, and which we shall find to have a quite contrary tendency.

The better to explain this combination, we must recall to mind, that the payment of the grand balance in coin or bills is unavoidable to banks. We have said that this balance is commonly paid by exchangers, who pick up the coin in circulation; a thing the bank cannot prevent. This we have called exhausting a part of (B). the consequence of this is, to make the proprietors of (C) come upon the bank, and demand coin for filling up (B): to this the bank must also agree. But by these operations (C) comes to be diminished, below the level necessary for carrying on trade, industry, and alienation: upon which I have said there commonly comes an application to the bank to give more credit, in order to support domestic circulation, which if complied with, more solid property is consequently melted down.

This swells the mass of securities, and raises (A) to its former level. But here the bank has a choice, and may refuse to grant more credit: in the former operations it had none. Now if the bank, from a terror of being drained of coin, should refuse to issue notes upon new credits, for the demands of domestic circulation; in this case, I say, they fail in their duty to the nation, as banks, and hurt their own interest. As to their duty to the nation, I shall not insist upon it; but I think I can demonstrate that they fail in their manner of reasoning, with respect to their own interest, and that is enough.

I say, then, that as long as there is one single note in circulation, and any part of a grand balance owing, this note will come upon the bank for payment, without a possibility of its avoiding the demand. Refusing therefore credit, while any notes remain in the hands of the public, is refusing an interest which may help to make up the past losses: but of this more hereafter.

In the next place, I think I have demonstrated, that as soon as the grand balance is paid, it is impossible that any more demands for coin can come upon the bank for exportation. Why then should a bank do so signal a prejudice to their country, as to refuse to lend them paper, which the ready-money demands of the country must keep in circulation? And why do this at so great a loss to themselves? It has been said above, and I think with justice, that this recruit, issued to fill up circulation, adds to the mass of bank securities, and very properly represents that part of the income of the solid property of the country, which the bank must dispose of to foreigners, in order to procure from them the coin or bills necessary for answering the demand for payment of a grand balance.

In this light nothing can appear more imprudent, than to refuse credit.

A bank is forced to pay to the last farthing of this balance; by paying it, the notes that were necessary for domestic circulation are returned to them; and they refuse to replace them, for fear that their supplying circulation should create a new balance against them! This is voluntarily taking on themselves all the loss of banking, and rejecting the advantages of it.

Such management may be prudent when the circulating notes of a bank are very few, and when the balance is very great. In this case, indeed, were the thing possible, it might be prudent to give over banking for a while, till matters took a favourable turn. But if we suppose their circulating notes to exceed the balance due, then all the hurt which can be done is done already; and the more notes that are issued, and the more credit that is given, must be so much the better for the bank; because the interest due upon all that are issued above the balance, must be clear profit to the bank.

To bring what has been said within a narrower compass, and to lay it under our eye at once, let us call the sum of money necessary for carrying on the domestic circulation of a country, where a bank is established, (A).

The specie itself, to carry it on, (B).

The balances to other nations, (D).

The bank must be able to command coin and credit equal to the sum of (B) and (D). If they have in credit the value of (D) in any foreign place, where a general circulation of exchange is carried on, then they have occasion only for (B) at home, and can furnish bills to the amount of (D).

But in furnishing bills to the amount of (D), those who receive the bills from the bank, must pay to the bank the value of these bills in bank notes; and the notes with which they pay for the bills, must be taken out of (A), which (A) we suppose to be necessary for carrying on domestic circulation. This diminution upon the value of (A), will occasion a new demand for notes in order to carry (A) to its former extent; and the bank at issuing the notes demanded, will receive new securities from those who demand them. Farther, the interest paid upon these new securities, will answer for the payment of the interest of the money owing to foreigners, in consequence of the bills drawn upon them to the order of those who bought the bills from the bank for the payment of (D).

This transaction concluded, the consequence will be: that (A) will be made up to the complete sum necessary for domestic circulation; and that the interest of the money borrowed from foreigners, in order to acquit the balance (D), will be paid out of the interest paid upon the new securities.

As soon as (D) is thus completely paid off, were coin drawn from the bank, and sent away by private people, (exchangers, etc.) it would, form a balance due to the country; which balance would render exchange favourable, and would occasion a loss to those who sent away the coin. During this period, the more credit the bank gives, so much more will its profits increase, and no demand can be made upon it for coin.

To conclude: Let banks never complain of those who demand coin of them, except in the case when it is demanded in order to be melted down, or for domestic circulation, which may as well be carried on with paper.

And so soon as a demand for coin to pay a foreign balance begins, it is then both the duty and interest of all good citizens to be as assistant as possible to banks, by contenting themselves with paper for their own occasions, and by throwing into the bank all the coin which casually falls into their hands. As for duty, I shall offer no argument to enforce it. But I say it becomes a national concern to assist the bank; because the loss incurred by the bank in procuring coin, falls ultimately on every individual, by raising exchange; by raising prices; by raising the interest of money to be borrowed; and, last of all, by constituting a perpetual interest to be paid to foreigners, out of the revenue of the solid property of the country. Upon such occasions, a good citizen ought to blush at pulling out a purse, when his own interest, and that of his country, should make him satisfied with a pocket book.

Chapter XIII : Continuation of the Same Subject; and of the Principles upon which Banks ought to borrow Abroad, and give credit at Home.

In every question relative to this subject, we must return to principles. This is the only sure method of avoiding error. The more intelligent reader, therefore, must excuse short repetitions, and consider them as a sacrifice he is making to those of slower capacities, to whom they are useful.

The principle of banking upon mortgage, is to lend paper money, and to give credit to those who have property, and a desire to melt it down. This is calculated for the benefit of trade, and for an encouragement to industry. If such banks, therefore, borrow, it must be done consistently with the principles upon which their banking is founded. If the borrowing should tend to destroy those advantages which their lending had procured, then the operation is contrary to principles, and abusive. So much for recapitulation.

While trade flourishes and brings in a balance, banks never have occasion to borrow; it is then they lend and give credit. This, I believe, we may take for granted.

When the country where the bank is established begins to owe a balance to other nations, the bank, as we have seen in the last chapter, is obliged to pay it off in coin or in bills. We have there shewn, that in such cases it is inconsistent with their principles and interest, to withhold lending and giving credit, as far as is necessary for keeping up the fund of domestic circulation to that standard which alienation and ready-money demands require.

To refuse credit, and at the same time to borrow at home, must then, at first sight, appear to be doubly inconsistent. But in order to set this point in the clearest light I am capable, I shall reason upon a supposition analogous to the situation of the Scotch banks, and by this means avoid abstract reasoning as much as I can.

Let me then suppose that Scotland, during the last years of the war, ended in 1763, and ever since (I write in 1764), from the unavoidable distress of the times, was obliged, first, to import considerable quantities of grain in some bad years; secondly, to refund the English loans of money settled there in former times; thirdly, to furnish some of the inhabitants with funds, which they thought fit to place in England; fourthly, to pay the amount of additional taxes imposed during the war; while, at the same time, several of the ordinary resources were withdrawn; such as, first, a great part of the industrious inhabitants who went to supply the fleets and armies; secondly, the absence of the ordinary contingent of troops; and thirdly, the cutting off of several beneficial articles of commerce. Let me suppose, I say, that from the total of these losses incurred, and advantages suspended, Scotland has lost annually, for eight years past, two hundred thousand pounds. I am no competent judge of the exactness of this estimate, it is of no consequence to the argument; but I think I have carried it, as I wish to do, rather beyond the truth.

On the other hand, let me suppose that the sum of currency in paper, sufficient (with the little coin there was) to circulate the whole of the alienations in Scotland (that is to say, the whole domestic circulation, supposing no balance to be owing to England or other countries) to be one million sterling. I am persuaded I am here below the true estimate, but no matter.

Is it not evident, from this supposition, and from the principles we have been deducing, that unless the banks of Scotland had borrowed every year 200,000 l. sterling, and alienated annually in favour of England, a fund for paying the interest of two hundred thousand pounds capital; the million of Scots currency would have been diminished in proportion to the deficiency: and would not the consequence of this be, caeteris paribus, to bring the currency below the demand for it; and, consequently, to hurt trade, industry, and alienation?

Now supposing the banks, instead of borrowing in England a fund equal to this grand balance (as I have said they should do), to remain in consternation and inactivity, giving the whole of their attention to the providing of coin and bills to supply the demand of exchangers, whose business it is to send out this annual balance; what would the consequence be?

I answer, that if the banks, in such a case, do not follow the plan I have proposed, the consequence will be, that two hundred thousand pounds of their paper will be, the first year, taken out of the domestic circulation of Scotland; will be carried to the bank, and coin demanded for it. If the coin is found in the bank, it is well: it goes away, and leaves the paper circulation of Scotland at 800,000 l. This void must occasion applications to the bank for credits to supply it. Is it not then the interest of the bank to supply it? We have said in the former chapters that it is. But now let us suppose it to be objected, that if banks should issue notes at such a time, their cash having been exhausted, they would be obliged to stop altogether, upon a return of those notes issued upon additional credits.

To this I repeat again, because of the importance of the subject, that notes issued to support the demand of circulation never can return upon the bank, so as to form a demand for coin; and if they do return, it must be in order to extinguish the securities granted by those who have credit in banks (I except always that regular demand for coin, at all times necessary for circulating the paper for domestic uses); and if those notes return of themselves, without being called in, this phaenomenon would be a proof that circulation is diminishing of itself: but supposing such a case to happen, it is plain that such return can produce no call for coin; because when the notes return it is not for coin, but for acquitting an obligation or mortgage, as has been often repeated.

Notes are paid in, I say, because circulation has thrown them out. Now if circulation has thrown them out as superfluous, it never can have occasion for coin in their stead; because coin answers the same purpose.

But then it is urged that they do not return, because circulation has thrown them out, but because coin is wanted: be it so. Then we must say, that circulation is not diminished, as we at first supposed; but that the return of another year's balance, makes a new demand for coin necessary.

Now I ask, how the withholding of this 200,000 l. from circulation, after the first year's drain, can prevent the balance from returning? There are by the supposition still 800,000 l. of notes in the country; will not exchangers get hold of two hundred thousand out of this fund, as well as out of the million? For he who owes, must pay, that is, must circulate. It is the circulation of the industrious only, and of the rich; in short, it is buying, that is to say, voluntary circulation, which is stopped for want of currency: paying, that is, involuntary circulation, never can be stopped; debtors must find money, as long as there is any in the country, were they to give an acre for a shilling, or a house for half a crown. Now those who owe this foreign balance are debtors; consequently, they must draw 200,000 l. out of circulation, the second year as well as the first, whether the standard million be filled up or not. The withholding, therefore, the credits demanded upon the first diminution, has not the least effect in preventing the demand for coin the year following: it only distresses the country, raising exchange, and the interest of money, by rendering money scarce; and, what is the most absurd of all, it deprives the bank of 10,000 l. a year interest, at 5 per cent upon 200,000 l. which it may issue anew.

Suppose again, that a second year's demand for a balance of 200,000 l. comes upon the bank: if the coin is out, as we may suppose that after the first year's drain it will not be in great plenty, expedients must be fallen upon. In such a case, if the bank do not at once fairly borrow at London (without any obligation to repay the capital) a sum of 200,000 l. and pay for it a regular interest, according to the rate of money, as government does, half yearly, on the change of London, it will be involved in expedients which will create a monstrous circulation of coin in the bank, perhaps double of the sum required, and all these operations will end (as to the bank) in paying this sum out of the mass of its securities or stock. If the bank should borrow this 200,000 l. in London, in the manner we have said, the circulating fund of coin will be noise diminished; there will be no call extra-ordinary for coin, no rising of exchange; the bank will have this in its hands; and if it rise, it will be the bank, not the exchangers who will profit by it.

But let us suppose that instead of this, it should have recourse to temporary credits upon which the capital is constantly demandable, or to other expedients still less effectual for answering the call which is to come upon it for the second year's balance; what will be the consequence? To this I answer, that those merchants, or others who owe the balance, will apply to exchangers for bills, for which they must pay a high exchange: these bills will be bought from the exchangers with notes (taken out of circulation), and will reduce this to 600,000 l. the exchangers ill carry these to the bank and demand coin. If the bank should make use of an optional clause, to pay in six months, with interest at 5 per cent the exchangers ill obtain six months' credit at London, and in consequence of this, their bills will be honoured and paid. This credit, however, costs them money, which is added to the exchange: the bank, at the end of six months, must pay 200,000 l. sterling in coin, which in the interval it must provide from London. It must pay also six months, interest upon the paper formerly presented by the exchanger: add to the account, that bringing down the coin must cost the bank at least 12 shillings per hundred pounds, and as much more to the exchanger who receives it in order to send it back again; and after all these intricate operations which have cost so much trouble, ill blood, stagnation and diminution of circulation, expence in exchange to the debtors of the balance, stress of credit upon exchangers for procuring so large advances with commission, etc. expence to the bank in providing coin, expence to the exchangers in returning it: after all, I say, the operation ends in this; that 200,000 l. of notes, taken out of the circulation of Scotland returns to the bank, who must have provided at last, either coin, or credit at London for them. This return of 200,000 l. of notes does not diminish the mass of those obligations lodged in the bank, in virtue of which they are creditors upon the proprietors of Scotland: consequently the bank has constituted itself debtor to England for those funds which have been torn from it in the manner above described: consequently, had it, by a permanent loan, constituted itself voluntarily debtor to England from the beginning, it would have paid no more, nay less than it has been obliged to pay; circulation would not have lost 200,000 l. and the bank would have had the interest of 200,000 l. added to its former securities, which would compensate (pro tanto at least) the expence of borrowing this sum in England upon a permanent fund. Instead of which it compensates the interest taken out interest of a temporary loan, with the same sum of of the securities in its hand. If, therefore, from an ill-grounded fear of issuing as much paper as is demanded, it shall withhold it, there will result to itself a loss equal to the interest of what it refuses to lend; that is to say, there will be a lucrum cessans to the bank of the interest of this 200,000 l. at 5 per cent or 10,000 l. a year; which other banking companies will fill up, and thereby extend their circulation.

If, besides refusing credits, it should call in any part of those credits already given, it will still more diminish circulation: but then by this operation it will diminish the mass of its securities, and so diminish the sum of the interest annually paid to itself. If it go farther and borrow money at home, such loans will be made in its own paper, which will diminish farther the mass of circulation; and if it go on recalling its credits and mortgages, it will soon draw every bit of its paper out of circulation, and remain creditor upon Scotland for the balance only it has paid to England on her account. Such are the consequences, when a bank which lends upon private security withholds credit, at a time when a national balance is due, and when applications are made to it for new credits, to fill up the void of circulation occasioned by the operations used for the payment of the balance: such also are the additional fatal consequences, when to this it adds so inconsistent an operation as that of borrowing its own notes, or recalling the credits it had formerly given.

By the first step, namely, by refusing credit, it appears passive only in allowing natural causes to destroy both the bank and the nation, as I think has been proved.

By the second, namely, by borrowing its own notes, it is active in destroying both itself and the country.

What benefit can ever a bank which lends upon private security reap by borrowing within the country of which it is the centre of circulation; nay, what benefit can it ever reap from withholding its notes from those who can give good security for them!

Every penny it borrows, or calls in, circumscribes its own profits, while it distresses the country. After considering all circumstances, I can discover but one motive which (through a false light) may engage a bank to this step, to wit, jealousy of other banks.

As this speculation is designed to illustrate the principles of circulation, from circumstances relative to the present state of the Scotch banks, let us call things by their names.

The banks of Edinburgh resemble, more than any other in Scotland, a national bank. Let me then suppose all that can be supposed, viz. that the abundance of their paper has given occasion to smaller banks to pick up from them every shilling of coin which these smaller banks have ever had; and that these have had the address also to throw the whole load of the balance upon those of Edinburgh: let this be supposed, more cannot, and let us allow farther, that this must ever continue to be the case. In these circumstances, what motive can the banks of Edinburgh have for withholding credit from those who are able to give security? What motive can they have for borrowing their own notes?

Indeed I can account for this plan of management in no other way than by supposing, that, disgusted at the long continuance of an unfavourable balance of trade against their country, and vexed to find the whole load of it thrown upon themselves, they have taken the resolution to abandon the trade, and are taking this method to recall their paper altogether.

Let me suppose the contrary, and I shall not be able to discover how it is possible that such a conduct can turn to their own advantage, throwing out all consideration for the public good, which for some time, no doubt, must be greatly hurt by it.

As long as any considerable quantity of their notes is in circulation, and while the principal exchangers reside at Edinburgh, they never can avoid the loss of paying the balance; consequently, by refusing to fill up the void occasioned by the return of their notes, they deliver the whole profit of replacing them to the other banks, their rivals.

Let me next estimate the loss they sustain by furnishing coin to the other banks for the payment of the balance; and then compare this with what they lose by not keeping circulation full.

I shall suppose the balance to cost them two hundred thousand pounds per annum; and I shall suppose that all the smaller banks put together have occasion for two hundred thousand pounds in their chests: Is not this computation far above what can possibly be supposed?

Will it be allowed that if the banks of Edinburgh willingly submit to pay the whole of the bills of exchange demanded on London, for this balance, they will have at least the preference in replacing this sum to circulation?

If they pay the balance of 200,000 l. a like sum of their notes must come in to them, without diminishing one shilling of the interest paid upon the securities lodged in their banks; consequently, the only loss incurred is the difference between the interest they receive, which is 5 per cent and what it would cost them to borrow a like sum in London, and to remit the interest of this sum twice a year.

Now the value of a 4 per cent is at present about 96; so in paying 40 s. half yearly on the change of London, the Edinburgh banks may have at London a capital of 96 l. Let me call it only 94 l. supposing their credit not to be quite so good as that of the funds. I think it as good to the full; and I am sure it is so. At this rate, the 200,000 l. will cost them an interest of 8510 l. instead of the 10,000 l. which they will receive for the like sum added to their former securities. Now let me suppose that they shall have recourse to exchangers to remit this interest, and that they shall pay for it 5 per cent (which is an absurd supposition, as they will have the exchange entirely in their own hands) and that they give all the bills for the 200,000 l. at par (also a ridiculous supposition); the 5 per cent on 8510 l. is 425 l. 10 s. which added to the interest, makes 8935 l. 10 s. so that after all, they will have upon the whole transaction 1064 l. 10 s. of profit.

Next, as to the loss incurred in furnishing 200,000 l. to the other banks: If this coin be demanded of them by those banks, the demanders must, for this purpose, draw 200,000 l. of Edinburgh notes out of the circulation of Scotland; which I have supposed may be replaced in some little time by the Edinburgh-banks; consequently, if this sum also be borrowed at London, there will result upon this operation, as well as upon the last, a profit of 1064 l. 10 s. But then indeed they must be at the expence of bringing down the coin borrowed, at 12 s. per 100 l. because those banks will insist upon having coin, and refuse bills on London. This will cost 1200 l. from which deduct the profit of 1064 l. 10 s. gained by the first operation, remains of loss upon this last transaction 135 l. 10 s. no great sum.(4*) Does it not follow from this reasoning, that the banks of Edinburgh will have the whole business of exchange in their own hands? What exchanger then will enter into competition with them? The domestic transactions with the merchants and manufacturers of Scotland will be their only business. Farther:

What prevents the banks of Edinburgh to have offices in every trading town in Scotland, where their notes may be regularly paid on presentation, and new credits given as circulation demands them?

The only objection I can find to this plan of banking, is the difficulty of finding credit at London to borrow such large sums.

This, I think, may also be removed, from the plain principles of credit. If the banks of Edinburgh enter into a fair coalition, as they ought to do, I think, in order to form really a national bank, totally independent of that of England; may they not open a subscription at London, and establish a regular fund of their own, as well as any other company, such as the India, or South Sea? By borrowing in the beginning at a small advance of interest above the funds, and paying as regularly as government does, will not all those who make a trade of buying and selling stock fill their loan, rather than invest it in any other carrying a less interest? And if the whole land securities, and stocks of those banks at Edinburgh be pledged for this loan, will it not stand on as good a bottom as any fund upon earth? And can it be doubted but parliament will encourage such a scheme, upon laying the affairs of Scotland and the banks properly before them?

By this means they will really become a national bank: because England seems at present to be to Scotland, what all the rest of the world is to England. Now, the bank of England has no such fund of credit on the continent, that I know; and were that country to fall into as great distress, by a heavy balance, as Scotland has, she would find as many difficulties in extricating herself by domestic borrowings, bank circulation, etc. as Scotland has found by the like domestic expedients. She would then be obliged, for her relief, to have recourse to a fund opened in Holland, Spain, or Portugal, like to what I propose for Scotland with respect to England.

I have heard it alleged, that the whole distress occasioned to the banks and circulation of Scotland, was occasioned by a false step taken by them, some years ago; at the time when the lowness of the English funds, and a prospect of a peace, occasioned great remittances from Scotland, and a withdrawing of the large capital of, perhaps, 500,000 l. owing in Scotland to English persons of property.

At that time, it is said, the banks imprudently launched out in giving extensive credits to the debtors of those capitals, and to those who wanted to remit the funds they had secured in the hands of people who could not pay them; that this threw a load of paper into circulation, which it could not vent, being far beyond the extent of it; and that, consequently, the paper came back upon the bank, produced a demand for coin, which soon exhausted, in a manner, all that was in Scotland; and that the country has never been able to recover itself since.

This representation is plausible, and has an air of being founded on principles: in order therefore to serve as a further illustration of the subject of circulation, I shall point out where the fallacy of it lies.

It is said the banks did wrong in giving those credits. I say, they did right; but they did wrong in not providing against the consequences.

Had they refused the credits, the English and other creditors would have fallen directly upon their debtors, and obliged them to pay, by a sale of their lands, at an under value; which, I think, would have been an infinite loss to Scotland. In this way the price would have been paid in bank paper, taken out of circulation; for we have said, that he who owes must pay, be the consequence what it will. This paper would have come upon the banks at any rate: and being a balance due to strangers, must have been paid by the banks. The banks therefore did right to supply the credits demanded; but then they might have foreseen that the whole load of paying those debts would fall upon them; which they being in no capacity to do, should have immediately pledged in England, the interest of the credits they had given out, after supplying the want of Scots circulation, and when the notes came in, they would have had at London the capital of that interest prepared for paying them off, and no inconvenience would have been found.

The only thing then the banks seem to have misjudged, was the granting those credits too hastily, and to people who perhaps would not have invested their funds in England, had it not been from their facility in giving credit.

Banks therefore should well examine the state of circulation, and of the grand balance, in difficult times, before they give credit. If circulation be full, they may, with justice, suspect that the credits are demanded with a view of expediency, to transport property out of the country, which otherwise may remain. But in favour of circulation, or in favour of what may be exacted by foreign creditors, banks never can misjudge it in giving credit; because, if they should refuse to do it, they in the first place incur a loss themselves; and in the second place, they diminish the fund of circulation, and thereby hurt the country. Now when, at such times, a credit is asked or given, that demand is a warning to banks to prepare; and by preparing they are ready, and no loss is incurred.

Upon the whole, it is an unspeakable advantage to a nation to have her foreign debts paid by her bank, rather than to remain exposed to the demands of private foreign creditors; because, when a bank pays them, I suppose her to do it upon a loan in the funding way, where the capital is not demandable by the creditor; whereas when private citizens are debtors to strangers, the capitals are always demandable; and when a call comes suddenly and unexpectedly, the country is distressed. What would become of Great Britain, were all her debts to strangers demandable at any time? It is the individuals who owe, in effect, all that is due to foreigners; because they pay the interest: but they pay this interest to the public; and the public appears as the debtor to all strangers, who have no right to exact the capital, although the state may set itself free by making payment of it whenever it is convenient.

I have said above, that after all my reasonings, I could discover but one motive to induce a bank to withhold credit at a time when it was demanded for the use of domestic circulation, viz. jealousy of other banks. What my combinations could not then discover, my inquiries have since unfolded.

It is said, that the banks finding so great a propensity in the inhabitants of Scotland to consume foreign manufactures and produce, fell upon this expedient for calling in the old, and for refusing new credits, in order to cut off such branches of hurtful luxury and expence.

Could the execution of such a plan prove a remedy against the vice complained of, this circumstance alone would more clearly demonstrate the utility of banks upon mortgage, than all I have been able to say in favour of this establishment.

Let us therefore have recourse to our principles, in order to discover what influence a bank can have in this particular.

We have distinguished between necessary and voluntary circulation: the necessary has the payment of debts; the voluntary has buying for its object.

We have said that he who owes is either a bankrupt, or must pay, as long as there is a shilling in the country.

But he who buys, or inclines to buy, must have money, or he can buy nothing; for if he buys on credit, he then falls immediately into the former category, and must pay.

By withholding money for the uses of circulation, which banks may do for some time, buying may be stopped; paying never can.

Now if the mass of money in circulation be brought so low, as that the higher classes of the people, who consume foreign productions, cannot find money to buy with, what are we to suppose will be the case with manufacturers, and with the merchants who buy up their work? Could this operation of the bank affect the higher classes only, by curbing their anti-patriot expences, without affecting the lower classes, by curbing their industry, I should think it an admirable discovery. If it even could be made to affect those merchants and shopkeepers only, who deal in foreign commodities, so as to discourage them from carrying on that business, there would result from it a notable advantage.

But alas! wherein are they hurt? They trade in such commodities, not because they are bad citizens, but because they are freemen, and seek for profit wherever the laws permit.

Perhaps, they find more difficulty than other people in forcing coin from the bank, as matters stand: perhaps, they are loaded with opprobrious appellations for extorting such payments from the bank: perhaps, their credits with the bank are recalled. But must not those who buy from them, pay them? And must not the bank give coin, or bills, for the notes they receive, when presented for payment? Why, therefore, throw difficulties in the. way? All the world knows, that no human engine can prevent a merchant from laying all the expences of his trade upon the consumer. Correct the taste of the consumers, and you may stop the trade: no other restraint will be of any consequence. But in order to correct the taste of consumers, do not deprive them absolutely of money; because the money the extravagant landlord receives, comes from the industrious farmer, for the price of his grain, etc. Would it be a good scheme for preventing soldiers from drinking brandy, to cut off their subsistence-money? Give a drunkard but a penny a day, it will go for liquor; and those who are fond of foreign clothing, will take the price of it from their bellies, to put it on their backs.

If this scheme of the bank's withholding credit, prove, at present, any check to those dealers in English goods, it will be but for a very short time. They have been taken by surprize; and perhaps, thrown into inconveniences from an unexpected change of bank management; but as long as there is a demand for such commodities, there will be a supply of them; and when people owe, they must pay. No operation of a bank can prevent this.

I must, therefore, according to principles, disapprove of this public-spirited attempt in the banks of Edinburgh; because, if it should succeed, it will have the effect of ruining all the trade and industry of Scotland, in order to prevent the sale of English goods: and if it does not succeed, which is more than probable, from the assiduity of other banks in supplying credit, it will have the effect of ruining the banks of Edinburgh themselves.

This step, of calling in the bank credits, and opening a subscription for a loan, is represented by others in a light somewhat different.

By these it is alleged, that in the beginning of the year 1762, when the Edinburgh banks withdrew 1/4 of all their cash accompts, and opened a subscription for borrowing their own notes, at an interest of 4, and even 5 per cent the demand for money, to send to England, was not occasioned by the great balance owing by Scotland, but to the high premium money then bore at London; because says the author of a letter to J... F...... Esq; published at that time,

'This demand arises from a profit on carrying money to London, as a commodity, and not as a balance of trade.'

It is not easy to comprehend how there could be much profit in carrying money to London at 3 per cent loss by exchange, from Scotland, where it bore 5 per cent interest.

It is true, that at certain times, there were considerable profits made upon stock-jobbing; by which some won, and others were ruined. I agree, that the country was greatly hurt by the folly of those who played away their own property, and by the roguery of others, who borrowed that of their neighbours, with an intention of gaming at their risk. But is this a vice which any bank can correct, while it has a note in circulation?

Had it therefore been a sentiment of patriotism which moved the banks to such a plan of conduct, I say they thereby did more hurt to industry, by contracting circulation, than good to Scotland, by attempting a thing which was beyond their power to accomplish.

If they were moved to it by a principle of self-preservation, I say they lost their aim, by cutting off their own profits, which would have done much more than indemnify them for the loss of borrowing at London, at the time when money there was hardest to be got: for whatever exorbitant expence of exchange gamesters may incur, to procure ready money to play with, the rate of the stocks at that time never was so low, as to afford a profit upon money remitted at 3 per cent loss by exchange, while that money was bearing 5 per cent interest at home.

The lowest rate of stocks was in January 1762. Towards the end of that month 3 per cents fell to 63 1/4: this makes the value of money to be about 4 l. 12 s. per cent. In these funds, certainly, no body could invest, with profit, money sent from Scotland.

After the new subscription had been open for some time, scrip indeed, or 4 per cent fell in this month so low as 74 1/2, that is, money rose to 5.4 per cent whereas had scrip stood at the proportion of the 3 per cents it should have been worth about 84: but at the beginning of a war with Spain, when the minds of men were depressed, and filled with apprehensions, and when a new loan was perhaps expected at a higher interest than ever government had given, was it natural for people to be fond of investing in a 4 per cent stock, which was to fall to 3 per cent in a few years?

Besides, let us examine the profit to be made by investing even in this fund. 100 l. produced in Scotland 5 l. interest, this capital remitted to London at 3 per cent exchange, was reduced to 97 l. now if 74.5 l. produced 4 l. the produce of 97 l. would be about 5 l. 4 s. Would any man for the sake of 1/5 per cent advance of interest on money remitted, ever think of sending large sums to London to be invested in a falling stock?

I allow that, upon opening subscriptions, great profit was sometimes made by those who contracted with government, and who received the subscriptions at prime cost. But this profit depended entirely upon the subsequent rise of the subscription, when the original subscribers brought it first to market; as also from the small sums they had advanced: this operation was over before the end of January 1762. The smallness of the sum advanced, upon which the profit was made, and the ministerial interest which was necessary to obtain a share in those subscriptions, rendered it extremely difficult for people in Scotland to share in the profit by remitting large sums in the proper point of time.

Farther, might not the banks, in the short period during which such large profits were made, had they had the exchange in their hands, have raised it so high as to frustrate the attempts of our Scots gamesters? If it be said, that exchangers would have disappointed them, by giving it, lower. I answer in the negative: because with this set of men exchange will rise, of itself, in proportion to the value of money in the place to which people incline to remit it. And could money at any time bring in, at London, 20 per cent interest, exchange upon that place would rise universally in proportion.

The only motive, not already mentioned, for sending money to London at this time, under so great disadvantages, was the prospect of a great rise upon the stocks, in the event of a peace. Upon which I observe, that the value of that probability was included in the then price of stock; and had the probability of a peace, in January 1762, been great, stocks would have risen in proportion: he, therefore, who vested his money in stock, by remitting from Scotland at that time, upon an expectation peculiar to himself, I consider as a gamester, and as an ignorant gamester too; because he was giving odds upon an equal bett. This every man does, who, without any prospect of a profit peculiar to himself, pays a high exchange to bring money to a market, where he buys at the same price with those who pay no exchange at all.

From these considerations, I am led to differ from the ingenious author of the letter to J. F. Esq; who says, 'That in the present case' (the circumstances operating in January 1762,) 'the demand' (for money to remit to London) 'is unlimited, and no provision the banks can make can be of use; on the contrary, could they find a treasure, suppose of a million, it would only serve to increase it; because this demand arises on a profit on carrying money to London as a commodity, and not as the balance of trade.'

Chapter XIV: Of optional Clauses contained in Bank Notes

As we are examining the principles upon which banks of circulation upon mortgage, which issue notes payable in coin, are established in Scotland, it is proper to take notice of every circumstance which may arise from the extensive combination of the interests of trade and circulation, especially when we find such circumstances influencing the political welfare of society.

An optional clause in a bank note is added to prevent a sudden run upon banks, at a time when more coin may be demanded of them than they are in a capacity to pay.

Banks not regulated by statute, are private conventions, in which the parties may include what conditions they think fit. Banks, therefore, may insert in their notes, the conditions they judge most for their own advantage. Thus, they may either promise peremptory payment in coin upon demand, or they may put in an alternative, that in case they do not choose to pay in coin, they may pay in bills, or in transfer of their stock, or in other circulating paper not their own; or they may stipulate payment at a certain time after the demand, with interest during the delay. All these alternatives are inserted, in order to avoid the inconvenience of running short of coin, and of being obliged to stop payment altogether.

We have said above, that the profits of banks consist in their enjoying the same interest for the notes they lend, as if the loan had been made in gold or silver. This is a very great object, no doubt; but the policy of nations has established it, and therefore we shall suppose it to be an incontroverted principle.

In which ever way, therefore, an optional clause is inserted, it should be such as to cut off all profit from the bank, upon all paper presented for payment, from the time of presentation; and every artifice used to suspend the liquidation of the paper, to the advantage of the bank, and prejudice of the bearer, should be considered as unfair dealing in the bank, and prohibited by law.

When the optional clause has no tendency to procure an advantage to the bank, in prejudice of the holder of the paper (except as far as the holder is thereby deprived of the use of the coin, which on certain occasions cannot be supplied by the paper), it becomes the duty of a statesman to examine how far it is expedient to suffer such stipulations to be inserted in a money, which is calculated to carry on the mercantile interest of the nation.

Banks, we have said, are the servants of the public, and they are well paid for their services. Although the notes issued by them are not commonly made a legal tender in payment; yet the consequence of a well established bank, is to render them so essential to circulation, that what is not a legal obligation becomes one, in fact, from the force of custom.

Let us therefore examine the advantages which result to banks from this optional clause, and the loss which results to a nation from their using it, and then compare the advantages with the inconveniences, in order to determine whether it be expedient to permit such obstructions in the circulation of paper.

The advantage which banks reap is confined to that of gaining time, at the expence of paying interest. The interest paid by them is an awkward operation. They receive interest for the note; because they have in their possession the original security given for the notes when they were first issued; and they begin to refund this interest to the holder of the note from the time they avail themselves of the optional clare. Could banks, therefore, borrow coin in a moment, at the same interest which they pay to the holder of the note, they would certainly never make use of this optional clause. But this coin can not be found in a moment; and the banks, to save themselves the trouble, and the expence of augmenting their fund of coin, or of procuring a fund in another country, upon which they might draw for the payment of that national balance, which, by becoming banks, they tacitly engage to pay for the nation; render the credit of individuals precarious with strangers, and raise a general distrust in the whole society which they ought to serve. Here then is a very great loss resulting to a nation from the establishment of banks. Were no bank established, no merchant would contract a debt to strangers, without foreseeing the ready means of discharging it with the coin circulating in the country. In proportion as this coin came to diminish, so would foreign contracts of debt diminish also. Thus credit, at least, might be kept up, although trade might be circumscribed, and manufactures be discouraged. Now when, in order to advance trade and encourage manufactures, a statesman lends his hand towards the melting down of solid property, and countenances banks so far as to leave this operation to them, with the emolument of receiving interest for all their paper; and when, in order to facilitate the circulation of this paper, the very inhabitants concur in throwing all their specie into a bank, is it reasonable to indulge banks so far as to allow them to add an optional clause, which disappoints the whole scheme, which stops trade, ruins manufactures, raises the interest of money, and renders the operation of melting down property quite ineffectual for the purposes which it was intended to answer. Farther:

The loss a bank may be at, in providing coin, is susceptible of estimation, let it be brought from ever so distant a country; because we know that the quantity to be provided never can exceed the value of the grand balance. But who can estimate the loss a nation sustains, when an interruption is put to the carrying on of trade and manufactures? When the industrious classes of inhabitants are forced to be idle for a short time, the consequences are hardly to be repaired: they starve, they desert; the spirit of industry is extinguished: in short, all goes to ruin.

Besides, when banks do not lay down a well digested plan for paying regularly, and without complaining, this grand balance due to strangers, they are forced to have recourse to expedients for preserving their credit, more burdensome, perhaps, than what is required of them; and not near so effectual for removing the inconveniences complained of.... This being the case, the shortest and the best method for preventing such abuses, is to oblige banks to pay upon demand, in coin or bills, at the option of the holders of the note. This will force them into the method for providing them; to wit, fairly to borrow money from nations to whom we owe, and to pay a regular interest for it, without an obligation to refund the capital, until the grand balance shall take a favourable turn; in which case, the banks will regorge with coin drawn from strangers; and these strangers will then find as great an interest in being repaid, as the bank found in borrowing from them, while the balance was in their favour.

Chapter XXII: Of the Bank of England and of the Banks of Circulation established on Mercantile Credit

I have examined, with all the care I am capable of, the nature of banks calculating for the melting down of solid property, and the converting of it into paper for the use of circulation.

The nature of such banks is but little known in countries where they have not been established; therefore a distinct account of them may suggest hints, which in time may prove useful.

People who do not employ their thoughts on the theory of trade and credit, are apt to overlook objects of real utility; and those who do, have seldom the opportunity of being informed of the customs of different nations. Were my experience greater, or had I more opportunities to dive into the recesses of this great object, the work I now present to the public would better deserve its attention.

I now proceed to a deduction of the principles upon which are founded those banks which are chiefly calculated for the use of commerce; and as the ground-work of my inquiry, I shall trace some of the principal operations of the bank of England.

The establishment of this great company was formed about the year 1694. Government at that time having great occasion for money, a set of men was found who lent to it about 1,200,000 l. sterling, at 8 per cent for the exclusive privilege of banking for 13 years: with this additional clause, that 4000 l. sterling, per annum, should be given them to defray the expence of the undertaking. This sum of 1,200,000 l. sterling, was the original bank stock. It has been since increased to 11,000,000 l. by farther loans to government, for the prolongation of their privileges; as has been taken notice of in the 16th chapter of the second part.

This stock, as in banks of circulation upon mortgage, is to be considered only as a subsidiary security to the public for the notes they issue: were it the principal and only security for their paper, this bank would then be founded on the principle of public, not of mercantile credit; under which last denomination we are going to point out in what the nature of it differs from those we have already explained.

It is a rule with the bank of England to issue no notes upon mortgage, permanent loan, or personal security. The principal branches of their business may be comprehended under four articles, viz. 1. The circulation of the trade of London: 2. The exchequer business of Great Britain: 3. The paying of the interest of all the funds transferable at the bank: 4. Their trade in gold and silver. I shall now shortly explain the nature of these four great operations; and first as to the circulation of the trade of London.

When we speak of the circulation of trade, we understand the circulation of money paid on the account of trade.

The great occupation of the London merchants engages them to simplify their business as much as possible. For this they commit to brokers every operation which requires no peculiar talents or ingenuity in the merchant himself; and, for a like reason, they commit to the bank and private bankers the care of their cash.

A Scots merchant begins by drawing money from the bank, or from an exchanger, for which he pays interest: a London merchant begins by putting money into the bank, for which he draws no interest at all.

A London merchant, therefore, can give no order upon the bank, unless at a time when he has money lodged in it.

If he has occasion for money at any time, he sends to the bank the bills he has before they become due, and the bank discounts them at certain rates, according to their nature.

If it be a foreign bill, the bank, in discounting it, retains of the sum, at the rate of 4 per cent per annum, for the time the bill has to run; but if the bill be at a longer day than 6o days they will not discount it. So in this case the merchant must keep his bill until it is within 6o days of the term of payment.

The reason for this is evident: the security upon which such bills stand, is purely mercantile. The nearer, therefore, the payment is, the less risk the bank incurs from the failure of those who are bound in it.

The intention of this operation of discounting hills, is plainly to employ the cash of the bank in a way to draw an interest for it; but as merchants allow their money to lie dead for as short a time as they possibly can, the bank must have quick returns for what they advance upon discount, in order to be constantly ready to answer all demands. This is no loss to the bank, and a prodigious advantage to trade, as I shall briefly explain.

The bank is constantly receiving cash from every person who keeps their cash with it. This occasions a constant fluctuation of payments, which of course must leave at all times a considerable sum of other people's money in the bank; because it never is in advance to any one.

By long practice in the trade, this sum of money becomes determinate: let us call it the average-money in the hands of the bank. It is then with this average-money alone, that the bank can discount bills. Now if the trade of London do afford bills to be discounted at different dates within 60 days, sufficient to absorb the whole average-money of the bank, appropriated for discounting; this branch of business would not go forward with the celerity required for the trade of London, did the bank indulge merchants so far as to discount at a longer day.

From this we learn another reason why the bank of England discounts no bill which has more than 60 days to run. The first, mentioned already, is for the greater security of payment; and the second, which we now discover, is in order to be able to discount more bills than otherwise they could do, did they discount at a longer day.

As I am here upon the subject of discounting bills of exchange by the bank of England, an operation it has in common with all the private bankers in the capital, I must answer a question I have frequently heard proposed.

How does it happen, that in a city of so great trade as London, it is possible that people should be found even among merchants, who allow their money to remain in the hands of bankers without interest; when in Scotland, a place of so little trade, interest may always be got for money for the shortest time?

The answer to this question is to be gathered from the very principles of trade itself.

The money which merchants have either in the hands of the bank, or of bankers, though very considerable at all times, is in perpetual fluctuation: it cannot then be lent to any but to a banker, who would consent to pay interest for the sums in hand. But no such banker can be found, nor ever will be found, until all the bankers in London consent to such a regulation. The reason is plain. One principal use the bankers make of the average-money in their hands, is the discounting of bills. Who then could pay interest for money, and discount, in competition with others of the same trade, who have it for nothing?

But suppose the bank, and all the bankers in town, should come to the resolution of giving interest for the money in their hands, what would be the consequence?

I answer, that upon such an alteration, discount would rise above the present rates, to the great prejudice of the trade of the nation; and bankers would lend money in their hands upon a more precarious security for the sake of a higher interest.

All the landed men who reside in London, and many other wealthy people, not concerned in trade, constantly keep their money either in the bank, or in some banker's hand without interest: this enables bankers in general to discount foreign bills at 4 per cent as has been said, even when the rate of interest is rather above this standard. This is, as it were, a contribution from the rich and idle, in favour of the trade of the nation.

Let, therefore, gentlemen who have much idle money, think of any other expedient than that of obtaining interest for it, from those who discount bills in London. Not one of them can afford to do it, and thrive by his business; and the hurt which would result to trade in general, will constantly be a sufficient bar against a general resolution for that purpose.

What has been said, will, I hope, prove satisfactory as to the resolution of the question above proposed, so far as regards London. It remains to be answered, how those who supply the place of bankers in Scotland, and even the banks themselves can afford to pay interest for any sum put into their hands for a short time.

I answer, that as to the Scotch exchangers, as we have called them, the profits on their trade admit of borrowing money at interest, which that of the bank of England and private bankers cannot do. If these last can gain 4 or 5 per cent by discounting of bills, it is all they can honestly expect: every other employment of the money in their hands is precarious, either as to the security or promptitude of calling it in, to answer the demands which are made upon them.

As to Scotland, we have seen how directly contrary to all principles it is, for its banks to borrow money within the sphere of their own circulation. How this diminishes the profits upon their own trade, and hurts the circulation of the country; but although it diminish their profit, it carries along with it no positive loss to them, as would be the case, were a London banker to pay interest for all the money in his hands, when he never can draw any back, except for that part which we have called the average.

Every London banker is obliged to have a certain sum of cash constantly in his chest, the interest of which would be all lost, did he pay for it: whereas the exchangers in Scotland never have a shilling by them; and when any demand is made upon them, they draw the money from the banks, in consequence of their credit by cash accompts.

Besides foreign bills, which the bank of England discounts at 4 per cent they also discount inland bills, and notes of hand between merchants in London, at 5 per cent.

The inland bills to be discounted at the bank must all be payable in London. The bank calls in no money from any distant quarter of the kingdom.

As the discounting of notes of hand between London merchants might operate the same effect, as if the bank should advance them money upon personal security, which would be the case, were the notes of hand drawn for obtaining credit, instead of paying money really due between the merchants, in the course of business; the clerks of the bank keep a watchful eye over this branch of management, and, by examining the reciprocal draughts of merchants between themselves, they easily acquire a knowledge of the state of their affairs, and are thereby enabled to judge how far it is expedient to launch out in discounting either the notes or bills wherein they are concerned.

I shall not pretend to assign a reason why, in the price of discount, the bank makes a difference of 1 per cent between foreign and inland bills of exchange. It may either be an indulgence and encouragement to foreign trade; or it may be upon the consideration of the better security of foreign bills, which commonly pass through several indorsations before they are offered to be discounted at the bank.

I come next to the circulation between the bank and the exchequer.

The bank of England is to the exchequer, what a private person's banker is to him. It receives the cash of the exchequer, and answers its demands.

Cash comes to the exchequer from the amount of taxes. The two great branches of which are the excise and customs. To explain this operation with the more distinctness, I shall take the example of the excise.

The excise is computed to bring in annually from London, and the fifty two collections over all England, nett into the exchequer, above four and a half millions sterling.

The fifty two collectors send the amount of their collections to London eight times a year, almost entirely in bills. As the same may be said of the remittances of all the other taxes, we may from this circumstance observe by the way, that London alone must constantly owe to the country of England a sum equal to all the bills drawn upon it; that is to say, to all the taxes which the country pays: a circumstance not to be overlooked, from which many things may be learned, as will be taken notice of in the proper place.

The bills sent by the fifty two collectors, are drawn payable to the commissioners of excise; they indorse them to the receiver general; he carries them to the bank as they fall due, and gets a receipt for the amount; this receipt he carries to the exchequer, who charge it in their account with the bank, and deliver tallies to the receiver general for the amount of his payments; these tallies he delivers to the commissioners of excise, who enter them in their book of tallies. This operation is performed once every week, and serves as a discharge from the commissioners to the receiver general.

The bank, again, keeps an account with the exchequer, which is settled once every day, by two clerks, who go from the bank to the exchequer for this purpose. When coin is wanted by the exchequer, for payments where bank notes will not answer, the coin is furnished by the bank; when paper will serve the purpose, paper is issued.

Besides this operation in the receipt of taxes, the bank advances to government, that is to the exchequer, the amount of the land or other taxes imposed, which are to be levied within the year. This we see is a loan upon government security for a short term, quite consistent with the principles upon which the bank is established. The large sums the bank is constantly receiving of public money, and the great assistance it obtains from thence in carrying on the other branches of its trade, enable it at present to make advances of money to government at 3 per cent. It observes the same rule with respect to the great companies of the East Indies, and South Sea, for the same reason; but no advances are made to private people; and in the discounting of bills and notes of hand, the regulations above mentioned are adhered to.

Thus the whole amount of taxes is poured into the bank, in the manner we have been describing.

The bank also keeps the transfer books of all the funds negotiated at the bank; and out of the public money in its hand, it pays the interest of these funds for which government allows to the bank a sum proportionate to the expence of this branch of management.

When the bank, as a company, lends to government upon a permanent fund, the capital whereof is not demandable, this operation is foreign to their business as a bank, and is conducted by the company as an article of management of their private property.

Let us now examine by what channels their notes enter into circulation, and the security upon which they stand.

When issued in the discount of bills, they stand upon the principles of mercantile credit, and depend upon the goodness of the bills discounted. When issued upon the faith of taxes to be paid within the year, they stand upon the security of this payment, which is of a very complex nature, as any one may perceive. As long as the inhabitants of England consume excisable goods, the excise will be paid: as long as trade goes on, customs will be paid: and as long as government subsists, the collateral security of the state will serve to make up all deficiencies in the amount of taxes. No security, therefore, can be better than the notes of the bank of England, while government subsists. The losses that great companies meet with from bad debts, I am informed, are very inconsiderable.

The greatest risk the bank runs, is in discounting bad bills; but by the extent of their business in this branch, and by circulating the cash of all the merchants who keep accounts with them, they acquire so perfect a knowledge of the state of their affairs, that it rarely happens that any one can break for very considerable sums, without the bank's having a previous notice of it. A sudden loss may no doubt happen, without a possibility of being foreseen; but the matter of fact proving that their losses upon bad bills are inconsiderable, we may thence infer, that there is but little mystery to the bank, with regard to the credit of London merchants.

I come now to the last branch of their management, to wit, their trade in gold and silver.

For the circulation of bank notes, coin is necessary. We have seen, in treating of the Scotch banks, how coin is brought it: to wit, in consequence of all the payments made to the bank, in which there must be a proportion of coin equal to what is found in common circulation. What is not paid in coin, comes in, in their own notes, which are thereby taken out of the circle; and consequently make place for a subsequent supply, which issues in the manner we have described.

In times of peace, and a favourable balance of trade, the bank suffers little by the obligation it is under to pay in coin, except as far as the great confusion of the present currency affords an occasion to money-jobbers to melt down the new guineas. The extent of this traffic I am no judge of, and the bank no doubt has an interest in preventing it as far as the laws have provided a remedy against it.

But when large payments are to be made abroad, the distress of the bank is no doubt very great.

In Scotland, the banks, upon such occasions, are totally drained of coin. They have no market for the metals; because they have no mint to manufacture them into coin. It is different with respect to the bank of England; their distress proceeds from another cause.

The exportation of the heavy guineas in time of war, and during a wrong balance upon the trade of England, leaves circulation provided with a light currency only, in which the bank is obliged to pay their notes; and the intrinsic value of the gold in which they pay, regulates the price of the metals they are obliged to buy at market. If they provide them themselves from abroad, they must pay the price of them in bills of exchange. But then the lightness of the currency at home sinks the value of the pound sterling, as it raises the value of the ounce of gold and silver. So the only considerable loss they incur, is in providing the metals, which must ever be considerable, as long as the old guineas remain in circulation.

The loss upon coining silver is still greater than upon gold; because besides the loss incurred by reason of the lightness of the gold, the metals in the silver and gold coin of Great Britain, are not proportional to the value they bear in the London market, where they have been bought; as has been sufficiently explained already in another place.

Chapter XXIII: Of the first Establishment of Mr Law's Bank in France, in the year 1716

In deducing the principles of credit, I have it chiefly in view, to set in a fair light, the security upon which paper money is established: and as I imagine, this important branch of my subject will still be rendered more intelligible, by an example of the abuse to which this great engine of commerce is exposed, I now propose to give my reader a short account of the famous bank of circulation first established in France by Mr Law; but afterwards prostituted (whether by design, or by fatality, I shall not here determine) to serve the worst of purposes; defrauding the creditors of the state, and a multitude of private persons.

So dreadful a calamity brought upon that nation, by the abuse of paper credit, may be a warning to all states to beware of the like. The best way to guard against it, is to be apprised of the delusion of it, and to see through the springs and motives by which the Mississippi bank was conducted.

After the death of the late King of France, Louis XIV, the debts contracted by that Monarch were found to extend to 2000 millions of livres, that is, to upwards of 140 millions sterling.

It was proposed to the Duke of Orleans, regent of the kingdom, to expunge the debts by a total bankruptcy. This proposal he rejected nobly; and, instead of it, established a commission (called the Visa) to inquire into the claims of such of the nation's creditors as were not then properly liquidated, nor secured by the appropriation of any fund for the payment of the interest.

In the course of this commission, many exorbitant frauds were discovered; by which it appeared, that vast sums of debt had been contracted, for no adequate value paid to the King.

After many arbitrary proceedings, this commission threw the King's debts, at last, into a kind of order.

Those formerly provided for were all put at 4 per cent. The creditors to the amount of six hundred millions, which had not been liquidated, nor provided for, had their claims reduced, by the commission, to two hundred and fifty millions. for which they obtained notes of state, (Billets d'état, as they were called,) bearing an interest of 4 per cent also.

These operations performed, the total debts of the late King were reduced to the sum above mentioned; to wit, two thousand millions; bearing an interest of 4 per cent or eighty million per annum.

From the necessities of government, and the distressed situation of the kingdom, this interest was ill paid; and there hardly remained, out of an ill-paid revenue, wherewith to defray the expence of the civil government.

About this time, Mr Law presented to the Regent the plan of a bank of circulation.

Chapter XXV: Continuation of the Account of Law's Bank

The bank accordingly was established in favour of Law and Company, by letters patent, of the 2nd of May 1716. The Company was called, the General Bank; and the note run thus:

The bank promises to pay to the bearer at sight livres, in coin of the same weight and fineness with the coin of this day, value received at Paris.

The first fund of this bank consisted in 1200 actions (or shares) of one thousand crowns (or 5000 livres) bank money; in all six millions; the crown being then 5 livres, 8 to the marc; silver coin at 40 livres per marc, as has been said: which makes this livre just worth one shilling sterling: consequently, the shares were worth 250 l. sterling, and the bank stock worth 300,000 l. sterling.

By the clause in the note, by which the bank was obliged to pay according to the then weight and fineness of the coin, those who received their paper were secured against the arbitrary measures common in France of raising the denomination of the coin; and the bank was secured against the lowering of it. In a short time, most people preferred the notes to the coin; and accordingly they passed for 1 per cent more than the coin itself.

This bank subsisted, and obtained great credit, until the 1st of January 1719: at which time the King reimbursed all the proprietors of the shares, and took the bank into his own hand, under the name of the Royal Bank.

Upon this revolution, the tenor of the note was changed. It ran thus: The bank promises to pay to the bearer at sight, livres, in silver coin, value received at Paris.

By this alteration, the money in the notes was made to keep pace with the money in the coin; and both were equally affected by every arbitrary variation upon it. This was called rendering the paper monnoie fixe; because the denominations contained in it did not vary according to the variations of the coin: I should have called it monnoie variable; because it was exposed to changes with respect to its real value.

Mr Law strenuously opposed this change in the bank notes. No wonder! it was diametrically opposite to all principles of credit. It took place, however; and nobody seemed dissatisfied: the nation was rather pleased: so familiar were the variations of the coin in those days that nobody ever considered anything with regard to coin or money, but its denomination: the consequences of the variations in the value of denominations, upon the accompts between debtors and creditors, were not then attended to; and the credit of the notes of the royal bank continued just as good as the credit of those of Mr Law's had been; although the livres in this contained a determinate value; and the livres in that could have been reduced at any time to the value of halfpence, by an act of the King's authority, who was the debtor in them. Nay more, they in fact stood many variations during the course of the system, without suffering the smallest discredit. This appears wonderful; and yet it is a fact.(5*)

Political writers upon the affairs of France at this period, such as De Melon, Savarie, Dutot and others, abundantly certify the incredible advantage produced by the operations of Mr Law's Bank; and the chain of events which followed, in the years 1719, and 1720, when it was in the King's hands, shew to what a prodigious height credit arose upon the firm foundation laid by Mr Law.(6*)

But alas! the superstructure, then, became so far beyond the proportion of the foundation, that the whole fabric fell to ruin, and involved a nation, just emerging from bankruptcy and ruin, into new calamities, almost equal to the former.

As long as the credit of this bank subsisted, it appeared to the French to be perfectly solid. The bubble no sooner bursted, than the whole nation was thrown into astonishment and consternation. Nobody could conceive from whence the credit had sprung; what had created such mountains of wealth in so short a time; and by what witchcraft and fascination it had been made to disappear in an instant, in the short period of one day.

Volumes have been since written in France, by men of speculation, in order to prove, that it was a want of confidence in the public, and not the want of a proper security for the paper, which occasioned this downfall.

This, if we judge by what has been written, has been the general opinion of that nation to this day: and since it was found impossible, in France, to create confidence in circulating paper, which had no security for its value, many people there, and some even among ourselves, conclude, that a great part of the wealth of Great Britain, which consists in paper, well secured, is false and fictitious.

I shall now proceed to set before my reader the great lines of the Royal Mississippi Bank of France, from the 1st of January 1719, to the total overthrow of all credit, upon the fatal 21st day of May 1720. This was a golden dream, in which the French nation, and a great part of Europe was plunged, for the short space of 506 days.

Chapter XXVI: Account of the Royal Mississippi Bank of France, established on Public Credit

In order to unravel the chaos of this affair in a proper manner, it will not be amiss to begin by giving the reader an idea of the plan which naturally might suggest itself to the regent of France, from the hint of Mr Law's bank. By the help of this clue, he will be the better able to conduct himself through the operations of this system, as the French call it.

The Regent perceived, that in consequence of the credit of Law's bank, people grew fond of paper-money. The consequence of this, he saw, was to bring a great quantity of coin into the bank. The debts of France were very great, being, as has been said, above 2000 millions. The coin, at this time, in France, was reckoned at about 1200 millions, at 60 livres the marc, or 40 millions sterling. The Regent thought, that if he could draw either the whole, or even the greatest part of this 1200 millions of coin into his bank, and replace the use of it to the kingdom, by as much paper, secured upon his word, that he should then be able to pay off, with it, near one half of all the debts of France: and by thus throwing back the coin into circulation, in paying off the debts, that it would return of itself into the bank, in the course of payments made to the state; that credit would be thereby supported, as the bank would be enabled to pay in coin the notes as they happened to return, in the course of domestic circulation.

This was both a plausible and an honest scheme, relatively to a Duke of Orleans, whom we cannot suppose to have been master of the principles of credit; and very practicable in a country where there was so great a quantity of coin as 40 millions sterling, and a well-established credit in the bank, which prevented all runs upon it from diffidence. Nothing but a wrong balance of trade could have occasioned any run for coin; because, for the reason already given, the paper bore for the most part a premium of 1 per cent above it.

Accordingly, during the whole year 1719, the credit of the royal bank was without suspicion, although the regent had, by the last day of December of that year, coined of bank paper, for no less a sum than 769 millions, reckoning in 59 millions of paper, which had been formerly issued by the general bank of Law and company; for which he had given value to the proprietors, when he took the bank into his own hands, as we have said above.

I must here observe, that by this plan of the Regent, there was, in one sense, a kind of security for the notes issued. So far as they were issued for coin brought in from the advanced value of the paper, this coin was the security: in the second place, when the coin was paid away to the creditors of the state, the Regent withdrew the obligations which had been granted to them; and although I allow that the King's own obligation withdrawn, was no security to the public, who had received bank notes for the payment of it; yet still the interest formerly paid to the creditors, was a fund out of which, upon the principles of public credit, the annual interest for the notes was secured. Had, indeed, the French nation perceived upon what bottom the security for the paper stood, during the year 1719, perhaps the credit of the bank might have been rendered precarious; but they neither saw it or sought after it: and the men of speculation were all of opinion, that as long as there was no more paper issued by the bank than there was coin in the kingdom, there could be no harm done. Of this, any person who has read Dutot, De Melon, Savarie, and others, will be perfectly satisfied. And I desire no farther proof of the total ignorance of the French in matters of this kind, than to find them agreeing, that bank paper must always be good, provided there be coin in the nation to realize it, although that coin be not the property of the bank. (Dutot, p. 132, 133.) On the contrary, it is very evident from what has been said, that although there should be a thousand times more coin in a country than the bank paper, still that bank paper must be a mere delusion, and, in fact, of no value whatsoever, except so far as the bank is possessed of the value of it in one species of property or another.

And on the other hand, let the bank paper exceed the quantity of coin in the proportion of a thousand to one, yet still it is perfectly good and sufficient, provided the bank be possessed of an equivalent value in any species of good property. This I throw in here to point out how far the French were, at least at that time, and many years after, when Dutot and Melon wrote, from forming any just notion of the principles of banking. And, I believe, I may venture to say, that the only reason why banks have never been established in France, is, because the whole operation is still a mystery to them. I ground this conjecture upon an opinion of M. de Montesquieu, who thinks that banks are incompatible, with pure monarchy; a proposition he would never have advanced, had he understood the principles upon which they are established.

The next remarkable and interesting revolution made upon this famous bank, was by the arret of February 22, 1720; which constituted the union of the royal bank with the company of the Indies.

By this arret, the King delivered to that company the whole management of the bank with all the profits made by him since the first of January 1719, and to be made in time to come. Notwithstanding this cession, the King remained guarantee for all the notes, which were not to be coined without an order of council: the company was to be responsible to the King at all times for their administration; and, as a security for their good management, they engaged to lend the King no less than sixteen hundred millions of livres.

Here is the aera and beginning of all the confusion. From this loan proceeded the downfall of the whole system.

Chapter XXIX: Continuation of the Account of the Royal Bank of France, until the time that the Company of the Indies promised a Dividend of 200 Livres per Action

These things premised, what follows will, I hope, be easily understood.

As soon as the Regent of France perceived the wonderful effects produced by Law's bank, he immediately resolved to make use of that engine, for clearing the King's revenue of a part of the unsupportable load of 80 millions of yearly interest, due, though indeed very irregularly paid, to the creditors.

It was to compass this end, that he bestowed on Law the company of the West Indies, and the farm of the tobacco.

To absorb 100 millions of the most discredited articles of the King's debts, 200,000 actions or shares of this company were created. These were rated at 500 livres each, and the subscription for the actions was ordered to be paid in billets d'état, so much discredited by reason of the bad payment of the interest, that 500 livres, nominal value in these billets, would not have sold upon change for above 160 or 170 livres. In the subscription they were taken for the full value. As these actions became part of the company's stock, and as the interest of the billets was to be paid to the company by the King, this was effectually a loan from the company to the King of 100 millions at 4 per cent.

The next step was to pay the interest regularly to the company. Upon this the actions which had been bought for 170 livres, real value, mounted to par, that is, to 500 livres.

This was ascribed to the wonderful operations of the bank; whereas it was wholly owing to the regular payment of the interest.

In May following 1719, the East India company was incorporated with the West India company: and it was stipulated that the 200,000 actions formerly created, were to be entitled to a common share of the profits of the joint trade.

But as the sale of the first 200,000 actions had produced no liquid value which could be turned into trade (having been paid for in state billets), a creation of 50,000 new actions was made in June 1719, and the subscription opened at 550 livres payable in effective coin.

The confidence of the public in Mr Law, was at this time so great, that they might have sold for much more: but it was judged expedient to limit the subscriptions to this sum; leaving the price of the actions to rise in the market, according to demand, in favour of the original subscribers.

This money amounting to 27,500,000 livres in coin, was to be employed in building of ships, and other preparations for carrying on the trade.

The hopes of the public were so much raised by the favourable appearance of a most lucrative trade, that more actions were greedily demanded.

Accordingly in a month after (July 1719) another creation was made of 50,000 actions; and the price of them fixed at 1000 livres.

It must be observed, that all actions delivered by the company of the Indies, originally contained an obligation on the company for no more than 4 per cent upon the value of 500 livres, with a proportion of the profits on the trade; so that the rise of the actions proceeded entirely from the hopes of those great profits, and from the sinking of the rate of interest; a consequence of the plenty of money to be lent.

But besides the trade, what raised their value at this time, was, that just before the last creation of actions,June 10, 1719, the King had made over the mint to the company for a consideration of 50 millions of livres; and this opened a new branch of profit to every one interested.

The sale of the last coined actions taking place at 1000 livres each, so great a rise seems to have engaged the Regent to extend his views much farther than ever. To say that he foresaw what was to happen, would be doing him the greatest injustice. He foresaw it not, most certainly; for no man could foresee such complicated events. But had he conducted himself upon solid principles; or by the rules which, we now say, common honesty required, he certainly never would have countenanced the subsequent operation.

The fourth creation of actions was in the beginning of September 1719.

In the interval between the third and the fourth creation, the Regent made over the general farms to the company, who paid three millions and a half advanced rent for them. And the company obliged themselves to lend the King (including the 100 millions already lent upon the first creation of actions) the immense sum of 1600 millions at 3 per cent that is, for 48 millions interest. Now it is very plain, that before the month of September 1719, it was impossible they could lend the King so great a sum.

They had already lent him, in September 1718, 100 millions, by taking the billets d'état for the subscription of the first creation of actions; the second creation had produced coin, laid out in mercantile preparations; and the third creation of actions, at the standard value, was worth no more than 50 millions of livres: this was their whole stock. Where then could they find 1500 millions more to lend?

I therefore conclude, that at this time, the scheme which I am now to unfold, must have more or less, taken place between the Regent and this great company.

The public was abundantly persuaded of the prodigious profits of the company, before they got possession of the general farms. No sooner had they got this new source of riches into their hands, than they promised a dividend of no less than 200 livres on every action, which was ten times more than was divided on them when at first created.

The consequence of this was, that (supposing the dividend to have been permanent and secure) an action then became as well worth 5000 livres as at first it was worth 500 livres; accordingly to 5000 did it rise, upon the promise of this new dividend.

But what could be the motive of the company to promise this dividend, three months only after their establishment? Surely, not the profits upon a trade which was not as yet opened. Surely, not the profits upon the King's farms; for these profits it was greatly their interest to conceal.

Their views lay deeper. The Regent perceived that the spirit of the nation was too much inflamed, to suffer people to enter into an examination of the wonderful phaenomena arising from the establishment of the bank, and company of the Indies. If the company promised 200 livres dividend, the public concluded that their profits would enable them to pay it; and really in this particular the public might be excused.

The plan, therefore, concerted between the Regent and the company seems to have been, to raise the actions to this great value, in order to keep up a greater quantity of notes in circulation.

This was to be accomplished, first by the Regent's purchasing the actions himself from the company; secondly, by borrowing back the notes he had paid for them, in order to fill up the loan which the company had agreed to make; thirdly, to pay off all the public creditors with those notes so borrowed back; and fourthly, when the nation was once filled with bank paper, to sell at an adequate price, the actions he had purchased from the company, to withdraw his own paper, and then to destroy it.

By this operation the whole debts of France were to be turned into actions; and the company was to become the public debtor, instead of the King, who would have no more to pay but 48 millions of interest to the company.

By this operation also, the Regent was to withdraw all the bank notes which he had issued for no other value but for the payment of debts; which notes were demandable at the bank: and for the future, he was to issue no more (I suppose) but for value preserved.

Chapter XXX: Inquiry into the Motives of the Duke of Orleans in concerting the Plan of the Mississippi

Now if we examine the motives of the Regent, with regard to this plan, and suppose that he foresaw all that was to happen in consequence of it; and if we also suppose that he really believed that the company never could be in a situation to make good the dividend of 200 livres, which they had promised upon their actions; in a word, if we put the worst interpretation upon all his actions, we must conclude that the whole was a most consummate piece of knavery.

But as this does not appear evidently, either by the succeeding operations, or ultimate consequences of this scheme, I am loth to ascribe, to that great man, a sentiment so opposite to that which animated him, on his entrance upon the regency, when he nobly rejected the plan proposed to him for expunging the debts altogether.

I may therefore suppose, that he might believe that the company to whom he had given the mint, the tobacco, the farms, and the trade of France, and to whom he soon after gave the general receipt of all the revenue, might by these means be enabled to make good their engagements to the public. I say, this may be supposed; in which case justice was to be done to everyone; and the King's debts were to be reduced to 48 millions a year, instead of 80 millions.

That this is a supposable case, I gather from Dutot, who gives us an enumeration of the revenue of the company, Vol. I, p. 162, as follows:

Revenue of the Company of the Indies.
Interest paid to the company per annum.48,000,000
Profits upon the general farms.15,000,000
Ditto upon the general receipt of other taxes.1,500,000
Ditto upon the tobacco.2,000,000
Ditto upon the mint.4,000,000
Ditto upon their trade.10,000,000
In all of yearly income.80,500,000

Now if we suppose the interest of money at 3 per cent this sum would answer to the capital of 2664 millions, which was more than all the debts of the kingdom, for which they were to become answerable.

Upon this view of the matter, I say, it was possible, that the Regent might form this plan, without any intention to defraud the creditors; and more I do not pretend to affirm.

I have said that he purposely made the company raise the price of their actions, in order to draw more notes into circulation.

To this it may be objected, that he might as well have paid off the creditors with bank notes, without going this round-about way to work; and have left them to purchase the actions directly from the company.

I answer, that such an operation would have appeared too barefaced and might have endangered the credit of the bank. Whereas in buying the actions, which were sought after by everybody, the state appeared desirous only of acquiring a share of the vast profits to be made by the company. Farther:

As the company appeared willing to accept of bank notes from the state, in payment of their actions, this manoeuvre gave an additional credit both to the actions, and to the notes; a thing very necessary to be attended to, in a scheme which was calculated to bring about a total transformation of the security for the King's debts.

I must however observe, that at the period concerning which we are now speaking (viz. at the time the company promised the dividend of 200 livres per action) the plan we have been describing could not have been carried into execution.

There were at that time no more than 400,000 actions created, rated at 777 millions: of these were already disposed of at least 250,000, to wit, the original 200,000; and the second creation of 50,000, sold for coin. Besides, there were then only coined in bank notes for 520 millions. So there was not a possibility of executing the plan I have mentioned, as matters then stood.

It is from the subsequent operations of the system, that it appears evident that this and this only could be the intention.

We shall see how the number of actions were multiplied, without any other view than to make the public imagine, that the funds necessary for carrying on the trade of the company were immense.

The number of the actions sold to the public was very inconsiderable, compared with those sold to the Regent, and found in his hands at the blowing up of the system.

Besides, at the period when the number of actions was carried to the utmost, viz. to 624,000, the bank notes bore no proportion to their value; for, on the 4th of October 1719, when the last creation of actions was made, the bank notes did not exceed the sum above specified, to wit, 520 millions.

But in tracing the progress of the system upon the preceding table, we perceive, that after the actions were once carried to their full number (October 4th 1719), the coining of bank notes went on at a most prodigious rate: so much that by the month of May 1720, they were increased from 520 millions, to above 2696 millions; and on the 21st of that month, all this sum, except 461 millions, were found in circulation.

Farther: We shall see, that when the Regent and the company made out their accompts, there were found in the Regent's hands no less than 400,000 actions, which were burnt; and in consequence of this 25 millions of interest upon the sum of money due by the King to the company, were extinguished.

These facts prove beyond a doubt, that these 400,000 actions had been bought with the notes coined posterior to the 4th of October 1719; otherwise the actions could not have become the property of the state.

Besides, it was acknowledged publicly, that the notes were coined for this purpose. (See Dutot, Vol. I, p. 144.) In the next place, it is evident, that the notes which had been given by the state in payment for these actions, must have been paid back to the state, by the company, in order to fill up the loan of 1600 millions of livres; which the company never could have otherwise lent to the King. And in the last place, it is certain that the public debts were paid off with these notes, so borrowed back from the company: because we shall find the notes in circulation at the blowing up of the system, on the 21st of May 1720; and we shall see how they were paid and withdrawn in October following.

This detail is, I confess, a little long, and perhaps too minute: but I thought it necessary to prove the solidity of my conjectures concerning the Regent's motives in concerting this plan; which no French author, that ever I saw, has pretended to unfold, except by hints too dark to be easily comprehended.

What is now to follow, will still set my conjectures in a fairer light. We have seen already from the table, with what rapidity the creation of actions went on from the 13th of September to the 4th of October 1719. No less than 324,000 were created in this interval.

Yet Dutot, vol. ii, p. 169, et seq. positively says, that on the 4th of October, the company had not sold for more than 182,500,000 livres of their actions. Now the total value, as they were rated when created, extended to 1,797,500,000; so there was little more than one tenth part of the value sold off.

Why therefore create such immense quantities of actions, and so far beyond the demand for them, but to throw dust in the eyes of the public; to keep up the spirit of infatuation; and to pave the way for the final execution of the plan?

The actions being brought, by four successive creations, of the 13th and 28th of September, the 2nd and 4th of October, to their full number, the company, during this interval, obtained the general receipt of the whole revenue. Thus, says Dutot, vol. ii, p. 197, the company was intrusted with the whole revenue, debts and expenses of the state, and all unnecessary charge was avoided in collecting and administering it.

In the month of November 1719, the credit of the bank, and of the company, was so great, that the actions rose to 10,000 livres. Notwithstanding, says Dutot, vol. ii, p. 198, that the company did what they could to keep down the price, by throwing into the market, in one week, for no less than 30 millions. He assigns seven different reasons for this, which, all put together, are not worth one; to wit, that the Regent was ready to buy up every one that lay upon hand, in concert with the company.

If the company had been inclined to keep down the price of the actions, they had nothing more to do than to deliver part of the vast number they still had unsold, at the standard value of 5000 livres, at which they were rated when created; and this would have effectually prevented their rising to 10,000 livres.

But it was the interest of the Regent, who was at that time well provided with actions, to stock-job, and to buy with one hand, while he was selling with the other: these operations were then as well known in the street called Quinquempoix, as now in Change-alley.

As a proof of the justness of my allegation, that the Regent was doing all he could to raise the price of the actions, Dutot informs us, in the place above cited, that the bank, at this very time, was lending money, upon the security of actions, at 2 per cent. Since this was the case, how was it possible that an action, with 200 livres dividend, should sell for less than 10,000 livres, which is the capital corresponding to 200 livres, at 2 per cent?

This is evident; and were it necessary, it may be proved to demonstration, that the rise of the actions was merely the consequence of a political contrivance.

But if money, at that time, came to bear no more than 2 per cent and if the company were able to afford 200 livres upon the action; where was the iniquity of raising the actions to 10,000 livres? I confess I can see none, nor do I perceive either the impossibility or improbability of the two postulata, had matters been rightly conducted.

As to money's falling to 2 per cent any man of 20 years old may expect to see it, without a Mississippi: and as for the payment of the dividends, there never were in the hands of the public, nor ever could be, had all the creditors of the 2000 millions of public debts invested in actions at 10,000 a-piece, one half of 624,000 actions disposed of: consequently, the 200 livres dividend would not have amounted, upon 312,000 actions, to more than 62,400,000 livres; and the revenue of the company, as we have seen, exceeded 80 millions a year.

This still tends to justify the Regent from the gross imputation of fraud, in the conduct of the Mississippi.

But what should still more exculpate this Prince, in the eyes of every impartial man who examines the whole conduct of the affair, is the uniform sentiments of the most intelligent men in France concerning the doctrine of money and credit.

When we find Dutot, who wrote against the arbitrary change of the coin; and De Melon, the Regent's man of confidence and secretary, who wrote in favour of it, two persons considered in France as most able financiers, both agreeing, that during the operations of the system, money never was to be considered but according to denominations; that there was nothing against good policy in changing the value of these denominations; and that paper-money, whether issued for value, or for no value, or for the payment of debts, was always good, provided there was coin enough in France for the changing of it; and this, although the coin itself did not belong to the debtors in the paper: when these principles, I say, were adopted by the men of penetration in France; when we find them published in their writings, many years after the Regent's death, as maxims of what they call their credit public; I think it would be the highest injustice to load the Duke of Orleans with the gross imputation of knavery, in the Mississippi scheme.

Law no doubt saw its tendency. But Law saw also, that credit supported itself on those occasions, where it stood on the most ticklish bottom; he saw bank notes to the amount of more than two thousand millions, issued in payment of the King's debts, without occasioning any run upon the bank, or without suggesting an idea to the public that the bank should naturally have had some fund, to make them good: he saw people, who were in possession of a value in paper exceeding 6000 millions of livres, 60 to the marc, (Dutot, vol. i, p. 144.) look calm and unconcerned, when, in one day, the coin was raised in its denomination to 80 livres in the marc; by which operation, the 6000 millions of the date before lost 25 per cent of their real value. He saw that this operation did not in the least affect the credit of the bank paper; because people minded nothing but denominations.

He saw farther, that by the operation proposed, the whole debt of the King would be transferred upon the company. He saw that these debts, being turned into bank notes, would not be sufficient to buy above 200,000 actions, at the value they then sold for. He knew that the Regent, who had bought 400,000 of these actions at 5000 livres apiece, that is, at half price, would remain in possession of 200,000 actions, after selling enough to draw back the whole of the bank notes issued for the payment of the debts; and he saw that the company of the Indies had a yearly income of above 80 millions to enable them to make good their engagements: besides, he saw a power in the King to raise the denominations of the coin at will, without shocking the ideas of his people; by which means he might have paid the 2000 millions with one louis d'or. Put all these circumstances together, and I can imagine that Law's brain was turned; that he had lost sight of all his principles; and that he might believe that his former common sense was, at that time, become absolute nonsense in France.

That common sense may become nonsense, is a thing by no means peculiar to France, but quite peculiar to man.

I shall offer but one argument more, to prove that the Duke of Orleans, and Law, could have no premeditated design of defrauding the public, by these wonderful operations; which is, that to suppose the contrary, would be to allow them an finite superiority of understanding over all the rest of Europe.

Until the bubble bursted nobody could know where it was to end: everything appeared very extraordinary indeed; and the fatal catastrophe might have been expected from the greatness of the undertaking, merely. But had there been any roguery in the plan itself, it must have appeared palpable long before; because the whole of the operations in which only it could consist, were public.

All the notes were created by public act of council; so were the actions: the loan of 1600 millions to the King, by the company, was a public deed; so was the alienation in their favour, of 48 millions for the interest of this sum. Notes were avowedly coined in order to purchase actions, (Dutot, Vol I, p. 144.) the creditors were avowedly paid with bank notes, at a time when it was forbidden to have 500 livres in coin in any person's custody; consequently, it was also forbidden to demand coin for bank notes.

Now all this was going on in the months of February, March, April and the beginning of May 1720; without any suspicion of any failure of credit. The coin also was sometimes raised, sometimes diminished in its value, and still the fabric stood firm.

Under these circumstances, to say there was knavery, is to say that all the world were absolutely blockheads, except the Regent and John Law: and to this opinion I never can subscribe.

It may seem surprising that I should take so much pains to justify the two principal conductors of this scheme. My intention is not so much to do justice to their reputation, which has been grossly calumniated by many, who have written the history of those times, as to prove, that an ill-concerted system of credit may bring ruin on a nation, although fraud be out of the question: and if a nation be plunged into all the calamities which a public bankruptcy can occasion, it is but a small consolation to be assured of the good intentions of those who were the cause of it.

Chapter XXXI: Continuation of the Account of the Royal Bank of France, until the total Bankruptcy on the 21st of May 1720

I now resume the thread of my story. We left off at that period when the credit of the company and of the bank was in all its glory (November 1719); the actions selling at 10,000 livres, dividend 200 livres a year per action, and the bank lending at 2 per cent: all this was quite consistent with the then rate of money.

In this state did matters continue until the 22nd of February 1720, when the bank was incorporated with the company of the Indies.

The King still continued guarantee of all the bank notes; none were to be coined but by his authority: and the comptroller-general for the time being, was to have, at all times, together with the Prevot des marchands of Paris, ready access to inspect the books of the bank.

As the intention, at the time of the incorporation, was to coin a very great quantity of notes, in order to buy up the actions, and to borrow back the money, in order to pay off the creditors, it was proper to gather together as much coin as possible, to guard against a run upon the bank: for which purpose, the famous Arret de Conseil, of the 27th of February 1720, was published, forbidding any person to keep by them more than 500 livres in coin.

This was plainly annulling the obligation in the bank paper, to pay to the bearer on demand the sum specified, in silver coin.

Was it not very natural, that such an arret should have, at once, put an end to the credit of the bank? No such thing however happened. The credit remained solid after this as before; and nobody minded gold or silver any more than if the denomination in their paper had had no relation to these metals. Accordingly, many, who had coin and confidence, brought it in, and were glad to get paper for it.

The coin being collected in about a week's time, another Arret de Conseil, of the 5th of March, was issued, rising the denomination from 60 livres to 80 livres the marc. Thus, I suppose, the coin which the week before had been taken in at 60 livres, was paid away at 80: and the bank gained 33 1/3 per Cent. upon this operation. Did this hurt the credit of the bank paper? Not in the least.

As soon as the coin was paid away, which was not a long operation, for it was over in less than a week; another Arret de Conseil, of the 11th of the same month of March, came out, declaring that, by the first of April, the coin was to be again reduced to 70 livres the marc, and on the first of May to 65 livres. Upon this, the coin, which had been paid away the week before, came pouring into the bank, for fear of the diminution which was to take place the first of April. In this period of about three weeks, the bank received in coin about 44 millions of livres; and those who brought it in thought they were well rid of it.

It was during the months of February, March, and April 1720, that the great operations of the system were carried on.

We may see by the chronological anecdotes in the 28th chapter, what prodigious sums of bank notes were coined, and issued during that time. It was during this period also, that a final conclusion was put to the reimbursing all the public creditors with bank notes: in consequence of which payment, the former securities granted to them by the King, under the authority of the parliament of Paris, were withdrawn and annulled.

Here then we have conducted this scheme to the last period.

There remained only one step to be made to conclude the operation; to wit, the sale of the actions, which the Regent had in his custody to the number of 400,000.

These were to be sold to the public, who were at this time in possession of bank notes to the value of 2,235,083,590 livres. See the foregoing table.

Had the sale of the actions taken place, the notes would all have returned to the bank, and there have been destroyed: by which operation, the company would have become debtor to the public for the dividends of all the actions in their hands, and to the King for all those which might have remained in the hands of the Regent. These proportions we cannot bring to any calculation, as it would have depended entirely on the price of the actions during so great an operation; and on the private conventions between the parties, the Regent and the company.

But alas! all this is a vain speculation. The system, which hitherto had stood its ground in spite of the most violent shocks, was now to tumble into ruin from a childish whim.

In order to set this stroke of political arithmetic in the most ludicrous light possible, I must do it in Dutot's own words, uttered with a sore heart and in sober sadness.

He had said before, that the coin of France was equal to 1200 millions of livres at 60 livres the marc. This marc was now at 65 livres (in May 1720, as above) so the numerary value, as he calls it, (that is the denomination,) of the coin was now risen to 1,300,000,000; but the bank notes circulating in the month of May were carried to 2,696,400,000; then he adds,

'The 1300 millions of coin which were in France, were very far from 2696 millions of notes. In that case the sum of notes was to the sum of coin, nearly as 2 2/27 are to 1; that is to say, that 207 livres 8 sols 1 7/8 denier in notes, was only worth 100 livres in coin; or otherwise, that a bank note of 100 livres was only worth 48 livres 4 sols 5 deniers in coin, or thereabouts.' Would not any mortal conclude from this calculation of Dutot's, that the whole sum of 1300 millions had been in the bank, as the only fund for the payment of the paper?

This is a laboured equation, and from it we have a specimen of this gentleman's method of calculating the value of bank paper: but let us hear him out.

'This prodigious quantity of money in circulation', says he, 'had raised the price of every thing excessively: so in order to bring down prices, it was judged more expedient to diminish the denomination of the bank notes, than to raise the denomination of the coin; because that diminished the quantity of money, this augmented it.'

This was the grand point under deliberation, before the famous arret of the 21st of May was given, viz. whether it were better to raise the value of the coin, which did not belong to the bank, but to the French nation, to double the denomination it bore at this time, that is, to 130 livres the marc, by which means the 1300 millions would have made 2600 millions, or to reduce the 2600 millions of bank notes to one half, that is, to 1300 millions, the total denomination of the coin.

To some people it would have appeared more rational to reject both the alternatives, and to allow matters to stand as they were, as long as they would stand, at least until the actions had been all sold off; but this was not thought proper. After a most learned deliberation, it was resolved to reduce to one half, the denomination of all the paper of France, bank notes as well as actions, instead of raising the denomination of the coin; and this because the prices of commodities were supposed to be in proportion to the quantity of the denominations of money.

The arret was no sooner published than the whole paper fabric fell to nothing. The day following, the 22nd of May, a man might have starved with a hundred millions of paper in his pocket.

This was a catastrophe the like of which, I believe, never happened: it is so ridiculous that it is a subject fit only for a farce.

Here Dutot's lamentations and regrets are inimitable.

In one place he says, 'Credit was too far fetched to be solid. It was therefore proper to sacrifice one part, to give a solidity to the other. Even this was done; but the consequences did not correspond to the intention. Confidence, which is the soul of credit, eclipsed itself, and the loss of the bank note, drew on the loss of the action.'

In another place he says, 'This arret of the 21st of May, which according to some blessoit l'équité,' (a very mild expression!) 'destroyed all confidence in the public; because the King had diminished one half of that paper money (the bank notes) which had been declared fixed.'

Is it not a thousand pities that confidence should have disappeared upon so slight a wound given to equity, only in the opinion of some? For Dutot thought the operation perfectly consistent with the principles of public credit.

He tells us, that a letter was written to calm the minds of the people, and to shew them how absurd it was, to allow the paper to be fixed, while the coin varied; but, says he, 'as there was a revenue attached to the action, the value of that paper did not depend so much upon the capital, as on the sum of the interest.' Very just. But were the dividends to stand at 200 livres, without suffering the same diminution as the action? And how was confidence to subsist in a county, where the denominations of both the paper and the coin were at the disposal of a minister?

The diminution upon the paper, by the arret of the 21st of May, raised a most terrible clamour; and Law became the execration of France, instead of being considered as its saviour. He was banished, and reduced to beggary the same day.

What profit could either the Regent, or Law, have reaped from the success of such an operation? Had the coin been raised to 130 livres the marc, no hurt would probably have ensued, and the same effect would have been produced.

Had matters been left without any change at all, no bad consequences would have followed: these existed only in the heads of the French theorists. There was, indeed, twice as much money in bank notes as in coin, in the whole kingdom of France: and what then?

When the Regent saw the fatal effects of his arret of the 21st of May, he revoked it on the 27th of the same month. On the 29th, he raised the coin to 82 livres 10 sols in the marc, and re-established all the paper at its former denomination: but, as Dutot has said, confidence was gone, and was no more to be recalled. Nothing surprises me, but that she lived so long under such rough management.

Dutot, in talking of this augmentation of the coin, on the 29th of May, to 82 livres 10 sols, says, 'This operation was consistent with the principles of public credit, and advantageous. They would have done better had they pushed the augmentation to 135 livres the marc; which would have made the specie of France equal to the sum of bank notes.' These are his words, p. 165.

Are not these very sensible principles, coming from a man who has written a book, which indeed few people can understand, in order to prove the great hurt of tampering with the coin of France?

Chapter XXXII: Conclusion of the Mississippi Scheme

The Regent, persuaded that the blunder of the 21st of May was absolutely irreparable, fell to work next to clear accompts with the company.

He owed them 1600 millions capital, and 48 millions a year of interest upon it.

On the other hand, he had in his possession no less than 400,000 actions, which at 200 livres dividend, which the company was obliged to pay, amounted to 80 millions a year.

How the Regent and the company settled matters I do not know precisely. This, however, is certain, that by the arret of the 3d of June 1720, the number of 400,000 actions, belonging to the Regent, were burnt; and 24,000 more, which had been created by his particular order, the 4th of October 1719, and never delivered to the company, were suppressed.

On the other hand, the company ceded 25 millions a year, of the 48 millions which had been transferred to them.

This sum was constituted anew upon the town-house of Paris, as a fund to be subscribed for by the proprietors of bank notes, at the rate of 2 1/2 per cent or as the French call it at the 40th penny. (Dutot, p. 168.) In consequence of this, 530 millions of bank notes were subscribed for, and paid in, in the month of June 1720.

After the destruction of the 400,000 actions, the credit of the bank notes languished until the 10th of October 1720.

The object for which they were created was now gone. The whole scheme of transferring the King's debts upon the company vanished in the conflagration of the actions. What was then to be done?

The bank was at an end: 2235 millions of discredited bank notes in circulation, and a small sum of coin to make them good, was a situation which no authority could long support.

The resolution then was taken to put a final conclusion to this great affair; to bid a long farewell to credit and confidence; and to return to the old system of rents upon the town-house of Paris; and of coming at money in the best way they could.

In this light I see the Mississippi scheme. I may, no doubt, be mistaken in many things: the lights, or rather the glimmerings, by which I have been conducted through this inquiry, must plead my excuse.

But it is not facts so much as principles, I have been investigating through this whole disquisition; and the imperfect account I have been able to give of the former, will at least point out, I hope, the notions which the French nation, at that time, had of the latter. If the contrast between French principles, and those I have laid down, tend to cast any light upon the subject of paper credit in general, my end is accomplished: if they ever prove of use to mankind, I shall not think my labour lost.

Chapter XXXIII: Why Credit fell, and how it might have been supported

I shall now make a few general observations upon the total and sudden fall of credit in France in May 1720: and I shall suggest the means by which, I think, it might have been sustained, even after all the preceding mismanagement.

Was it any wonder that the French should be astonished at this prodigious revolution, at this immense value of paper on the 21st of May, and at the total discredit of every bit of it the very day following?

If there had been a value, said they, what became of it? If there never was any value, how could a nation be so deceived? This phaenomenon has puzzled many a head; but the nature and principles of credit furnish an easy solution of it.

In deducing the principles of credit, we have shewn that a permanent and well secured fund of interest is always equal in value to a corresponding capital.

The difference between a permanent and well secured fund, and a precarious and ill secured fund, consists in this, that the first never can disappear, and the other may.

Now the fund, in this case, was at first real and did exist; but it was rendered precarious, by a blundering administration: then credit filed, and in that convulsion, the fund of interest was fraudulently diminished by an act of power.

Had the true principles of credit been understood in France, the bank notes and actions might have been supported, even after the arret of the 21st of May: and all the monstrous value of paper, rised so high by the low rate of interest, might have been preferred: consequently this value, in capital, really existed relatively to the rate of interest.

As the object of the present disquisition into the principles upon which the Mississippi scheme was conducted, is only intended as an illustration of the principles of credit in general; I shall first account for the wonderful phaenomenon above mentioned and then shew how, in the greatest of all the French distress, their credit might have been re-established in a more solid manner than ever.

As to the wonderful phaenomenon of the prodigious wealth created by the system, and annihilated in one day, I answer, that there had been no creation of wealth at all, except in consequence of the fall of interest.

First, We have seen that at the death of the late King of France, the interest of his debts amounted to 80 millions. Was not this a fund which ought to have been made solid and permanent? Will any man say, that a regular plan of paying this interest was a means of creating new wealth? Certainly not.

Secondly, These debts were mostly secured by contracts of constitution of annual rents upon the town-house of Paris: a security taken in the name of a particular creditor, which requires a form of law to transfer.

By the scheme we have been explaining, all these securities were changed: and instead of constitutions of rent, bank notes, in which the King was equally debtor, were given.

Will any man say, that this was the means of either increasing or diminishing the wealth of France? Certainly not. A man who has a good bond in his pocket is as rich before it is paid with bank notes as after: but he has not so much money in his hands; because the bond is not money, and the notes are.

Thirdly, We have said that the interest of the King's debts amounted to 80 millions a year, at 4 per cent.

We have seen how the company of the Indies were provided with a fund equal to this sum, arising from the 48 millions which the King paid for the loan of the paper with which the debts were to be paid, and from many other lucrative branches of revenue; which instead of being burthensome to the King, were, on the contrary, the means of augmenting his income, by the advanced rent the company gave for the different farms which produced them.

Had the public creditors, therefore, vested their claims in actions, they would, in consequence of that operation, have become sharers in the fund of 80 millions a year, administered by themselves, (and they would then have been the company) open to be improved by trade abroad, and by a good administration at home.

Had this system been carried on in a plain easy way, consistently with common sense, the public creditors would have been paid; the King's revenue augmented; and it would have been put under a good and a cheap administration.

But, when, by the absurd operations of changing the denominations of coin and paper, and wantonly playing with every man's property, the creditors saw themselves standing on the brink of a precipice; and finding, instead of a good contract on the town-house of Paris, a bank note put into their hands, which might be diminished in its value by one half every month, while at the same time the coin might be raised to double, it was very natural to suppose, that the intention of the King's ministers was to withdraw from them totally these 80 millions, to which they were entitled: in which case, there was an annihilation indeed of all the notes; but there was no annihilation of wealth: for in that case, the wealth was still the same, only it was transferred from the creditors to the King the debtor: that is, the creditors were defrauded.

On the other hand, stood the proprietors of the actions sold. These had been used to make a traffic of buying and selling the 200,000 actions which had been in their hands ever since September 1717, when they were first created. For we have shewn, that the posterior creation of actions by the united company, was a mere delusion, as they were all found in the custody of the Regent. The actions, I say, were immediately put into a state of stagnation; because of the discredit cast upon the bank notes, with which it had been usual to buy them.

Fourthly, I must observe, that the stagnation of a paper which carries no interest, is equal to a temporary annihilation. The holder then is deprived of the use of his money; and he is not paid for the loss he sustains.

If, therefore, it had been possible to have given a new activity to this bank paper, without allowing it to die away, as it were, in this temporary fit of fainting, credit would have revived: all accompts would have been kept clear, for this is the use of paper money, and so short a shock would hardly have been felt.

But the great damage resulting to the public, upon every occasion of this kind, proceeds from the delay in applying the proper remedy. When any paper is discredited, it immediately falls in its value. The person then who is the original and real creditor for the whole value, and in whose hands the paper is when it suffers the discredit, sells at discount: this is an irretrievable loss to him; and when the paper recovers its credit again, either in part, or on the whole, the profit then belongs to the person who had bought it at discount, and does not go to indemnify the real sufferer.

This was the case with respect to the notes of the French bank: they were allowed to languish from the 21st of May that they were discredited, until the 10th of October, when their fate was decided, as has been said.

Farther, we have seen, that this whole movement of credit had for its basis 80 millions a year, originally paid to the creditors for their interest. This sum answered to the capital of 2000 millions; because at the old King's death, interest was fixed at 4 per cent.

When, by the operations of the system, all this capital was turned into money, that is, bank notes, the regorging plenty of it made interest fall to 2 per cent consequently, the capital, which constantly draws its value from the interest paid for it, rose to 4000 millions. We have said that the total value of the paper rose to 6000 millions, but we must reflect, that above 2000 millions of these 6000 millions was in bank notes, and employed in buying of actions. So that both the notes and the actions must not be reckoned as existing together.

Had the Regent sold the actions, he would have burnt 2000 millions of bank notes, and thus the value in paper would have remained at 4000 millions, so long as interest remained at 2 per cent; and had interest fallen still lower, and dividends remained at 200 livres per action, the value of actions, and consequently of this capital of 4000 millions, would have risen in proportion, just as the value of the capital of the debts of Great Britain rises and falls according to the rate of money; although the same sum of interest be paid to the creditors at all times.

This augmentation, therefore, upon the value of all capitals, during the Mississippi, of lands as well as actions, was in consequence of the fall of interest, and from no other artifice whatever. Lands in France, at that time, sold at 80 and 100 years purchase. (Dutot, vol. II, p. 200.)

When credit failed, and when all the circulating paper was thrown into a state of stagnation, interest rose, in proportion to the deficiency of the supply for the demands of borrowers. The value of capitals then diminished. But this might have happened from another cause, had there been no bankruptcy, or intention to defraud the creditors: a war might have produced it; or any circumstance which might have raised the rate of interest.

The rise, therefore, upon capitals, from the fall of interest, I consider here as no acquisition of wealth: I reckon wealth to be that which is the annual produce of the capitals.

So much for the resolution of this wonderful phaenomenon.

I must now shew that in the height of the distress, the confidence of the public was still to be regained, and credit recovered, even after the fatal arret of the 21st of May 1720.

I lay it down as a principle, that whoever has a sufficient fund, and pays interest regularly for the money he owes, runs no risk of losing his credit.

So soon, therefore, as the Regent found that by his arret of the 21st of May, all credit had disappeared; had he, upon the 27th of the same month, or at the time he raised the coin to 82 livres 10 sols per marc, ordered all bank notes presented to the bank, either to be paid in coin, or marked in the books of the bank as bearing interest at 2 per cent. I say, credit would not have suffered in any comparison to what it did. Nobody then would have sold a note at discount; and, had it been necessary, he might have ordered the interest to be paid monthly.

The authority I have for this opinion is Dutot, who says, that upon opening the subscription of 25 millions in the month of June, the notes fell in their value 11 1/2 per cent only.

Now the rate of this subscription was at 2 1/2 per cent as we have seen; consequently, if 100 livres of notes lost but 11 1/2 per cent they were worth 88 1/2 livres in coin; but these 100 livres in notes were worth 2 1/2 per cent because the subscription was open at that rate: consequently 88 1/2 livres in coin was also worth 2 livres 10 sols per annum: consequently interest, at that time, was at 2.825 per cent that is, below 3 per cent even after the bankruptcy.

Where then was the great harm? Where was the occasion to fly immediately to the destruction of actions, which were in the Regent's own hand? A little patience, and good management, would have set all to rights.

I should, therefore, have left the notes in circulation under this regulation, viz. that such as should be presented to the bank should have had a transfer of 2 per cent paid quarterly; or a value, in actions, at 10,000 livres per action; which is the capital answering a dividend of 200 livres at 2 per cent at the option of the holder: and in case interest had come to fall still lower, the price of actions might have been augmented.

I should have set before the public a full and exact account of the company's funds. I should have banished all mystery from the affairs of credit. I should have registered a declaration in parliament, setting forth,

First, That all future changes either upon the denominations of paper or coin, were contrary to the maims of good government.

Secondly, That all stipulations between the King and his creditors, were to be inviolable. And,

Thirdly, That the parliament of Paris should for ever remain invested with an exclusive right to watch over these regulations in time to come; and I should have bound the parliament by a special oath for this purpose. I should even have had the King to take the same oath: and he might have ratified it at his coronation in 1725.

By these steps I should have vested a new power in the Kings of France which they never had before: a power of having money from their subjects, from their allies, and from their enemies: a power they have not, nor ever will have, until the principles of credit be better understood among them.

Had such a plan been followed, I have not the least doubt, but that, first, The actions would have been sold at a very great advanced value above the standard of 5000 livres, at which the Regent had bought them: secondly, That money would have come back to 2 per cent and then, thirdly, Had banks been established upon a proper plan, ease, with industry, would long ere now have appeared in every corner of that kingdom.

How finitely more easy would it have been to establish such a plan in 1720 than at present? At that time the most difficult part of the whole was executed. The creditors had taken notes for their claims: the credit then was given and accepted. There was nothing to be done but to support it. The creditors were then at the mercy of the state: at present the state is at the mercy of the creditors. Were such operations on coin to take place at present, as were then familiar; were the King at present to attempt to turn the constitutions of rent, perpetual and life-annuities, into any other form than what they have, the credit of France would be undone for a long time; and who knows what views of ambition a situation so deplorable might not stir up in certain courts of Europe.

What state would pay its debts, if it durst do otherwise? And what state can diminish its debts in any other way than by lowering the interest upon them? But of this more in its proper place.

Chapter XXXIV: Of Banks of Deposit and Transfer

I now dismiss the subject of banks of circulation. The unspeakable advantages drawn from this institution, when properly regulated, in supplying money at all times to those who have property for the encouragement of industry, and for improvements of all sorts, and the bad consequences which result to society, from the abuse they are exposed to, has engaged me, perhaps, in too long a discussion of various circumstances relating to them.

I now come to treat of banks of deposit or of transfer of credit: an institution of the greatest utility for commerce.

These two species of banks differ essentially in two particulars.

First, That those of circulation serve the purpose of melting down unwieldy property into money; and of preserving the quantity of it at the proportion of the uses found for it. Those of deposit, are calculated to preserve a sum of coin, or a quantity of precious moveables, as a fund for carrying on the circulation of payments, with a proportional value of credit or paper money secured upon them.

Secondly, In the banks of circulation, the fund upon which the credit is built, is not corporeally in the custody of the bank; in the other it is.

The fundamental principle, then, of banks of deposit, is the faithful preservation of the fund delivered to the bank, upon which credit, in money, is given for the value.

If at any time a bank of deposit should lend, or should in anywise dispose of any part of this fund, which may consist in coin, bullion, or any other precious moveable, once delivered to them, to the end that a credit in money may be written down for it in their books of transfer, in favour of the depositor, and his assigns; by this act, the bank departs from the principles upon which it is established. And if any bank be established which, by its regulations, may so dispose of the fund of its credit, then such a bank becomes of a mixed nature, and participates of that of a bank of circulation.

These things will be better understood by reasoning from an example of a true bank of deposit.

Chapter XXXV: Of the Bank of Amsterdam

Many authors have written concerning this great bank of deposit: particularly, Davenant, Sir William Temple, Ricard, in his Traité de Commerce revu par Struyk, the author of the Essai sur le Commerce, and Mr Megens, in his book, which has been translated into English, under the title of The Universal Merchant.

In these authors we find a number of facts, which I shall combine with my own informations, and here apply principles to them; in order to communicate a distinct idea of this establishment. A detail of its particular operations regards practice, and falls not within my subject.

The original intention of the States of Holland, in establishing the bank of Amsterdam, was to collect a large capital in coin within that city, which might there perpetually remain, buried in a safe repository for the purposes which we are now to explain.

In order to accomplish this plan they established the bank upon the 31st day of January 1609.

The method they fell upon to collect the coin, was to order, that all bills of exchange, for any sum exceeding 300 florins, should be paid in specie to the bank; and that the holder of such bills should, instead of receiving the coin, have the value of it written down in the books of the bank to his credit, at his command, to be transferred to any person he should appoint; but never more to be demandable from the bank in specie.

By this operation, the mass of coin circulating constantly from hand to hand, between the merchants of Amsterdam, began, by degrees, to be heaped up in the bank; and as the heap augmented, so did the sum of credit augment upon the books of the bank.

It is evident, from this change in the mode of circulation, that no loss could be incurred from the locking up of the coin.

As long as coin is in a state of constant circulation, it can produce no interest to any person. Interest commences from the moment the coin begins to stagnate; that is to say, so soon as it comes into the hands of one who has no ready money demand upon him. When this happens, the proprietor lends it at interest.

Now the credit in the books of the bank, which is every day transferable at the bank, answers every purpose of coin, either for payment or loan: and the proprietor has neither the trouble of receiving the species, nor any risk from robbery, or false coin.

The first advantage the city reaped from this institution, was, to secure the residence of trade in that place.

Capitals transferable only at the bank, laid the proprietors under a necessity of fixing their dwelling where their funds were, and where only they could be turned to accompt.

It had another excellent effect in commerce: it pointed out the men of substance. A credit in bank is no wise equivocal: it is a fund of undoubted security.

From the constitution of this bank we may form an estimate of the extent of the deposit.

It can only swallow up a sum equal to what is necessary for circulating the payments of the city of Amsterdam. Were a sum exceeding this to be shut up in the bank, and were the credits written in the books of the bank to exceed this proportion, it is plain, that the value of the bank money would sink immediately. The reason is obvious: the credits transferable are of no use to those who have no occasion to transfer; that is, to pay, lend, or exchange at Amsterdam. So soon, then, as all the demand of Amsterdam is satisfied, the proprietors of the overplus will seek to realize their superfluous credit, in order to invest the value arising from it, in some other place where a demand may arise.

In order to realize, they must sell their bank credit for coin; because the bank pays in transfer only. Coin then would be demanded preferably to credit in bank; consequently, coin would rise in its proportional value to bank money, or bank money would lose, which is the same thing. This fluctuation between bank money and coin, leads me to explain what is called the agio of the bank.


1. Solid property, here, is not taken in the strictest acceptation. In countries of commerce, where banks are generally established, every denomination of good personal security may be considered as solid property. Those who have personal estates, may obtain credit from banks as well as landed men; because these personal estates are secured either on lands, or in the funds, or in effects which contain as real a value as lands, and these being affected by the securities which the proprietors grant to the bank, may with as much propriety be said to be melted down, as if they consisted in lands. In subjects of this nature, it is necessary to extend the meaning of our terms, in proportion to the circumstances concerning which we reason.

2. Let it be remarked in this place, that although all persons obtaining credit from a bank for a determinate sum, be obliged to grant a proper security for the whole sum; yet by the nature of the obligation, no interest becomes due to the bank in consequence of it, except in proportion to the sums advanced, and to the time of such advance by the bank. Example: A. Obtains a credit from a bank for one thousand pounds. After one month he mikes a call for one hundred pounds; the interest of this hundred pounds commences from the day only on which the bank pays it; and were A. to replace this sum to the bank one week after, he will be liable for one week's interest only, of one hundred pounds notwithstanding that his obligation lies in the hand of the bank for one thousand pounds. When, therefore, in the course of this subject, we shall mike mention of the interest due to the bank upon the securities in their hand, for the credits they have given; this is always understood to be restricted to the sums actually advanced by the bank upon such credits.

3. At this time there was another circumstance, besides the demand of a balance to be paid abroad, which distressed the bank, viz. a suspicion which took place, that if the rebellion had succeeded, the credit of the bank would have totally failed.

This very case points out the great advantage of banks upon mortgage of private credit.

We have said, that the credit of such banks ought to be established upon the principles of private securities only. If their notes be issued upon solid property, then no rebellion can influence them : but of this more hereafter.

4. We are not to suppose that this yearly balance of 200,000 l. is always to continue. We have seen how it has been occasioned by a course of unfavourable circumstances, which have run Scotland in debt; we have seen how the banks may interpose their credit, in order to assist the country in paying it; and we shall see, before we dismiss this subject, how they will be enabled to repay it, and set Scotland free, by a return of a favourable balance upon their commerce. Let it then be remembered, that all those contracts in England are properly the debts of Scotland, not of the banks. Scotland, therefore, and not the banks, must be at all the expence thereby incurred. These points shall be explained as we go along.

5. Here the bank departed from the principles of private and mercantile credit, upon which Law had formed it, and proceeded upon those of public credit. Public credit in France is the credit of the Sovereign ; the solidity of which depends upon the maxims which he follows in the course of his administration.

6. Dutot, speaking of the great value of paper in notes and actions, throws out several reflections, in the passage I am now to transcribe from him, which, at the same time that they prove the great advantages resulting to France from the establishment of credit among them, abundantly evince how lame this author's ideas were concerning the principles of paper credit, and of circulation. He says, (vol. ii p. 200) 'This paper was indeed just so much real value, which credit and confidence had created in favour of the state: and by this sum was circulation augmented, independently of all the coin which was then in France.

Upon this revolution, Plenty immediately displayed herself through all the towns, and all the country. She there relieved our citizens and labourers from the oppression of debts, which indigence had obliged them to contract: she revived industry: she restored that value to every fund, which had been suspended by those debts: she enabled the King to free himself, and to make over to his subjects, for more than fifty-two millions of taxes, which had been imposed in the years preceding 1719; and for more than thirty-five millions of other duties, extinguished during the regency. This plenty sunk the rate of interest; crushed the usurer; carried the value of lands to eighty and a hundred years' purchase; raised up stately edifices both in town and country; repaired the old, which were falling to ruin, improved the soil; gave a value to every fruit produced by the earth, which before that time had none at all. Plenty recalled those citizens, whom misery had forced to seek their livelihood abroad. In a word, riches flowed in from every quarter. Gold, silver, precious stones, ornaments of all kinds, which contribute to luxury and magnificence, came to us from every country in Europe. Whether these prodigies, or marvellous effects, were produced by art, by confidence, by fear, or by whim if you please, one must agree, that that art, that confidence, that fear, or that whim, had operated all these realities which the ancient administration never could have produced.

What a difference in the situation of France at the beginning of the regency, and the situation in which she was in November 1719!

Thus far the system had produced nothing but good: everything was commendable, and worthy of admiration.' These are the sentiments of Dutot concerning this system of paper credit.

Part 3, Of Exchange

Chapter I: Of the first Principles of Exchange

Having ended what I had to say of banks, in which most of the principles of private credit and domestic circulation, have been sufficiently deduced, I now proceed to the doctrine of exchange, which is the principal operation of mercantile credit, for the carrying on of foreign circulation.

The security which merchants commonly take from one another when they circulate their business, is a bill of exchange, or a note of hand: these are looked upon as payment. When they give credit to one another in account, or otherwise, the cause of confidence is of a mixed nature; established partly upon the security of their effects, partly on the capacity, integrity, and good fortune, of the person to whom the credit is given.

No man but a merchant has any idea of the extent and nature of this kind of credit. It is a thing to be felt, but cannot be reduced to principles; and merchants themselves can lay down no certain rules concerning it. It is an operation which totally depends upon their own sagacity.

But when they deal by bills of exchange, the case is very different. The punctuality of acquitting these obligations is essential to commerce; and no sooner is a merchant's accepted bill protested, than he is considered to be a bankrupt. For this reason, the laws of most nations have given very extraordinary privileges to bills of exchange. The security of trade is essential to every society; and were the claims of merchants to linger under the formalities of courts of law, when liquidated by bills of exchange, faith, confidence, and punctuality, would quickly disappear; and the great engine of commerce would be totally destroyed.

A regular bill of exchange is a mercantile contract, in which four persons are concerned, viz. First, The drawer, who receives the value: Secondly, His debtor in a distant place, upon whom the bill is drawn, and who must accept and pay it: Thirdly, The person who gives value for the bill, to whose order it is to be paid: and, Fourthly, The person to whom it is ordered to be paid, creditor to the third.

By this operation, reciprocal debts, due in two distant parts, are paid by a sort of transfer, or permutation of debtors and creditors.

(A) in London, is creditor to (B) in Paris, value 1OO l. (C) again in London, is debtor to (D) in Paris for a like sum. By the operation of the bill of exchange, the London creditor is paid by the London debtor, and the Paris creditor is paid by the Paris debtor; consequently, the two debts are paid, and no money is sent from London to Paris, nor from Paris to London.

In this example, (A) is the drawer, (B) is the acceptor, (C) is the purchaser of the bill, and (D) receives the money. Two persons here receive the money, (A) and (D), and two pay the money, (B) and (C); which is just what must be done when two debtors and two creditors clear accounts.

This is the plain principle of a bill of exchange. From which it appears, that reciprocal and equal debts only can be acquitted by them.

When it therefore happens, that the reciprocal debts of London and Paris (to use the same example) are not equal, there arises a balance on one side. Suppose London to owe Paris a balance, value 100 l. How can this be paid? I answer, that it may either be done with or without the intervention of a hill.

With a bill, if an exchanger, finding a demand for a bill upon Paris, for the value of 100 l. when Paris owes no more to London, shall send 100 l. to his correspondent at Paris in coin, at the expence, I suppose, of 1 l. and then, having become creditor on Paris, he can give a bill for the value of 100 l. upon his being repaid his expence, and paid for his risk and trouble.

Or it may be paid without a bill, if the London debtor shall send the coin himself to his Paris creditor, without employing an exchanger.

This last example shews of what little use bills are in the payment of balances. As far as the debts are equal, nothing can be more useful than bills of exchange, but the more they are useful in this easy way of business, the less profit there is to any person to make a trade of exchange, when he is not himself concerned, either as debtor or creditor.

When merchants have occasion to draw and remit bills for the liquidation of their own debts, active and passive, in distant parts, they meet upon Change; where, to pursue the former example, the creditors upon Paris, when they want money for bills, look out for those who are debtors to it. The debtors to Paris again, when they want bills for money, seek for those who are creditors upon it. This is a representation of what we have frequently called the money market, in which the demand is for money, or for bills.

This market is constantly attended by brokers, who relieve the merchant of the trouble of searching for those he wants. To the broker every one communicates his wants, as far as he finds it prudent; and by going about among all the merchants, the broker discovers the side upon which the greater demand lies, for money, or for bills.

We have often observed, that he who is the demander in any bargain, has constantly the disadvantage in dealing with him of whom he demands. This is no where so much the case as in exchange, and renders secrecy very essential to individuals among the merchants. If the London merchants want to pay their debts to Paris, when there is a balance against London, it is their interest to conceal their debts, and especially the necessity they may be under to pay them; from the fear lest those who are creditors upon Paris should demand too high a price for the exchange over and above par.

On the other hand, those who are creditors upon Paris, when Paris owes a balance to London, are as careful in concealing what is owing to them by Paris, from the fear lest those who are debtors to Paris should avail themselves of the competition among the Paris creditors, in order to obtain bills for their money, below the value of them, when at par. A creditor upon Paris, who is greatly pressed for money at London, will willingly abate something of his debt, in order to get one who will give him money for it.

It is not my intention to dip into the intricacies of exchange: all intricacies must here be banished; and instead of technical terms, which are very well adapted for expressing them, recourse must be had to plain language, for pointing out the simple operations of this trade. It is by this method that principles must be deduced, and from principles we shall draw the consequences which may be derived from them.

From the operation carried on among merchants upon Change, which we have been describing, we may discover the consequence of their separate and jarring interests. They are constantly interested in the state of the balance. Those who are creditors on Paris, fear a balance due to London; those who are debtors to Paris, dread a balance due to Paris. The interest of the first is to dissemble what they fear; that of the last, to exaggerate what they wish. The brokers are those who determine the course of the day: and the most intelligent merchants are those who dispatch their business before the fact be known.

Now I ask, how trade, in general, can be interested in the question, who shall outwit, and who shall be outwitted, in this complicated operation of exchange among merchants?

The interest of trade and of the nation is principally concerned in the proper method of paying and receiving the balances. It is also concerned in preserving a just equality of profit and loss among all the merchants, relatively to the real state of the balance. Unequal competition among men engaged in the same pursuit, constantly draws along with it bad consequences to the general undertaking, as has been often observed; and secrecy in trade will be found, upon examination, to be much more useful to merchants in their private capacity, than to the trade they are carrying on.

Merchants, we have said, in speaking of the bank of England, endeavour to simplify their business as much as possible; and commit to brokers many operations which require no peculiar talents to execute. This of exchange is of such a nature that it is hardly possible for a merchant to carry on the business of his bills, without their assistance, upon many occasions. When merchants come upon Change, they are so full of fears and jealousies, that they will not open themselves to one another, lest they should discover what they want to conceal. The broker is a confidential man, in some degree, between parties, and brings them together.

Besides the merchants, who circulate among themselves their reciprocal debts and credits, arising from their importation and exportation of goods, there is another set of merchants who deal in exchange; which is the importation and exportation of money and bills.

Were there never any balance on the trade of nations, exchangers and brokers would find little employment: reciprocal and equal debts would easily be transacted openly between the parties themselves. No man feigns or dissembles, except when he thinks he has an interest in so doing.

But when balances come to be paid, exchange becomes intricate; and merchants are so much employed in particular branches of business, that they are obliged to leave the liquidation of their debts to a particular set of men, who make it turn out to the best advantage for themselves.

Whenever a balance comes to be paid, that payment costs, as we have seen, an additional expence to those of the place who owe it, over and above the value of the debt.

If, therefore, this expence be a loss to the trading man, he must either be repaid this loss by those whom he serves, that is, by the nation; or the trade he carries on will become less profitable to him.

Every one will agree, I believe, that the expence of high exchange upon paying a balance, is a loss to a people, no way to be compensated by the advantages they reap from enriching the few individuals among them, who gain by contriving methods to pay it off: and if an argument be necessary to prove this proposition, it may be drawn from this principle, to wit, whatever renders the profit upon trade precarious or uncertain, is a loss to trade in general: this loss is a consequence of high exchange; and although a profit do result from it upon one branch of trade, namely, the exchange business, yet this profit cannot compensate the loss upon every other.

We may, therefore, here repeat what we have said above, that the more difficulty, there be found in paying a balance, the greater will be the loss to the nation.

This being admitted, I shall here enumerate all the difficulties which occur in the paying of balances. Most of them have been already mentioned from their relation to subjects already discussed; and could it be supposed, that every reader had retained the whole chain of reasoning already gone through, a repetition in this place would be superfluous: but as this cannot be expected, I shall, in as short and distinct a manner as possible, recapitulate, under four articles, what I hope will be sufficient to refresh the memory upon each of them.

The first difficulty which occurs in paying a balance, is to determine exactly the true and intrinsic value of the metals or coin in which it is to be paid; that is to say, the real par.

The second, How to remove the domestic inconveniences which occur in paying with the metals or coin.

The third, How to prevent the price of exchange from operating upon the whole mass of reciprocal payments, instead of affecting the balance only.

The remedies and palliatives for these three inconveniences once discovered, comes the last question, viz. How, when other expedients prove ineffectual for the payment of a balance, the same may be paid by the means of credit, without the intervention of coin; and who are those who should conduct this operation.

Chapter II: How to determine exactly the true and intrinsic value of the Metals, Coin, or Money, in which a Balance to foreign Nations is to be paid

This first question regards the whole mass of reciprocal payments, as well as that of the balance.

Every payment to be made of a determinate and fixed value, that is to say, of a liquidated debt, must be paid in a value equally determinate in its nature.

This I suppose to be the case, whether payment be made in the precious metals unmanufactured, that is bullion, or in a nation's coin, or in denominations of money of account. All payments in merchandize, except bullion, must suffer conversions of value before the debts can be liquidated.

Money of accompt, which is what we understand by denominations, we have defined to be a scale of equal parts, calculated to determine the value of things, relatively to one another. It must, therefore, be by the money of accompt of different nations, that the value of bullion and of coin can be ascertained.

When coin is introduced, the denominations of money are realized in a determinate quantity of the precious metals, and the fabrication of the bullion into coin, raises the value of this commodity, bullion, like the manufacturing of every other natural production.

When coin, therefore, is employed in paying sums according to the legal denomination which it carries, it is money, not merchandize; but when it is given at any other rate than its denomination, it is merchandize, not money.

In the third book, we have shewn how utterly impossible it is to realize with exactness, the denominations of money of accompt, in the metals which are constantly varying in their value, and exposed to waste in circulation.

We have shewn, by many examples, how, in fact, the value of the pound sterling has been subject to great vicissitudes of late, from the great disorder of the coin.

The coin of France, is, indeed, upon a better footing in point of uniformity of weight, than ours; and the proportion of the metals in it comes nearer their present value in the market: but then as oft as the balance turns against France, the high imposition upon her coinage, exposes the coin to great fluctuations of value, when compared with bullion in the Paris market. This is also to be ascribed to the imperfection of the metals when used as money, while they are merchandize at the same time.

This being the case, the way to calculate the real par of exchange between nations, who have in common no determinate and invariable money, exclusive of coin, is to consider fine gold and silver as the next best standard.

This is a merchandize which never varies in its quality. Fine gold is always the same in every mass; and weight for weight, there is no difference in its value or quality any where.

This standard being once adopted, the calculation of the real par becomes an easy operation to those who know the course of the bullion market in the two places exchanging.

If, by the exportation of all the heavy coin of London, bills must be paid in a worn out currency, the rise in the price of gold in their market, above mint price, will mark pretty nearly how far it is light.

If, on the other hand, the wars of France, or an unfavourable balance upon her trade, shall oblige her to export her coin, this operation will sink the value of it, or raise the price of bullion, which ever way you choose to express it.

It is not here a proper place to resume the question, which of the two expressions is the most proper: we are here considering the value of the bullion to be the thing fixed, because it answers the purpose. But whether we say that bullion rises in the markets of Paris and London; or that the value of their currencies sink, though from very different causes, the calculation of the real par will proceed with equal accuracy. An example will illustrate this.

When fine gold is at the lowest price to which it can ever fall at Paris, that is to say, at the mint price, it is worth 740 livres 9 sols, or 740.45 livres per mark, in decimals, for the ease of calculation. The mark contains eight ounces Paris weight.

Were the ounces of Paris equal to those of troy weight, 1/8 of this sum, or 92.5562 livres, would be the value of that ounce by which gold is sold at London.

But the Paris ounce is about 1 1/2 per cent lighter than the troy ounce; and the exact proportion between them is unknown, from the confusion of weights, and the want of a fixed standard in England. By the best calculation I have been able to make, a Paris ounce should contain 473 grains troy, which makes the proportion between the two ounces to be as 473 is to 480, which last is the number of grins in the troy ounce.

Gold bullion at Paris is regulated by the mark fine, at London by the ounce standard.

When standard gold bullion is at the lowest price it can be at London, it is worth the mint price, or 3 l. 17 s. 101/2 d. per troy ounce, which, expressed in decimals, is 3.8937 l. sterling. Standard is to fine, as 11 is to 12; consequently, the ounce fine is 4.2476 l. sterling: and if the Paris ounce of fine bullion be worth at the mint, as has been said, 92.5562 livres; the ounce troy, according to the above proportion, will be worth 93.926 livres. Divide then the livres by the sterling money, and the quotient will give you the real par of exchange of the pound sterling, while bullion remains at the mint price in Paris and in London, viz. 93/42 920/476 = 22.112 livres for the pound, or 32.56 d. sterling for the French crown of 3 livres.

Gold bullion never can rise in the Paris market, at least all the last war it never did rise, above the value of the coin; that is, to 801.6 livres the mark fine, or 100.2 livres per ounce Paris, and 101.7 livres the troy ounce.

How high the price of gold bullion may rise at London no man can say; but the highest it rose to, during the last war, was, I believe, 4 l. 0 s. 8 d. per ounce standard, or to 4.3999 l. sterling per ounce fine. By this divide the value of the ounce troy fine in French livres, the real par at this rate of the metals in both cities will be 101.7/4.3999 = 23.11 livres for the pound sterling, or 31.155 pence sterling for the French crown of 3 livres. But suppose two cases which may happen, viz. 1. That gold bullion at Paris should be at the price of coin, while at London it may be at mint price: or, 2. That at Paris it may be at mint price, when at London it is at 4 l. 0 s. 8 d. what will then the real par of exchange be?

I answer, that on the first supposition, it will be one pound sterling, equal to 23.939 livres, and the crown of 3 livres equal to 30.076 pence sterling. In the other, equal to 21.34 livres for the pound sterling, and for the crown of 3 livres 33.728. A difference of no less than 8.9 per cent.

Is it not evident that these variations must occur in the exchange between London and Paris? And is it not also plain, that they proceed from the fluctuation of the price of bullion, not from exchange?

We have, I think, demonstrated, in the third book, that a wrong balance upon the French trade may raise bullion in the Paris market to the price of coin; and that a right balance may bring it down to mint price. The price of coinage is above 8 per cent. So that 8 per cent of fluctuation in the price of bullion is easily accounted for in the Paris market, without taking into the account the variations in the English market.

In London, where no coinage is paid, were all the coin of full weight, and exportation free, coin and standard bullion would constantly stand at the same price: but when the heavy coin is exported, and the currency becomes light by the old coin remaining in circulation, the price of bullion rises in proportion.

Is it surprising that, at London, gold in bullion should be worth as much as gold of the same standard in guineas, weight for weight? Is it not worth as much at the mint? Why should it not be worth as much at the market? I affirm that any man may offer to pay for the ounce of all the guineas coined by Charles II, James II, and William III, now in circulation, the highest market price that ever was given for standard gold bullion in London, and gain by the bargain.

This, I hope, will be sufficient to satisfy any body that there is a mistake in ascribing the high price paid for the French crown in the London exchange to a wrong balance upon the trade of England with France.

From this new light in which I have placed the question, I hope the arguments used in the 16th chapter of the first part of the third book, will acquire an additional force; and that thereby the eyes of this nation may be opened with regard to the interests of the French trade; a point, I should think, of the highest concern.

To calculate, as every body does, the par of the French crown, either by the gold or the silver in the English standard coin, when no such standard coin exists; and to state all that is given for the crown above 29 1/2 d. if you reckon by the silver, or 30 3/4 d. if you reckon by the gold, for the price of a wrong balance, is an error which may lead to the most fatal consequences.

If government should think fit to impose, in their own mint, a coinage, equal to that of France, and make all their coin of equal weight, and at the due proportion, it will take off all the loss we suffer by paying coinage to France (which we at present impute to the exchange) while she pays none to us. But then it will occasion nearly the same fluctuations upon the real par of exchange as at present; only from another cause on the side of Great Britain. At present our exchange becomes favourable from the weight of our own currency, and the balance against France upon her trade; which, in Paris, raises the price of the bullion with which we pay our French debts. On the other hand, our exchange becomes unfavourable from the lightness of our own currency, from the coinage we pay to France, and balance against us; which last carries off all our new guineas; and in the Paris market, sinks the value of that bullion in which we pay our French debts.

Were matters put upon a right footing, we should gain from France the price of our coinage, when our balance is favourable, and pay coinage to France when their balance is favourable; instead of seeing our exchange turn more in our favour, from the additional weight only of the coin in which we pay.

If French coinage should appear too high a price for the interest of other branches of British trade, a question I shall not here determine, let us impose at least as much as to keep our guineas out of the melting pot, and banish all the old coin which throws us into such confusion.

What has been said is undoubtedly too much upon this subject for the generality of readers. The number of those who can go through a chapter like this with pleasure is very small. But if the idea I have been endeavouring to communicate, be found just by one man of capacity, whose opinion shall have weight in the deliberations of Great Britain, the consequences may be of great advantage to this nation; and this consideration will, I hope, plead my excuse.

I shall now set this question in another point of view, from which the stress of my arguments will be felt, and all intricate reasonings will be laid aside.

Does not the price of exchange, or what is given above the par, proceed from the expence of sending the metals from the one place to the other, the insurance of them, and the exchanger's profit? If this be true, which I believe nobody will deny, must not what is paid for the bill, over and above these three articles, be considered as the real par, relatively to exchange? Now does the price of the bullion which the exchanger pays in his own market, or the price he gets for that bullion in the market to which he sends it, at all enter into the account of the transportation, risk, and profit, which the exchanger has on the operation? Certainly not. May there not be a very great difference between the buying and selling the very same bullion in different markets at one time and another? Ought we not to charge this to some other accompt than to the price of exchange, which is confined to the expence of transporting the balance only, and when two objects totally different are included under the same term, does it not tend to perplex our notions concerning them?

The great variation in the price of bullion in France, for example, and the expence of procuring it, proceeds from three causes. The first is, the coinage imposed in France, while none is imposed in England. What, therefore, is paid upon this account, is profit to France, and loss to England.

The second cause of variation, is the debasement of the value of the pound sterling, when the heavy gold has been sent abroad. This loss affects the nation, and every man in England, in the quality of creditor for sums specified in pounds sterling, to the profit of all debtors.

The third cause of variation, is from the great expence exchangers are put to, in procuring the metals from other countries, when they cannot be got at home: the consequence of this shall be explained in a succeeding chapter.

As all these causes are combined in the exchange upon bills when they come to market, I think it is proper to analize them, before the doctrine we are upon can be distinctly understood.

I shall therefore conclude my chapter with this proposition.

That the best method of 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 one and the other; and to state the difference as the price paid for the exchange.

Chapter III: How to remove the Inconveniences which occur in paying Balances with the Metals or Coin of a Nation

The inconveniences which occur when balances are to be paid in bullion or coin are these:

First, the want of secure and ready transportation, from the obstructions government throws in the way to prevent it.

Secondly, The difficulty of procuring the metals abroad when they are not to be found at home.

When we speak here of balances to be paid from one country to another, we understand that the general amount of the whole payments to be made to the world, exceeds the sum of all that is reciprocally due from it. So far as a balance due to one country is compensated with a balance due by another, they may be mutually discharged by bills of exchange, according to the principles already laid down. All compensations being made by bills drawn for reciprocal debts, we must here suppose a balance due by the country whose interest we are considering. This, like debts between private people, must either be paid in intrinsic value, or by security for it; that is, by contracting a permanent debt bearing interest. The first is the question here before us; the second will be examined in the succeeding chapter.

The first difficulty mentioned, to wit, the want of secure and ready transportation of the metals, proceeds in a great measure from the obstruction government throws in the way, to prevent the exportation of them. To remove which difficulty, it is proper to shew how far it is the interest of government to obstruct, how far to accelerate the transportation of the metals.

We have said that it is the advantage of every state, in point of trade, to have balances paid with the least expence. If then we suppose that it is either necessary or expedient that this balance should be paid in the metals, government, in this case, should facilitate by every method the sending them off in the cheapest and securest way.

But since governments do not generally follow this rule, we must examine the reasons which engage them to prefer a contrary conduct.

The principal, the most general, and most rational objection against the exportation of the metals, is, that when it is permitted without restriction, it engages the people, when they go to foreign markets for articles of importation, to run to the coin, instead of carrying thither the product and manufactures of the country. From which a consequence is drawn, that as long as coin and bullion are fairly allowed to be exported, the rich inhabitants will employ them for the purchase of foreign commodities, to the hurt of domestic industry.

This is an objection of great weight, relatively to the situation of many nations. The Spaniards and Portuguese feel it severely. Many individuals there are very rich; the numerous classes of the people are either lazy or not properly bred to industry. In this situation the alternative to government is very disagreeable. Either the rich must be deprived of many enjoyments with which their industrious neighbours alone can supply them, until, by very slow degrees, the lowest classes of their countrymen can be engaged to change their way of living, and be inspired with a spirit of industry; or they must be allowed to gratify the desires which riches create, at the expence of the nation's treasure, and the improvement of their country.

From this alternative we discover the principle which must direct the conduct of a statesman under such circumstances, viz.

To forbid the importation of every foreign manufacture whatsoever; to submit to the hardships necessarily implied in the circumstances of the nation; and to pay freely what balance may be owing upon natural produce imported for the uses of subsistence or manufacture.

This is a plan more rational and more easily executed, than a general prohibition to export the metals; because by good regulations, you may prevent the importation of manufactures; but it is hardly possible to prevent the exportation of the metals necessary to pay for what you have bought from strangers, by the permission of government: and on the other hand, suppose you do effectually prevent the exportation of the metals, the consequence will be, to put an end to all foreign trade even in natural produce, which on many occasions may be necessary for the subsistence of the people. What nation will trade with another who can pay only by barter? All credit will likewise be cut off; for who will exchange by bills, with a place which cannot pay, either in their own currency, or with the metals, the debts which they reciprocally owe?

The maxim therefore, here, is to prevent as much as possible the contracting of debts with strangers; but when they must be contracted, to facilitate the payment of them.

This reasoning is calculated to direct a statesman who finds himself at the head of a rich luxurious nobility, and an idle or ill-instructed common people, surrounded by industrious neighbours, whose assistance may be necessary upon many occasions, to provide subsistence, or the materials of manufacture, for his people; and this while he is forming a scheme for introducing industry at home, as a basis for establishing afterwards a proper foreign commerce.

But in this subject combinations are finite, and the smallest change of circumstances throws the decision of a question on a different principle.

I will not therefore say, that in every case which can be supposed, certain restrictions upon the exportation of bullion or coin are contrary to good policy. This proposition I confine to the flourishing trading nations of our own time.

To set this matter in a fair light, and as an exercise upon principles, I shall borrow two examples, one from history, and another from a recent experiment made in France, in which a clog upon the exportation of the metals and coin was very politically laid on.

We learn from the history of Henry VII of England, a sagacious Prince, that he established very severe laws against the exportation of bullion; and obliged the merchants who imported foreign commodities into his dominions, to invest their returns in the natural produce of England, which at that time consisted principally in wool and in grain.

The circumstances of the times in which that Prince lived, must therefore be examined, before we can justly find fault with this step of his political economy.

In Henry the VIIth's time, the foreign trade of England was entirely in the hands of foreigners, and every elegant manufacture almost came from abroad.

Under such circumstances, is it not plain, that the prohibition to export bullion and coin, was a compulsion only concomitant with other regulations, to oblige the foreign merchants, residing in his kingdom, to buy up the superfluity of the English natural produce of wool and grain? Had not the King taken these measures, the whole money of the nation would have been exported; the superfluous natural produce of England would have lain upon hand; the redundancy of which would have brought the price of them below the value of the subsistence of those who produced them; agriculture would have been abandoned; and the nation would have been undone.

I allow that nothing is so absurd as to permit the consumption of foreign productions, and to forbid the exportation of the price of them. I also allow that every restraint laid upon exporting silver and gold, affects the consumer of foreign goods, and obliges him to pay the dearer for them; but this additional expence to the consumer, does not augment the mass of foreign debts. The debt due abroad will constantly be paid with the same quantity of coin, whether the exportation of it be allowed or not; because the loss of those who pay the balance arises from the risk of confiscation of the money they want to export against law; or from the high exchange they are obliged to pay to those who take this risk upon themselves. In both cases, the additional expence they are put to remains in the country, and is repaid them by the consumers; consequently, can never occasion one farthing more to be exported. Prohibitions, therefore, upon the exportation of specie, are not in every case so absurd as they appear at first sight. It is very certain that nobody ever gives money for nothing; consequently, a state may rest assured that the proprietors of the specie, their subjects, will take sufficient care not to make a present of it to foreigners. The intention, therefore, of such prohibitions is not so much to prevent the payment of what people owe, as to prevent that payment from being made in coin or bullion; and also to discourage the buying of such foreign commodities as must be paid in specie, preferably to others which may be paid for with the returns of home produce.

When a statesman, therefore, finds the balance of trade, upon the main, favourable to the country he governs, he need give himself no trouble about the exportation of the specie, from this single principle, to wit, that he is sure that what is exported is not given for nothing; and that the favourable balance cannot fail to bring it back again, together with an additional supply But when the balance turns against him in the regular course of business, not from a temporary cause, then he may lay restraints upon the exportation of specie, as a concomitant restriction, together with others, in order to diminish the general mass of importations, and thereby to set the balance even.

In a trading nation, I allow that no restriction of this kind ought to be made general; because it then affects the useful as well as the hurtful branches of importation: but in Henry's days, the sale of corn and wool was sufficient to procure for England all it wanted from abroad; and the interests of trade were not sufficiently understood, to enable the state to act by any other than the most general rules. Forbidding the exportation of coin was found to promote the exportation of English productions, and this was a sufficient reason for making the prohibition peremptory. In this view of the matter, did not Henry judge well, when he obliged the merchants who imported foreign goods, to invest the price they received for them in English commodities? Once more I must say it, he was not so much afraid of the consequences of the money going out, as of the corn and wool remaining at home: had he been sure of the exportation of these articles to as good purpose another way, the prohibition would have been absurd; but I am persuaded this was not the case.

The example taken from France is this.

After the fatal bankruptcy in 1720, by the blowing up of the Mississippi, the trade of France languished from the effects of the instability of their coin, until the year 1726, when it was set upon that footing on which it has remained ever since.

Upon that last general coinage, the same principles of enriching the King by the operation directed the conduct of the minister.

The old specie was cried down, and proscribed in circulation: but it was thought, that as it was the King's coin, he had a liberty to set a price upon it, at a different rate from any other bullion of the same fineness: and that he had also a right to command the proprietors of it to bring it to the mint at his own price.

The consequence was, that those who could were very desirous to send it to Holland, in order to draw back the full value of it, in bills upon Paris.

Under such circumstances, were not prohibitions upon the exportation of this coin most consistent with the plan laid down? We shall, in the next chapter, examine the consequences of this operation upon the exchange of France.

What has been said, will, I hope, suffice to explain some of the principal motives which statesmen may have, when they lay restrictions on the exportation of the metals, with a view to favour the trade of their nation, or the interest of the exchequer.

But besides the interest of trade, there are other reasons for laying prohibitions on the exportation of the national coin, although that of bullion be left free under certain restrictions.

As often as it happens, that the value of a nation's coin remains at par with bullion of the same weight and fineness, this coin, if exported, may be melted down. This is a loss; because it puts the nation to the expence of coining more for the use of circulation.

When nations give coinage gratis, or when they allow the coin of other nations the privilege of passing current under denominations exactly proportioned to its intrinsic value, then coin never can be worth more than any other bullion of the same standard; consequently, will be exported or smuggled out whenever there is a demand for it abroad.

If, therefore, a nation do really desire to avoid an expence at the mint, they must make it the interest of merchants to export every other thing preferably to their own coin. This is done by imposing a duty upon the coinage; and this will either prevent the coins going out unnecessarily, or if it be necessary to export it, the coin will return in the payments made to the nation; because of its advanced value above any other bullion which can be sent.

The forbidding of the exportation of coin, implies a restriction upon the exportation of bullion; because, unless the bullion be examined at the custom house, and the stamps upon it looked at, it may happen to be nothing but the nation's coin melted down, with an intention to avoid the law. For this reason, whoever brings bullion to be stamped, whether it be for exportation or not, must declare that it has not been made of the nation's coin. How slender a check are all such declarations! The only one effectual is private interest; and as no man will take his wig to stuff his chair, when he can get cheaper materials equally good, so no man will melt down coin which bears an advanced value, when he can procure any other bullion.

On the whole, we may determine, that a flourishing commercial state, which has, on the average of its trade, a balance coming in from other countries, should lay it down as a general rule, to facilitate the exportation of its coin, as well as of bullion: and if a very particular circumstance should occur, which may continue for a short time, it may then put a temporary stop to it, and facilitate the payment of the balance by the means of credit.

I have enlarged so much upon the methods of removing the first difficulty of paying a balance, with the coin or bullion found in a nation, that what remains to be said upon the second difficulty, to wit, the procuring them from other nations, need not be long.

Were the mint weights of all countries sufficiently determinate; were the regulations concerning the standard of bullion exactly complied with; and were the current market prices of this important commodity, considered as a valuable piece of intelligence every where, the bullion trade would be much easier than it is.

We have said, that when the reciprocal debts of two nations are equal, there is no occasion for bullion to discharge them. But trading nations are many; and from this it may happen, that one who, upon the whole, is creditor to the world, may be debtor to a place which is also creditor to the world; and in this case bullion is necessary to pay the debt.

If a man owe money to a person who has many creditors, the person owing, may buy up a claim against him, and pay what he owes in that way: but if the person to whom he owes the money be indebted to nobody, then the debt must be paid with ready money. Just so of nations. For instance, when bullion is demanded to be exported to Holland, the English merchants, who are creditors on Spain and Portugal, take from thence their returns in bullion, for the sake of paying the balance to Holland, which is, upon the whole, creditor to the world.

But as it seldom happens, that he who deals with Holland is the person who has credit in Spain or Portugal, he is obliged to apply to Portugal merchants in order to procure bullion. They again who trade thither, having profit on the returns of the commodities they bring from thence, will expect the same profits upon the bills they give to the man who wants to take his return in bullion. This plainly raises the price of bullion in the English market; because it is brought home in consequence of a demand from England. On the other hand, when the demands of England for Portuguese commodities is less than the value of what Portugal owes her, the Portugal merchants in London are obliged to take the balance in the metals. These come to the London market, and are offered to sale to those who want them: then the price of bullion falls; because the demand comes from the other side.

To go through all the operations which merchants employ to abbreviate the process I have been describing, would, indeed, better explain the practical part of exchange, than what I have said; but I write not to instruct merchants, but to extract from their complicated operations, the principles upon which they are founded.

Chapter IV: How the Price of Exchange, in a prosperous trading Nation, may be prevented from operating upon the whole Mass of reciprocal Payments, instead of affecting the Balance only

We have taken for granted, that the price of exchange is a hurt to trade in general.

In this chapter, we shall inquire more particularly than we have done, in what this hurt consists. The point of view of every man, whether he be a merchant or not, is first honestly, and as far as law and fair dealing do permit, to consult his own private interest; and in the second place, to promote that interest with which his own is most closely connected.

According to this rule, every merchant will endeavour to manage his exchange business to the best advantage to himself. If the balance be against his country, he will sell his bills on the country creditor as dear as he can; that is, he will endeavour to raise the price of exchange as high as he can against his country, whatever hurt may thereby result to the general trade of it; and in so doing, he does only what duty to himself requires; because it is by minding his business only, that he can trade upon equal terms with his neighbours, every one of whom will avail themselves of the like fluctuations, when they happen to be in their favour.

From this I conclude, that since the loss upon high exchange against a country, affects principally the cumulative interest of the whole, relatively to other trading nations; it is the business of the statesman, not of the merchants, to provide a remedy against it.

The whole class of merchants, no doubt, exchangers excepted, would be very glad to find the course of exchange constantly at par. This is also greatly the interest of the state because it is from the balance in its favour, not from the profit made in drawing that balance from the debtor, that the state is a gainer. This must be explained.

I am to shew how it happens, that a nation is benefited or hurt by the net balance only, which it receives from, or pays to her neighbours: and that the whole expence of paying or receiving this balance, is not national, but particular to individuals at home. consequently, it would be the interest of all states, that balances both favourable and unfavourable, were paid by the nation-debtor, at the least expence possible.

The great difficulty in communicating one's thoughts upon this subject with distinctness, proceeds from the ambiguity of the terms necessary to express them. This may be avoided by adopting the technical terms of merchants; but these are still more difficult to be comprehended by any one who is not conversant in commerce. I shall acquit myself of this difficult task the best way I can.

When we speak of a balance between two nations, we shall call the nation who owes the balance the nation-debtor; the other to whom it is owing, the nation-creditor.

Balances imply reciprocal debts; consequently, reciprocal debtors and creditors. To avoid, therefore, confusion in this particular, we shall use four expressions, viz. the debtors to the nation-creditor; the debtors to the nation-debtor; the creditors of the nation-creditor; the creditors of the nation-debtor.

Let me suppose that Paris owes a balance to London, no matter for what sum. The reciprocal debts between Paris and London are all affected by the consequence of this balance: that is to say, some pay or receive more than the real par; some pay or receive less. To discover where the profit centers, we are now to inquire who are those who receive more, who are those who receive less. And as profit and loss are here only relative, that is to say, the profit of the one is compensated by the loss of the other; we must see whether upon the whole, the price of the exchange in this case be favourable to England, to which, by the supposition, the balance is due, and unfavourable to France, which is the debtor.

The question thus stated, let us examine the operations of exchange at London and Paris, and the state of demand in both, for money or bills.

In the London market the demand will be for money in London for bills on Paris; and he who demands, must pay the exchange; consequently, the London merchants, creditors of the nation-debtor, will pay the exchange; that is to say they will sell their bills on Paris below par; and the London merchants, debtors to the nation-debtor, will buy them, and gain the exchange; that is, they will buy bills upon Paris below par.

Now as this negotiation is carried on at London, I must suppose it to take place amongst Englishmen; one part of whom will gain exactly what the other loses; consequently England, in this respect, neither gains or loses by the exchange paid in London.

Let us next examine the interest of the merchants, and the interest of the nation's trade.

The creditors of the nation-debtor, who have lost by the exchange, are those who have exported English commodities to France. Upon this profitable branch of commerce the exchange occasions a loss, the consequence of which is, to discourage exportation.

The debtors to the nation-debtor, who have gained by the exchange, are those who have imported French commodities to England. Upon this hurtful branch of commerce, the exchange occasions a profit; the consequence of which is, to encourage importation.

This is not all. The English merchants exporters, who have lost, cannot draw back their loss upon the return of their trade; because the return of their trade is the money due by France, the balance included. Whereas the English merchants importers may draw back their loss upon the return of their trade; because that return is merchandize, which they can sell so much the dearer to their own countrymen.

If the balance be in favour of London, importers gain, as we have seen; when it is otherwise, and when they are obliged to pay the exchange, they indemnify themselves, by the sale of their goods so much the dearer. High exchange, therefore, may hurt exporters, but never can hurt importers.

Let us next examine the operation of exchange at Paris.

In the Paris market, the demand will be for bills upon London for money in Paris; and he who demands must pay the exchange. The debtors, therefore, to the nation-creditor, must pay the exchange, and the creditors of the nation-creditor will receive it; and as both are Frenchmen, the profit and loss to Paris exactly balance one another.

But the debtors of the nation-creditor are here the importers of English goods; consequently, this trade, hurtful to France, would be hurtful to the importer, could he not indemnify himself by selling them so much the dearer to his countrymen.

The creditors, again, of the nation-creditor, who gain the exchange, are the exporters of French goods to England; so that here the exportation meets with an encouragement from a balance against the country.

From the advantage found upon exchange in favour of exporters, and the loss upon it to the prejudice of importers, in the case of a wrong balance, it has been believed, that a wrong balance produced, upon importations and exportations, effects equal and contrary, which destroy one another, and thereby bring the balance even.

In answer to this, I have two short arguments to offer.

The first is, that were the argument conclusive, it would hold good in reversing the proposition; to wit, that the consequence of a favourable balance would be to destroy the difference also, and bring the balance even. This I never heard alleged.

My second argument is the stronger: that the enhancing of the prices of importations will not so effectually discourage the sale of them at home, as the enhancing the prices of exportations will discourage the sale of them abroad; for the reasons I shall give presently. But in the mean time,

If the compensation be considered in relation only to the merchants importers and exporters, there, indeed, I agree, that their profit and loss upon the exchange is most exactly balanced; because what the one party gains the other loses; and the country loses the balance only, as has been said.

The reciprocal debts thus transacted by bills of exchange, we see that no profit can be made, nor loss incurred, either to London, or Paris, by this operation.

The profit to Frenchmen is compensated by the loss to Frenchmen; the same may be said of the English merchants: but the balance due after these operations are over, and the more remote consequences of high exchange, affect the relative interest of the two nations.

This balance is generally sent by the country-debtor, either to the country-creditor, or to their order in a third country, to which the country-creditor is indebted.

The transportation and insurance of this balance is an expence to those who owe it, and the profit, if any there be on this operation, naturally belongs to the exchangers of the same nation, who conduct it. So whether exchange be paid upon bills drawn, or expence be incurred in the sending away the balances, no profit can accrue upon this to the nation-creditor, to the detriment of the debtor: it must, therefore, do hurt to both, relatively to nations where, upon the average of trade, exchange is lower.

I come now to the method of transporting balances in the metals.

We have seen how the creditors of the nation-debtor pay exchange upon the sale of their bills on Paris, which owes the balance. If by the operations of exchangers, this exchange should rise, to their detriment, higher than the expence, trouble, and insurance, upon bringing this balance from Paris, then they will appoint some factor at Paris, to whose order they will draw bills upon their debtors in that city; and as what the Paris-debtors owe to London is stated in pounds sterling, the London-creditors will value the pound sterling, according to the rate of exchange, in their favour; and in their bills upon their Paris-debtor, they will convert the sum into livres, including the exchange.

By this operation, we see how the transportation of the balance may become the business of the creditors of the nation-debtor: which is a circumstance we have not as yet attended to: a few words will explain it.

When the creditors of the nation-debtor sell their bills, they must pay the exchange, as has been said. When they draw bills to the order of a friend in the place where the balance is owing, they superadd the exchange. This their debtors pay: but then they themselves must be at the trouble and expence of bringing home the money.

It is from this alternative which both parties have of either sending what they owe to their creditors in bullion, or of allowing them to draw for it at the additional expence of paying the exchange, that a check is put to the extravagant profit of exchangers: and from this circumstance arise all the delicate operations of drawing and remitting.

Into these we shall not inquire: the principle on which they depend appears sufficiently plain, and this is the principal object of our attention.

I proceed now to consider how far those reciprocal profits and losses, between merchants in the same country, affect the trade of it in general.

When the balance is favourable, we have said that the exporters lose the exchange, and the importers gain it; and both being citizens, the country would not be concerned in their relative interests, were it not that these interests are connected with that of the country, which reaps great benefit from the trade of those who deal in exportations, and loss from the other.

If, therefore, exchange be found to hurt exportation, when the balance is favourable, in this respect the country has an interest in bringing it as low as possible. But as it may be said, that since the return of an unfavourable balance hurts in its turn the interests of importation, and favours that of exportation, exchange thereby operates a national compensation: I must, in this place, add one rejection more, in order to destroy the strength of this argument.

Were this proposition admitted, as I am sure it cannot, from what we have already said, it would afford no argument against doing what can be done, to render exchange as little hurtful as possible to exportation, during the favourable balance. But next as to the question itself of national compensation, I cannot allow that even exporters and importers are thereby brought on a level in point of trade: for this reason, that since it is allowed, that when the balance of trade is favourable, the price of exchange is a loss to the merchants exporters; this exchange in proportion as it augments, must discourage manufacturers, who must have regular, and even growing profits, according to the increase of demand. These the merchant exporter cannot afford; because he cannot draw back from his foreign correspondents, any advance upon manufactures at home, arising from domestic circumstances. But when upon an unfavourable balance, the merchant importer is affected by the exchange against him; this additional expence he can draw back. because he sells to those who are affected by all domestic circumstances.

Let us therefore determine, that it is the interest of a state to disregard this compensation which is said to be given to exportation during a wrong balance, which does so much harm; and to avoid the discouragement given to it by a right balance, which does so much good. The only way to compass these ends, is to keep exchange as near to par as possible.

Could reciprocal debts be always exchanged at par, and could the expence of bringing home, and sending a balance abroad, be defrayed by the state, I think it would prove a great advantage to the trade of a nation. I do not pretend to say that, as matters stand, the thing is practicable; but as this is a question which relates to my subject, and seems both curious and interesting, I shall here examine it.

At first sight, this idea will appear chimerical; and some readers may despise it too much, to be at the trouble to read what may be said for it. I shall therefore set out by informing them that the scheme has been tried, in a great kingdom in Europe, under a great minister: I say it was attempted in France, in the year 1726, under the administration of Cardinal Fleuri, and produced its effect; although it was soon given up, for a circumstance which, I think, never can occur in Great Britain.

After the last general coinage in France, 1726, exchange became so unfavourable to that kingdom, as to occasion a general outcry. The Cardinal, to put a stop to the clamour, and to set exchange to rights, as he thought, ordered Samuel Bernard, at that time a man of great credit, to give bills on Holland at par, to all the merchants; and in order to enable him to place funds in Amsterdam, for the payment of his bills, the Cardinal supplied this exchanger with sufficient quantities of the old coin, then cried down, and paid for the exportation of it to Holland.

Upon this, exchange on Holland came to par; and the exchangers at Paris looked on the operation with amazement. The minister, however, in a short time discovered, that by this he was undoing with one hand, what he wanted to establish with the other. He therefore stopped in his career, after having paid, perhaps, ten times the balance due to Holland.

By unfolding the combination of this operation, I shall be better able to cast light on the question before us, than in any other way.

When the general coinage was made in France, by the arret of the month of January 1726, all the old coin was cried down, and ordered to be recoined. The mint price of fine gold per marc was fixed at 536 livres 14 sols 6 deniers; that of the silver at 37 livres 1 sol 9 deniers. These were the prices at which the mint paid for bullion, when offered to be coined. But the King, as if he had a right upon the metal in the old coin, commanded it to be delivered at the mint at no higher rate than 492 livres for the marc of fine gold, and at 34 livres for the marc of fine silver: and to compel the possessors of it to bring it in, all exportation and melting down was made highly penal; the avenues from France were beset with guards to prevent the going out; and the melting pots were strictly watched. Upon this, the possessors of the old coin, rather than sell it to the mint at so great an undervalue, had recourse to exchangers for bills upon Holland for it: and these being obliged to send it thither at a great expence and risk, exacted a very high exchange, which, consequently, affected the whole trade of France.

Politicians persuaded the Cardinal, that exchange had got up so high, not from the discredit cast on the old coin, but because of the wrong balance of trade, and of the alteration which had been made at that time upon the denomination of the new coin: and that as soon as the balance against France was paid, exchange would return to par. Upon this the Cardinal set Bernard to work, but he soon discovered his mistake; and by arret of the 15th of June the same year, raised the mint price of the old coin, and then exchange became favourable.

These are all facts mentioned by Dutot, and yet he never will ascribe the rise of exchange in France to any other cause than to the tampering with the denominations of their coin: an operation which may rob one set of people in favour of another; but which has very little effect upon exchange, when other circumstances do not concur, as in the case before us.

Now had the high exchange against France been owing to a wrong balance upon her trade, is it not evident that the Cardinal's operation would have succeeded, that all demands for bills at Samuel Bernard's office would have been confined to the exact extent of this balance; that the reciprocal debts would have been negotiated between the merchants at par; and, consequently, that all expence upon exchange would have been saved to individuals, at the small charge to government of transporting the balance paid by the merchants at Paris, for Samuel Bernard's bills?

Were prosperous trading states, therefore conducted by statesmen, intelligent, capable, and uninfluenced by motives of private interest, they would make it a rule to be at the expence of sending off, and bringing home all balances, without any charge for exchange to the traders; but the consequence of either neglect, or incapacity in the person at the helm, would then make it too dangerous to attempt, at once, so great a change in the present method of paying balances: but I never make allowances for such defects in ministers, while I am deducing the principles which ought to direct the conduct of a statesman.

I shall next slightly point out the bad consequences which, upon an unfavourable state of commerce, might result from such a plan: and without recommending any thing to practice, leave the reader to judge of the expediency.

We see, that by a statesman's giving bills at par, on all occasions, and being himself at the expence of transportation and insurance, in bringing home and sending off all balances, exchange would of itself come to par.

The first consequence of this would be, the total annihilation of the exchange business; and if, after this, any interruption should happen by neglect in the statesman, trade might suffer considerably.

Another consequence is, that the most destructive trade would go forward without a check, as long as merchants could pay the par of the bills they demanded upon foreign parts: and this they would constantly be enabled to do, while there was neither coin or paper in circulation, as has been explained in treating banks of circulation upon mortgage.

The consequence of this again would be, to oblige the state to pledge the revenue of the country to strangers, in proportion to the balance owing, over and above the extent of the metals to discharge it.

Now the question is, and this I shall leave to the sagacity of my reader to determine, whether, as matters stand, there be any check proceeding from high exchange which can prevent the bad consequences here set forth. I suspect there is none. We see the most enormous sums lent by nations to nations; raising the exchange against the lenders; turning it in favour of the borrowers, but never preventing the loan from going forward. Does not Great Britain, as well as France, owe amazing sums to other nations, at the expence of paying the interest out of their revenue? And have not all these sums been transacted by exchangers, who have made great fortunes by the operation? Are not the most unfavourable balances paid in the ordinary method? Are there not, already, instruments in the hands of all nations, sufficient for their undoing? How then can their ruin be accelerated by this alteration in the mode only of performing the same thing?

But let it be observed, that our business, in this chapter, is to search for methods to advance the prosperity of flourishing nations, who have a balance owing to them; and here we have been setting forth the bad consequences which result from them, to others who are in decay. Every argument, therefore, drawn against this scheme, in favour of the idle or prodigal, is an argument in favour of it, with respect to the industrious and frugal. As all nations are liable to alternate vicissitudes of prosperity and adversity, the principles here laid down, require to be carefully combined with domestic circumstances, before they be applied to practice.

It was with a view to this distinction, that, in the title of this chapter, I pointed out the question there proposed, as being relative to the state of it in a prosperous trading nation; and I am not quite clear how far it might not be advantageous in every case: but this question I shall not here enlarge upon. What has been said, will, I hope, be sufficient to point out the principles upon which the decision depends; and if any statesman incline to try the consequences of it now and then, by an experiment, nothing is so easy as to do it, without any detriment. This is proved from the operation performed by the French cardinal, on the occasion of a very unfavourable and high exchange.

Chapter V: How, when other Expedients prove ineffectual for the discharging of Balances, the same may be paid by the Means of Credit, without the Intervention of Coin or Bullion; and who are those who ought to conduct that Operation

We have now applied the principles formerly laid down, towards discovering the most proper expedients for removing or palliating the three inconveniences to be struggled with in regulating exchange. First, How to estimate the value of a balance due: Secondly, How to pay it with the coin or bullion of the country: and lastly, How to prevent the price of exchange from affecting any thing more than the balance to be paid, after all reciprocal debts have been compensated.

It remains to inquire, what are the most proper methods to acquit what a nation may owe, after it has done all it can to pay the value of their balance in the other way.

At first sight, it must appear evident that the only method here is to give security, and pay interest for what cannot be paid in any other value. This in the end is constantly what is done by every nation; but as the ordinary methods of bringing it about, are very perplexed, and are attended with expences which raise exchange to a great height, and thereby prove a prodigious discouragement to trade in general: it would be no small advantage, could all this loss on exchange be thrown equally upon every class within the state, instead of being thrown entirely upon its commerce.

As this is the expedient to be proposed, it will not be amiss to observe, that foreign balances arise chiefly upon four articles. First, The great importation and consumption of foreign productions. Secondly, The payment of debts and interest due to foreigners. Thirdly, The lending money to other nations. And, Fourthly, The great expence of the state, or of individuals, abroad.

Could all the bad consequences arising from these four causes, and the high exchange occasioned by them, be cast upon that interest alone which occasions them, I should not propose to lay the whole body of the nation under contribution for repairing the loss.

But if from the nature of the thing, as matters stand, the whole be found to fall upon trade, without a possibility of preventing it; in this case, I think it would be better for the nation, in cumulo, to lend its assistance, and to share the burden, than to allow it to fall upon that part of the body politic from which the whole draws its vigour and prosperity.

It cannot be denied, that when a heavy balance is due by a nation, it has the effect of raising exchange upon every draught or remittance. When bills are demanded to pay a foreign claim, it cannot be determined from which of the four articles, just now mentioned, the claim has arisen. Whether for national purposes or not, the exchange is the same, and equally affects the whole interest of trade.

If this be a fair state of the case, I think we may determine that such balances ought to be paid by the assistance and intervention of a statesman's administration.

The object is not so great as at first sight, it may appear. We do not propose that the value of this balance should be advanced by the state: by no means. They who owe the balance must then, as at present, find a value for the bills they demand. Neither would I propose such a plan for any nation who had, upon the average of their trade, a balance against them; but if, on the whole, the balance be favourable, I would not, for the sake of saving a little trouble and expence, suffer the alternate vibrations of exchange to disturb the uniformity of profits, which uniformity tends so much to encourage every branch of commerce.

We have abundantly explained the fatal effect of a wrong balance to banks which circulate paper; and we have shewn how necessary it is that they should perform what we here recommend, to be done by the state itself. There is therefore nothing new in this proposal: it is merely carrying the consequences of the same principle one step farther, and making it a branch of policy, for government to be assisting to trade in the payment of balances, where credit abroad is required; and we have proposed that this assistance should be given out of the public money.

The greatest, and indeed, I think, the only objection to this scheme, is, that by it the condition of our foreign creditors, will be bettered, for no value received from them. This I allow will be the case when the balance is against England: but it will be compensated to the creditors by the loss they will sustain when the balance is in her favour. But supposing there should be a benefit to foreign creditors, will not this circumstance raise the confidence of all the world in the English funds? If, upon a proposal to government to lower the rate of money by refunding the debts which bear a higher interest than what money can be procured for, the continent should pour her wealth into our subscription, might we not then more readily expect a supply from that quarter? Besides, is not all the interest due to foreign creditors paid in bank paper? Is not this demandable in coin, and will not this coin be exported, if credit be not found? Were the bank of England to keep a subscription open, at all times, in Amsterdam, for money to be borrowed there, on the payment of the interest in that city, who doubts but loans might be procured at much less expence than at present, when we are beating about for credit every where, until by the return of a favourable balance upon the trade of England, she shall be enabled to fill up the void.

I feel my own insufficiency to unfold the many intricacies which such an operation must imply. I therefore shall not attempt what, at any rate, I must leave imperfect. What has been said, together with what has been thrown out on the same subject, in treating of other matters, is sufficient to give a hint, concerning the expediency of the plan in general. And as to the objection which arises from the payments to the public creditors abroad, I shall reserve the more ample discussion of it till I come to consider the doctrine of public credit.

Part 4, Of Public Credit

Chapter I

The principles which influence the doctrine of public credit are so few, and so plain, that it is surprising to see how circumstances should possibly involve them in the obscurity into which we find them plunged on many occasions.

For the better clearing the way towards the main object, I shall shew from experience, and from the progress of public credit in some nations, that the true principles have been overlooked, and so confounded with extraneous objects, as to be entirely lost.

The true method of decyphering, as it were, the complicated operations of statesmen with respect to this branch of politics, is to bring back to their native simplicity such plans of administration, as, from the infinite perplexity of them, make people believe, that the principles which influence this district of the science lie so involved, as to require a peculiar force of genius even to comprehend them.

By proceeding in this plain track, and by keeping principles constantly in view, the most perplexed systems of borrowing, funding, stock-jobbing, coining and re-coining of money, changing the weight, fineness, and denominations of specie, circulating paper in conjunction with it, imposing upon mankind with bubbles and bankruptcies, and calling them operations of public credit, may be rendered intelligible to the most slender capacity.

Many of these topics have been already explained, and dismissed. This will enable us to contract the plan of what remains in proportion to the objects it is to comprehend.

Public credit we have defined to be, the confidence reposed in a state, or body politic, borrowing money, on condition that the capital shall not be demandable, but that a certain proportional part of the sum shall be annually paid, either in lieu of interest, or in extinction of part of the capital; for the security of which payment, a permanent annual fund is appropriated, with a liberty, however, to the state to free itself, by repaying the whole, when nothing to the contrary is stipulated.

In this definition I have put in an alternative, of paying a perpetual interest for the money borrowed, or of paying annually a sum exceeding the interest; which excess is intended to extinguish the capital in a certain number of years. In both cases, the annual payment is called an annuity. When it is exactly equal to the interest agreed on, it is called perpetual; and determinate, when it is granted either for life, or for a certain number of years.

The solidity of this security is essential to the borrowing upon the cheapest terms: let me suppose it to be as solid as land-property, and as permanent as government itself: what will the consequence be?

If we suppose government to go on increasing, every year, the sum of their debts upon perpetual annuities, and appropriating, in proportion, every branch of revenue for the payment of them; the consequence will be, in the first place, to transfer, in favour of the creditors, the whole income of the state, of which government will retain the administration. The farther consequences of this revolution will furnish matter for a chapter by itself.

If the borrowings of a state be in proportion only to the extinction of the old capitals, or of what I have called determinate annuities, then the debts will not increase.

When a statesman, therefore, establishes a system of public credit, the first object which should fix his attention is to calculate how far the constitution of the state, and its internal circumstances, render it expedient to throw the revenue of it into the hands of a moneyed interest. I say, this is the most important object of his deliberation; because the solidity of his credit depends upon it.

If, all the interests of the state duly considered, that of trade be found to predominate; less inconvenience will be found in allowing the moneyed interest to swell: but in monarchies, where the landed interest is commonly, and ought to be the most powerful, it would be dangerous to erect so formidable a rival to it. In political bodies every separate interest will consult its own; and in the contest between those who will be made to pay, and those who are to receive the taxes, under the denomination of creditors, the security of public credit will become precarious.

From this we may conclude, First, That in governments where the swelling of a moneyed interest is found to threaten the tranquillity of the state, care should be taken either to establish a sinking fund, for paying off, in times of peace, what may have been borrowed in times of war, or the plan of borrowing upon determinate annuities must be established.

Secondly, If natural cares be left to work their own effects, without a systematical plan of borrowing, the consequence will be a bankruptcy and a total failure of public credit, at least for some time.

Thirdly, If a state should find the mass of their debts to amount to so great a sum as to be insupportable, they might have recourse to a total, or partial abolition of them by an act of power.

Fourthly, If they allow their debts to swell without limitation, and adhere to the faith of their engagements, the whole property of the state will be in constant circulation, from one class of men to another.

Fifthly, If the debts contracted be the property of foreigners, these will either remove into the country, where their funds arise, or the property, that is, the dominium utile of the country, will be transferred from the natives.

These and many other combinations will arise from the extension of public credit; and an examination into the most natural consequences upon every supposition, will be the best way to acquire a distinct idea of the subject in general. To pretend to foretell any one certain chain of consequences, which may, in fact, result from any particular case, is, I apprehend, impossible; because every one of them will depend upon circumstances totally unknown. These consequences, in our way of examining matters of this kind, are all to be founded upon supposition. To supply therefore, in some measure, this defect, I shall first have recourse to examples of what has happened in the hitherto infant state of public credit; and as to cases which have not as yet taken place, we must have recourse to ingenuity, and endeavour to form the most rational combinations we can.

Chapter II: Of the rise and Progress of Public Credit

While the policy of States directed them to form treasures, there was no occasion for public credit. This policy prevailed until the rise of the Roman empire. Then all the treasures of the world were plundered, and the nations were inslaved. On this revolution, the exigencies of that great empire were supplied from the annual tributes paid by conquered nations. Under good reigns, this annual supply swelled the public treasure, until a prodigal Emperor squandered it away; and took to rapine and extortion, to fill up the void.

Upon the total dissolution of the Roman empire, Europe was overrun by barbarous nations, who, with as little industry as ever, supported their power by the military services of the whole people.

After the establishment of the feudal kingdoms under the chiefs who first laid the foundation of them, arose the Barons, or principal vassals, who, in imitation of their chief, erected small principalities, which by degrees grew independent.

This distribution of power into many hands had the effect of destroying all systematic plans of government. Princes were obliged to act according to the perpetual fluctuation of circumstances. until, by a revolution in their favour, the power of the vassals was swallowed up, and confined within the limits of a more regular authority.

In proportion as this revolution took place among the nations of Europe, the system of their government resumed a more permanent form. Justice was administered with more uniformity; and from this insensibly arose a body of laws, which, in some countries, were called customs: in others, as in England, common law. Wars then became less frequent; and the military services not being necessary on all occasions, insensibly became converted into taxes, proportioned to the exigencies of the time.

During this period, the coin and precious metals of Europe were in a great measure, lodged, in private coffers. If wars brought them forth for a short time, they soon found their way back again. Princes were generally poor; because they were generally extravagant, and spent money as fast as they got it. In proportion as industry and alienation increased, the coin came abroad; the inhabitants became easy in their circumstances; the state flourished, and acquired reputation. The riches and power of a state began then to be estimated, as they ought to be, not by their treasures locked up, but by what was found in circulation; that is, by their industry. Venice, Genoa, and the Hanstowns, set the example. The Jews, banished from France, on account of their extortions in the time of the holy wars, fled, as it is said, into Lombardy, and there invented the use of bills of exchange, for drawing their riches from those countries to which they durst not resort in order to bring them off. Interest for money began to be considered as lawful in many cases: merchants were protected by Princes, for the sake of the consequences of trade and industry: and from such small beginnings has this mighty engine of public credit sprung.

While Princes mortgaged their lands and principalities, in order to obtain a sum of money, they acted upon the principles of private credit. This was the case in the more early times, before government acquired that solidity which is necessary to establish a firm confidence. In proportion as it drew toward a regular system, the dawn of credit put on appearances analogous to the solidity of the fund upon which it was established.

The second step was to raise money upon a branch of taxes assigned to the lender, for the reimbursement of his capital and interest. We shall shew the consequences of this plan of credit from some examples, which will fully point out all its inconveniences.

This plan of administration was attended with so much abuse, and so much oppression, that statesmen began to despair of carrying on public affairs by such expedients; and therefore concluded that the only way to obtain money at the least expence, was to raise it on the subject within the year, or upon what they called short funds.

At length public credit assumed its present form. Money was borrowed upon determinate or perpetual annuities: a fund was provided for this purpose: and the refunding of the capital was, in many cases, left in the option of government, but never in the option of the creditor.

This is a short view of the progress of public credit. The principles upon which it is built are so few, that were I to confine myself to a bare deduction of them, little new or interesting could be said. I shall therefore steer another course: I shall collect the sentiments of some eminent politicians, who have either written upon, or acted in the administration of this branch of government; and by applying principles as we go along, I shall be enabled to point out the extraneous circumstances which are so apt to involve this subject in obscurity. Had we not before our eyes the numberless examples of this kind, it would hardly be possible to conceive how so great confusion, and so many calamities, could have followed upon the operations of public credit.

Chapter III: Of Anticipations, or borrowing Money upon Assignments to Taxes for the Discharge of Principal and Interest; and of the Sentiments of Dr Davenant on this Subject

I have already observed, that by the cessation of the constant wars, in which all Europe was engaged during the feudal government of the barons, nations began to enjoy some sort of tranquillity. Upon this the military services became insensibly converted into taxes: and as Princes extended their jurisdictions over the cities, which had been formerly more immediately under the protection of the bishops who resided in them, taxes were augmented. These impositions were very inconsiderable, with respect to what they brought into the King's coffers. The policy in raising them was bad; the frauds in collecting them were great.

These considerations engaged Princes to begin by contracting debts, with a view, afterwards to pay them by temporary assignments to the taxes imposed.

From this again ensued the most terrible extortions on the side of the tax-gatherers, so often complained of by those who have written concerning the affairs of France, as we shall see in the following chapter.

Philip le bel, King of France, was the first who, in 1301, admitted, with great policy, the inhabitants of cities to have a seat in the states of the kingdom. He formed them into a distinct body, and called them tiers etat, or the third state, after the clergy and the nobility. His view was to facilitate thereby the jurisdiction he wanted to establish over those cities, and to engage them to consent to the imposition of taxes for carrying on his wars in Flanders, and for opposing the ambitious views of Boniface VIII. Accordingly, the people began to pay willingly, when once they found that they had a vote in what concerned them.

I take it for granted, that every tax, about that time, was imposed for a particular purpose, and assigned either to creditors, or to people who advanced money upon it: because we are told that the first imposition granted by the states to a King of France as a permanent branch of revenue, was an excise upon spirituous liquors granted to Philip de Valois, in the year 1345; at which time, however, according to Mr d'Eon's Memoires pour servir a l'Histoire generale des Finances, there were not less than twenty two different taxes known in France, which he enumerates as follows:

Tailles, complaintes, charges, redevances, coutumes, peages, travers, passages, centiemes, cinquantiemes, ôtes, chevauchées, subventions, exactions, chevaleries, aides, mariages, toultes, impositions, prisons, servitudes, and nouvellettes.

That all these impositions must have been mere trifles, I gather from a circumstance in the Political History of France, mentioned by the author just cited, which being itself exceedingly curious and tending greatly to confirm many things which I have advanced concerning the small circulation in former times, I shall here briefly relate it.

In 1356, John, King of France, applied to the States for 50,000 livres, about 9165 l. sterling, to pay his army. The States, besides several other taxes imposed to pay this sum, granted him 8 deniers on the livre, or 3 1/3 per cent upon all meat, drink, and merchandise, sold in France within the year; that is to say, upon the whole alienations of France. The tax, was levied, but fell far short of the sum required, and the deficiency was made up by a poll-tax.

Can any example be better calculated for forming a notion of the circulation of France at that time?

It may be here alleged that the prices of every thing were then so very low, that no judgment can be formed concerning the quantity of alienation from the smallness of the sum. This objection is of no force, as I shall presently shew.

We know from the records of the selling price of grain in France, which was then remarkably cheap in proportion to the years which followed and which had preceded, that in 1356, the septier of wheat, or nearly 4 Winchester bushels, sold for 17 sols 8 deniers of the then currency, which was 12 livres to the marc fine silver, and a French soldier's allowance for bread to this day, is 3 septiers, or nearly 12 Winchester bushels a year. Now let me suppose, that the whole 50,000 livres had been raised by this imposition of 3 1/3 per cent or 1/30 of the total value of the single article of corn sold at market, which was far from being the case, and then compare this with the number of men who could have been subsisted with all the corn sold in France at that time.

If 1/30 of the price were the tax, then by multiplying 50,000 livres by 30, we have the value of the corn sold; to wit, 1,500,000 livres: divide this sum by the value of what a man consumes in a year, to wit, 3 septiers at 17 sols 8 deniers, which make 2 livres 13 sols, and the quotient will be the number of portions for a man, to wit, 566,037. Since, therefore, the 50,000 livres could not be raised in consequence of the tax, it follows, that the whole alienation of France, at that time, fell far below the value of as much wheat as would have fed 566,037 men.

What a poor idea does this communicate of the state of Europe so lately as 400 years ago! It would be in vain to seek for examples to illustrate any principle of our complicated modern economy in the histories of those times: their taxes, their credit, and their debts, resembled ours in nothing but the name.

I shall now come nearer home, and give an account of the ideas of public credit formed by Davenant, who flourished about the time of the revolution in 1688, which I may take to be the aera of public credit in England.

No person at that time, whose writings I have seen, appears to have so thoroughly understood these matters as Davenant. He was a man of theory, as well as knowledge of facts: he had an opportunity which, and he few people have, to be well instructed in the one and the other; turned his talents to the best advantage for promoting the interest of his country. He has written many tracts on political subjects, which, when carefully read and compared with what experience has since taught us, cast great light upon many questions relative to the subject of this inquiry.

Davenant, like other great men of his time, was of opinion that borrowing money upon what he calls short funds, was much preferable to that upon perpetual interest; and he thought the most adviseable plan of all, could it be accomplished, was to raise the money wanted within the year.

Men, at that time, had a terror upon them in contracting debts for the public: they considered the nation as they would a private man, whose interest is one, uncompounded, and relative to himself alone: in this light, creditors appeared as formidable as enemies; they were looked upon by ministers as such; and this general opinion on one side, contributed, no doubt, to make the monied people less interested in the distress of government, and more ready to lay hold of every opportunity of improving such occasions, for their own advantage.

Government was in constant war with creditors: when ready money failed in England, it had nothing to pay with but exchequer tallies, upon the taxes imposed. these were much more easily issued than acquitted. When the first year's amount of a tax was engaged, people considered the security for what was to follow as very precarious; consequently, the value of it diminished.

This method, however, succeeded far better in paying off debts already contracted, than in contracting new ones; and the hardships put upon those who had already advanced money to government, and who were paid by assignments upon taxes previously engaged, made people very diffident afterwards, except upon proper security. The limited form of the English government, prevented the violent proceedings of ministers, with respect to the public creditors, which were common in France; and this circumstance contributed, no doubt, to establish the credit of the former upon the better footing. But still the long expectation of payment for the capital and interest, upon a distant fund, made Davenant acknowledge that 700,000 l. in ready money would at any time go farther than a million in tallies; and yet he thought it was better for the state to borrow the million upon a plan of discharging the debt in three or four years, than to obtain the 700,000 l. at the expence of a perpetual interest of 8 per cent.

There were many more considerations which moved Davenant to prefer what he calls short funds to perpetual interest.

It was the general opinion in his time (not his own indeed, for he endeavoured to shew the fallacy of it) that money borrowed upon the anticipation of a fund, raised and appropriated for the discharge of it, was not a debt upon the state; because it did not diminish the former revenue. We have a remarkable instance of the prevalence of this opinion, in the famous memorial presented by M. Desmaretz to Philip Duke of Orleans, after the death of the late King of France; wherein he advanced, that during seven campaigns, from 1708 to the peace of Rastad, while he had been at the head of the King's finances, he had not increased the public debts by more than nine millions of livres capital: and yet when he came into the administration, in 1708, the King's debts did not amount to 700 millions; and we have seen, that at the time of his death, they were upwards of 2000 millions. But Desmaretz did not reckon the difference, which was no less than 1300 millions as any debt at all; because he had settled it upon funds of his own creation. This was so much the language of the times, that no criticism was made upon it.

It is remarkable, that Davenant, in giving an account of the debts of England, during the period of which he writes, that is, from the revolution down to the peace of Ryswick, hardly ever takes notice of the sums paid for interest upon them. The minds of men at that time were totally taken up with the payment of capitals; and provided these could be discharged in a few years, it was no matter, they thought, what they cost in the mean time.

As long as nations at war observe the same policy in their methods of raising money, the ways in which they proceed are of the less importance: but when any one state makes an alteration, by which more money is thrown into their hands than they could formerly obtain; this circumstance obliges every other state to adopt the same method. Thus while Princes made war with the amount of their treasures and annual income, the balance of their power depended on the balance of such resources: when they anticipated their income on both sides, for a few years, the balance was in proportion still: when, afterwards, they adopted long funds and perpetual interest, the supplies increased; but still the balance was determined as formerly.

The usefulness, therefore, of an inquiry into the principles of public credit, has not so much for its object to discover the interest of states in adopting one mode of credit preferably to another, as to discover the consequences of every one in particular; and to point out the methods for making them severally turn out to the best account not only for the state, considered as a body politic by itself, but also for the individuals which compose it.

When so many different relations are taken in, the subject becomes much more complex, and therefore the consequences which can be guessed only at must be less determinate: but on the other hand, it opens the mind, and suggests many hints which with time may be improved for the good of society.

People who barely relate political facts, afford only an exercise to the memory: those who deduce principles, and trace a chain of reasoning from them, give exercise to the understanding; and as a small spark may raise a mighty flame, so a hint thrown out by a slender genius may set all the great men of a nation on a plan of general reformation and improvement.

Let us now take a view of the state of public credit in England, at the peace of Ryswick; in order to shew how Davenant came to be so great an enemy to long funds, and more especially to perpetual interest. We shall at the same time point out from what causes proceeds the great change of sentiments at present.

At the peace of Ryswick, the debts of England, according to Davenant, in his fifth discourse upon the public revenues and trade of England, stood at 17,552,544 l. sterling; call it 17 millions and a half, as we have no occasion to calculate with exactness.

Of this debt the capital of 3 1/2 millions was sunk, as he calls it; because 1,300,000 l. was on lives at 14 per cent and what was over to make up the 3 1/2 millions, was intended to remain a perpetual burthen on the nation.

For paying the interest of this sum, no less than 400,000 l. a year was necessary, which makes on the whole above 11 per cent.

But then it must be observed, that more than one third of the sum was upon lives at 14 per cent: the debt due to the bank, of which we have spoken in another place, was 1,200,000 l. for which was paid 100,000 l. a year, including 4000 l. allowed for the charge of management: the remaining million was upon lottery tickets, bearing about 8 per cent the price at which the bank had lent.

The second branch of debts was near 11 millions, which, he says, were in course of payment; because they were secured upon branches of revenue engaged for discharging them. A part of this class of debts was to be extinguished in the year 1700: and whenever this was done, then a proportion of the appropriated taxes, amounting yearly to above a million sterling, was immediately to be taken off.

The third class of debts were those not provided for at all; which in the place referred to, he makes to amount to no more than 3,200,000 l. but he afterwards finds his mistake, and that they in fact amounted to above 5 millions and a half, which makes the debts of England at the peace of Ryswick, to have been near 20 millions.

Was it then any wonder, that a man who wished well to his country, should prefer borrowing upon short funds at any expence whatever in the mean time, rather than at perpetual interest, when he found that parliaments could not be prevailed upon to allow any tax to subsist one instant after the discharge of the debts for the payment of which it had been appropriated?

Besides, there was very little to be gained by borrowing upon long funds and perpetual interest, as long as the lenders considered their advantage to consist principally in getting their capitals refunded.

The plain matter of fact was, that trade at that time was only beginning to take root in England, and demanded funds to carry it on. The use of banks for turning property into money, had not then been discovered. Circulation, consequently, was confined to the coin; and profits on trade were very great. All these circumstances rendered capitals of essential use; and the consequence was, to raise interest to an excessive height.

Compare this situation with the present. Were the capital of 140 millions sterling thrown by Great Britain, in a few years, into the hands of the present creditors; were France, on the other hand, to throw in as much, what trade could absorb it? Capitals now are of value, in proportion only to the interest they bring; and so long as the interest paid on public debts is sufficient to keep circulation full, and no more, interest will stand as it is: when this ceases to be the case, as in time of war, we see interest begins to rise; and when, on the other hand, the interest paid, proves more than sufficient for the uses of circulation, as upon a return of peace, then, from the same principles, interest must diminish.

Davenant, like an able politician, who had the state of facts before him, reasoned according to actual circumstances. Whatever was borrowed on long funds, was charged on the standing revenue of the state, which parliament was very unwilling to increase in proportion to the charges laid upon it. This, of itself, was argument sufficient with him to cast his view upon short appropriations, or upon his favourite object, of raising money within the year, to supply the exigencies of the state.

But in this operation he found great difficulties. In his treatise of ways and means, article excises, where he is searching for expedients to provide money for the war, he plainly shews a thorough knowledge of this imposition. It had taken place in England as far back as the great civil war, and formed at the revolution about 1/3 of all the revenue: but what is very extraordinary, and which at present will hardly be credited, the excise had at that time the effect of sinking the price of the subject excised, instead of raising the price of what was produced from it. Thus the excise upon malt, after the revolution, had the effect of lowering the price of barley, instead of raising the price of beer.

This effect of excises Davenant saw; from which he, and since him, many more have concluded, that all excises fall ultimately upon the land.

This circumstance, together with a feeling for the interest of the great number of idle poor at that time, who must constantly suffer by excises, engaged Davenant to propose having recourse to the land-property and poll-taxes, for raising, within the year, the sums required for carrying on the war.

According to his proposal, there was to be no less than 3 millions raised by a land tax, besides half a million by a quarterly poll, which made together, above 100,000 l. more than all the permanent taxes of England put together.

A proposal of this kind coming from Davenant, shews the difference of situation between those times and the present. On this subject more is to be learned by comparing facts, than by all the reasoning in the world.

We have seen how credit stood in England during the reign of William III. It was then in its infancy, and was set upon the principles of a free and limited authority, exercised by ministers of state, at all times responsible to parliament at the risk of their heads, in case of any open violation of the public faith. This is the best of all securities against the bad exercise of power.

Whoever reads the admirable writings of Davenant, and compares his ideas with what experience has since taught us, concerning the nature of taxes and public credit, will plainly discover that the great distress of England at that time, proceeded from the following causes.

The war they were engaged in, was far beyond their power to support, although they had the greatest part of Europe to assist them.

The bravery of the British nation was ill supported with money, the sinews of war.

The coin soon after the revolution fell into the greatest disorder, which sent it away; no expedient was found to supply its place for the uses of domestic circulation; and, consequently, the fixed revenue could not be paid, nor industry carried on.

The people were unaccustomed to taxes, tunnage and poundage, the branch with which they were best acquainted, and which they bore with the least murmuring, because it was little felt by individuals, together with the excise upon beer and ale, the hearth money, the posthouse, and wine-licences, composed the whole of the permanent revenue of the state, and amounted to about one million and a half sterling: besides which, the parliament had granted new customs (all to cease before 1690) to the amount of about half a million more, upon wines, tobacco, sugar, and French linen. This was the state of the revenue at the revolution.

One would imagine that England, under so small a burthen, might have been able to make the greatest efforts.

Were we now to grapple with France, under such circumstances, what sanguine hopes should we not form of success! The case turned out widely different: the first benefit the nation expected in consequence of their liberty restored, was an abolition of the hearth money; a tax which raised over the whole kingdom, 245,000 l. This was considered as an insupportable burthen.

Such sentiments and dispositions in the English nation, might have been a sufficient indication of what was to be expected from the war; the consequences of which had, before 1695, produced the following changes in the revenue.

The tunnage and poundage, which at the revolution produced 600,000 l. was by this time reduced to 286,687 l.

The excise upon beer and ale, from 666,383 l. was reduced to 391,275 l.

The hearth money was abolished.

The post-house, from 65,000 l. was reduced to 63,517 l.

The wine-licences, from 10,000 l. to 5000 l.

The temporary customs which subsisted at the revolution, were now expired, and had been either continued by new grants, or by others of the same nature introduced in their stead. The former had produced 415,472 l. the new produced 373,839 l.

The last and most important grant of all, was an additional excise upon beer and ale, which produced 450,000 l.

The revenue at the revolution produced, clear of all charges, 2,001,855 l. sterling. A revenue established at pretty much the same rate, and nearly on the same objects, with an addition of a new excise, which produced 450,000 l. produced net in 1694, no more than 1,570,318 l. so that, deducting the new excise, the old revenue was diminished in its produce, no less than 1,081,527 l. or above one half, in five years time.

In a country like England, at that time, taxes were of little use to the state, and were an excessive burthen on the people.

What could they be paid out of? Not out of the value in the hands of the people; because there was no way provided for turning this value into money. The whole of the money coined before the end of the war in 1697, did not amount to 8 1/2 millions. It was not to be expected that during the war, foreign coin was to come in, except in consequence of borrowing; and we may be very certain, that all that was borrowed, and a great part of what had been coined at home, had gone out from the year 1695 to 1697. under these circumstances, the exchequer issued tallies of wood, a notably expedient for facilitating circulation! And the bank of England lent not one farthing upon mortgage. all that was possible to be raised on the land and on the people, by pound-rate, assessment, and poll-tax, was imposed.

Now let us recall our principles concerning circulation, alienation, and banking upon mortgage, and combine these with what we have so frequently repeated, and I think demonstrated, viz. that in proportion to the extent of alienation, and the demands for money, a circulating equivalent should be provided, so as to be ready at the hand of every person who has property to pledge for it; and then decide whether it was any wonder that credit in England should have been at so low an ebb at the peace of Ryswick; that taxes should have diminished in their produce; that interest should have risen to such an extravagant height; that the people should have groaned under a load from which they could not relieve themselves.

Under such circumstances, England appears to me in the light of a dumb man put to the torture in order to extort a confession.

Were eight or nine millions sterling in coin, and a few wooden sticks, the tallies, constantly sold at a great discount, a circulating value sufficient to supply the exigencies of a state which was spending annually at the rate of five or six millions?

The consequence of this total drain of money, was, that people could neither consume exciseable commodities, or pay the taxes laid upon their persons and solid property.

The excises failed, because the body of the people, who paid them, were interrupted in their industry, for want of money to carry on alienation. Those who were liable to the arbitrary impositions, such as the landlords, could not pay; because what they had, their land, could not be given in payment.

From what I have here laid together, we may determine, that as alienations among individuals cannot exceed the proportion of the circulating equivalent of a country, so a statesman when he intends suddenly to augment the taxes of his people, without interrupting their industry, which then becomes still more necessary than ever, should augment the circulating equivalent in proportion to the additional demand for it.

This, according to my notions, cannot be so well compassed as, 1. by establishing banks of circulation upon mortgage: 2. by relieving those companies of the load of paying foreign balances by giving bills at par, or at a small exchange: and 3. by providing funds abroad for the payment of them, according to the principles above deduced.

Such expedients will work their effect, in a nation where the public faith stands upon the solid security of an honest parliament, and upon that responsibility which is fixed upon those who are trusted with the exertions of the royal authority.

I think I may illustrate this operation by a simile.

A gentleman chooses to form a cascade of the water which serves to turn his corn-mill; consequently, the mill stops; but in its stead, he immediately erects another which turns with the wind. Coin is the water, bank paper is the wind, and both are equally well calculated for the use they are put to.

Chapter V: Of the Present State of Public Credit in Great Britain

We have, in a preceding chapter,given a general view of the state of public credit in England, at the end of the last century. In this, I shall briefly run through the most remarkable revolutions, both in sentiments and events, which have succeeded since that time.

At the revolution the revenue of England was about two million sterling, affected by two debts. The first was called the bankers debt, contracted by Charles II and, by letters patent, charged upon his hereditary excise, to the amount of upwards of 1,300,000 l. This debt was arbitrarily reduced to one half, in the last years of King William, and put at 6 per cent perpetual annuity, to commence no sooner than 1706. The other was a debt of 60,000 l. due to that Prince's servants, neglected to be paid by his successor, and discharged after the revolution.

At the peace of Ryswick, the national debt amounted to about 20 millions. The branches of taxes subsisting at the revolution, and continued till then, produced no more than about 800,000 l.; but by additional taxes laid on in the reign of King William, the whole revenue extended to 3,355,499 l. of which above one million was to cease before 1700, as has been said. This reduced the revenue, at the beginning of Queen Anne's reign, to nearly what it had been at the revolution: out of which if we deduct the interest of the national debt then subsisting, and the expence of the civil list, we shall discover the extent of the funds prepared for engaging in the war with France; and then by comparing the state of the nation at her accession, with what it was at her death, we shall form a general notion of the progress of credit at that period.

The revenue of England at the accession of Queen Anne may be stated at about2,272,000
The debts subsisting on the 31st of December 1701, were6,748,780
Upon which the annual interest was566,165
Queen Anne's civil list600,000
Which two sums amounting to1,166,165
Being deducted from the revenue, there will remain for the current service of the state 1,105,835

What the exact amount of the revenue of England was at the death of the Queen, I cannot justly say. But as it may be comprehended under the three general branches of customs, excises, and other inland duties, we may form a guess at it, though imperfectly, I allow, from the number of articles in each.

At her accession, the customs comprehended fifteen articles; at her death, they amounted to thirty-seven: at her accession, the excises comprehended ten articles; at her death, they amounted to twenty-seven: at her accession, the other inland duties comprehended eight articles; at her death, they amounted to sixteen, including the land tax, then become in a manner perpetual, although laid on from year to year.

At her accession, the public debts amounted (as above) to near seven millions, at her death they exceeded fifty millions.

In fourteen years, from the revolution to her accession, the money granted by parliament, partly raised on the subject, and partly borrowed, or taken credit for, according to the custom of the times, amounted to above fifty-five millions. During the 13 years of Queen Anne, the money granted by parliament raised on the subject, or borrowed as above, amounted to upwards of 80 millions.

By this general sketch I do not mean to enter into exact details: facts must be sought for in books which treat of facts: our chief object is to examine the principles upon which the public credit was supported, let the exact sum of money raised be what it will.

The expences of the French war first engaged the nation to revive those taxes which had been suppressed; and to impose many others for a considerable number of years, in proportion to the money borrowed upon them, according to the principles of the former reign.

In 1702, interest was so low, that government got money at 5 per cent. It continued so till 1704, when some loans began to be made at 6 per cent and at this rate it stood during the war.

But in 1706, the exigencies of government were far greater than what all the money to be borrowed, or raised on the subject, could supply. This opened a door to the abuse of paying the growing deficiencies upon the taxes with exchequer bills, chargeable on distant funds. These fell constantly to great discount; and the unhappy servants of the state, who received them in payment, were obliged to dispose of them to people who could wait for an usurious reimbursement by parliament.

When these exchequer bills had once got into the hands of the monied people, they had interest with government to engage the bank to circulate them at 6 per cent interest: but as the funds upon which they were secured happened at that time, 1706, to be engaged for discharging debts previously contracted, the bank, during that interval, could receive no payment of this interest of 6 per cent so the expedient fallen upon, was to pay the bank compound interest for all the tallies and bills they were to discount, until the funds appropriated should be relieved.

This expedient, bad as it was, and burdensome to the state in the highest degree, proved of infinite service, both in establishing the credit of exchequer bills, and relieving those who received payment in them.

This operation was quite similar to those of banks of circulation upon mortgage. The bank of England was here employed in converting into money exchequer bills, secured upon the faith of government. Banks upon mortgage convert into money the property of individuals upon private security. Had, therefore, banks upon mortgage been established in England at this time, all those who had property would have got credits from them, and would have been enabled thereby to pay their taxes, and carry on their industry, without diminishing their consumption. The exchequer would then have had no occasion to issue discredited bills and tallies for making up deficiencies; because taxes would have been productive, and the state would have been relieved of this excessive burden of interest at 6 per cent accumulated quarterly in favour of the bank.

What extraordinary profit must have accrued to the bank by this operation, every one must perceive. They were not here procuring funds to lend at a great expence; all they did was to augment the quantity of their paper upon government security; which they knew well would remain current in the common circle of payments within the country; and the public borrowings were sufficient to furnish credit for the sums sent out of the country. In this view we may conclude, that almost the whole accumulated interest paid, became a pure profit to the bank, as well as a great augmentation of the national debt.

This operation of the bank in 1706, did not prevent subsequent deficiencies, in the payment of the navy, army, ordnance, and of many other articles. In 1710, they amounted to above nine millions sterling. This was too great a sum to be borrowed; and the bank durst not venture to discount more than what domestic circulation could support: so that after this great debt had circulated upon the discredited obligations which had been issued for it, and in this way had fallen again into the hands of monied people, at 30 and 40 per cent below par, the new proprietors of it were all incorporated into one great company, with a governor and directors, who got 6 per cent for the whole capital, with an allowance of 8000 l. a year for charges of management.

Thus all the original creditors for these deficiencies lost the discount; the monied people gained it, and the public paid for all.

When credit is in this languid state, every expence of government must rise in proportion to the discredit of the paper with which they pay, till at last the whole sum, with interest, accumulation, and expence, falls upon the state, as if every farthing of it had been frugally expended in ready money.

This is a general view of the state of credit in Queen Anne's reign.

Government had not, as in the former war, the inconveniences flowing from the disorder in the coin to combat with. These contributed more than any other circumstance, to raise the capital of the debts at the peace of Ryswick. Circulation, too, was considerably augmented, in consequence of the increase of taxes, public debts, and the operation of the bank in circulating exchequer bills and tallies. Yet money was still scarce, in comparison of what it night have been, had proper methods been contrived to preserve it upon a level with the occasions for it.

The incorporation, also, of nine millions capital in the hands of a corporation, which afterwards was called the South Sea Company, was an assistance to public credit, by increasing a monied interest, the principal view of which was to fill the government loans, on the lucrative conditions offered for them. And last of all, the strictly adhering to the public faith of engagements, without seeking, by acts of power, to indemnify the state for the losses it had been obliged to incur, from the circumstances of the times, laid the solid basis of national credit for the future.

Although the many taxes added to the former revenue, did not increase it in any proportion to the load laid upon the subject during this war, they served, however, as a good foundation for improvement, as soon as the effects of peace restored them to their full production. But the securities affecting these taxes having become every year greater, government was obliged to engage certain funds for thirty-two years to come, and sometimes longer; and many branches of taxes, which formerly had been granted for short terms, were then made perpetual. After the peace of Utrecht, the expences of the state were greatly diminished, and money began to regorge: so that in the year 1716, the first foundation of the sinking fund was laid, by opening a subscription for paying off about ten or eleven millions sterling, at that time, charged upon several branches of taxes, the produce of which amounted annually to 724,849 l. sterling.

The proprietors of these debts were allowed to subscribe into this new fund, at an interest of 5 per cent redeemable by parliament: and in case the whole subscription should not fill at that rate, the bank and South Sea company became bound to make it up, upon receiving a like annuity in proportion to their subscriptions.

The bankers' debt, of which we have spoken, the only public debt owing at the revolution, made part of those which were to be subscribed for.

The taxes which had been appropriated for the discharge of those capitals, from temporary, were made perpetual; with a clause added, that when the surplus of the fund, after payment of the interest, had discharged the capitals of all the national debt due the 25th of December in that year, the whole produce of the fund itself should remain at the disposal of parliament.

After this first operation in reducing the interest, the bank complied with a reduction to 5 per cent of what was due to them; and they began to circulate exchequer bills at a more moderate interest than formerly.

Public credit was now daily gaining ground. In 1719, the South Sea company, the capital of which was then swelled to eleven millions at 5 per cent with a sum of 9397 l. sterling for the expence of management, enlarged their views; and finding large profits to arise from so great a fund under one administration, formed a project of acquiring a farther sum of the public debts, which remained outstanding upon the original funds appropriated for them.

For this purpose they proposed to government to acquire, first, The property of above 16 millions of redeemable debts, bearing then 4 and 5 per cent interest; and to reduce the whole to 4 per cent at midsummer 1727. Secondly, To acquire the property of 794,000 l. of annuities upon lives, and for long terms, as they should agree with the proprietors, at 5 per cent upon the purchase-money, until 1727. and at 4 per cent afterwards. Annuities were then valued at fourteen and twenty years purchase, according to their length: they rose, however, during the operations of the South Sea, to 25 and 30 years purchase. Thirdly, They were to have a sum added to their former allowance for the charge of management, in proportion to this augmentation of their stock. Fourthly, That for the advantage which might follow upon this agreement with government, the company was to pay into the exchequer above seven millions sterling, toward discharging other national debts outstanding. And in the last place, they engaged to circulate a considerable sum of exchequer bills, and to pay the interest of 2 pence per cent per diem, which should grow upon them during seven years. (1)

From the operations we have been describing, we perceive, that the point of view in England, from the peace of Utrecht, has always been, to reduce the interest of the national debt; but never to leave in the hands of the creditors, any part of the savings made, in order to diminish the capital. These savings have constantly been thrown into a sinking fund supposed to be intended for extinguishing the capital: and were it employed for this purpose for a few years only, and not diverted to other uses, I am persuaded the consequence would be, to reduce the interest of money in England lower than ever perhaps it has been seen in any nation. That interest may be reduced, by making money regorge in the hands of the lenders, is, I think, an uncontroverted principle: that by regorging in France, anno 1720, it reduced interest to 2 per cent is a fact indisputable. I shall not pretend to say positively, that the total appropriation of the sinking fund, and an augmentation upon annual grants, to make up the void, would in Great Britain work this effect in a few years; but I think it is very probable that it would: and if the domestic creditors, in any state, where debts, due to strangers, are swelled to such a height as to exceed the whole profits made upon trade, shall by their influence, and from a motive of present advantage, obstruct a scheme of this nature; the consequence will prove, in the first place, to discourage, and then totally to extinguish commerce, and in a little time to occasion an unavoidable bankruptcy; as shall be farther explained in a succeeding chapter. I return to the South Sea company.

The proposal of the South Sea company, mentioned above, was accepted of, and ratified by act of parliament, 6 Geo. I. Chapter 4th. But the disaster which befell credit, in consequence of the ambitious views of those who were in the administration of that company, prevented the nation from reaping all the advantages which might have proceeded from it.

The reign of K. George I though little disturbed by foreign wars, produced not the smallest diminution upon the capital of the public debts; and those which subsisted at the peace of Utrecht, stood, at his death, at 50,354,953 l. The same taxes subsisted; and every one almost was by this time made perpetual, except indeed the land tax and malt duty, which to this day continue to be annual grants.

But alas! this apparent revenue, arising from a multitude of taxes, was of no use towards defraying the smallest extraordinary expence of government. Every article of it was engaged for debts; and the operations for reducing the interest were calculated only to produce a fund for discharging the capital. The civil list, indeed, that is to say, the expence of civil government, exclusive of army, navy, ordnance, and incidental articles, was paid from the permanent taxes, and considered as a charge upon them. But were not armies and navies then become as regular an expence upon every state in Europe as judges and ambassadors? Undoubtedly they were. Yet after the peace of Utrecht, in laying down the plan which has constantly been followed ever since, for defraying the regular expence of British government, these two great and unavoidable expences were considered as contingent only, and provided for by annual grants: and because armies, in time of peace, in former reigns, had proved dangerous to liberty from the abuse of power, they were still considered in the same light, at a time when liberty and trade were continually threatened from their armed enemies and rivals abroad.

When the continuance of peace, in the reign of George the First, had produced the effect of reducing interest, on many occasions, to 3 per cent the sinking fund began to gather strength. The land tax, from the year 1722, had not exceeded two shillings in the pound; and the extraordinary expence of government, according to the annual grants of the 13 years of his reign, did not exceed 34,800,000 l. or 2,670,000 l. a year. Public tranquillity was very little disturbed during the first twelve years of the succeeding reign; and all the extraordinary expence did not much exceed three millions per annum: yet this expence, small as it was, compared with what it has been since, was almost every year made out, by taking one million at least from the sinking fund: and in the years of the least expence, such as 1731 and 1732, the land tax was reduced to one shilling in the pound, at the expence of taking two millions and a half from the sinking fund.

These steps of administration I neither censure, or approve of. I must suppose every statesman to have good reasons for doing what he does, unless I can discover that his motives are bad. May not the landed interest, who composed the parliament, have insisted upon such a diminution of their load? May not the proprietors of the public debts have insisted on their side, that no money out of the sinking fund should be thrown into their hands, while the bank was making loans upon the land and malt duties at 3 per cent? Might not the people have been averse to an augmentation of taxes? When three such considerable interests concur in a scheme, which in its ultimate, though distant consequences, must end in the notable prejudice of perpetuating the debts, although opportunities offer to diminish them, what can government do? They must submit; and, which is worse, they cannot well avow their reasons.

Such combinations must occur, and frequently too, in every state loaded with debts, where the body of the people, the landlords and the creditors, find an advantage in the non-payment of them. It is for this reason that I imagine, the best way to obviate the bad consequences of so strong an influence in parliament, would be, to appropriate the amount of all sinking funds in such a manner, as to put it out of a nation's power to misapply them, and by this to force them either to retrench their extraordinary expences, or to impose taxes for defraying them.

The second period of George IId's reign, was from the breaking out of the Spanish war in 1739, to the peace of Aix-la-Chapelle in 1748. During these ten years, (1748 being included,) the extraordinary expence was, upon an average, very near seven millions; and at the end of the year 1738, the public debts amounted to 46,661,767 l. bearing 1,962,053 l. interest.

The first expedient for borrowing money during this war, was to continue the duty on salt for seven years; and to mortgage it at once for 1,200,000 l. according to the old plan. To this was added, the expedient of lotteries, and loans upon indeterminate annuities, according to the current value of money.

An additional excise upon spirituous liquors, brought in wherewithal to compensate these additional sums of interest; and the East India company, for lending one million at 3 per cent upon this occasion, had their charter continued from 1766 to 1780. This operation I also consider as an anticipation; and as it was to commence at the distance of 23 years from the time of the grant, could not fail of being very burdensome to the nation, however convenient it might be at that particular time.

Were the India company now, 1766, to purchase the renewal of their charter for 14 years, what a sum might be expected from it! Yet the value given for the grant they then obtained did not exceed 30,000 l. because the other annuities of 3 per cent. were sold at that time for 97 l. or, in the language of the funds, at 3 l. premium for every 100 l. subscribed; and this so early in the war as 1743.

The practice of borrowing upon premiums had taken place in Queen Anne's reign, and has of late years been very common. The credit of Great Britain is so firmly established, that in whatever way government inclines to borrow, the moneyed men are willing to lend, provided the loan be made according to the rate of interest at the time.

To avoid therefore the establishment of funds at different rates of interest, in proportion to the fluctuations of money, the bargain is made at one determinate rate. Suppose, for an example, 3 per cent. Then, according as money is found to rise above this rate in the market, a premium is paid out of the money subscribed; as in this case 3 l. was paid out of the 100 l. subscribed; that is, the subscriber retained it, and obtained his 3 l. annuity, for the payment of 97 l. so this remained a 3 per cent loan, instead of being, as it really was, at 3 9/97 per cent. and was sold and transferred as every other 3 per cent without occasioning any perplexity.

As the war continued, interest rose, from the demand for money, when the supplies became deficient.

The year following, viz. 1744, this manifested itself, by the conditions offered by government, which were. That, of two millions to be borrowed at 3 per cent as before, upon the whole sum, 1,500,000 l. should be formed into perpetual annuities, and the remaining 500,000 l. into a lottery, consisting of 50,000 tickets, to be sold at 10 l. each. The original subscribers to this loan subscribed therefore 10 l. for the ticket, and 30 l. for the annuity, in all 40 l.; for which they were to receive 3 per cent. But the premium consisted in this; that every subscriber for 10 tickets, that is, 400 l. of the total fund, had an annuity for life given to him of 4 l. 10s.

This made five thousand annuities on lives, of 4 l. 10s. each, or 22,500 l. a year to be added to the interest of 3 per cent. on the two millions, that is, to 60,000 l. a year of perpetual annuities. So that the whole loan of two millions this year cost government 82,500 l. of interest, of 4 1/8 per cent; 22,500 l. of which was to extinguish with the lives of the subscribers.

Now, if we suppose these life-annuities worth 20 years purchase, (2) this was the same thing as if government had given a deduction of 90 l. out of the 400 l. subscribed; consequently the remainder, which was 310 l. produced 12 l. This makes the rate of interest upon the loan to have been 3.87 per cent. And as government inclined that the loan should be made in this way, the lenders were willing that it should be so; and the difference between 3.87 per cent (the then rate of money) and 4 1/8 interest, which was paid by government, was a sinking fund, as it were, for the gradual extinction of the capital of the lottery for 300,000 l. during the lives of the annuitants.

In 1746, perpetual or indeterminate annuities were constituted at 4 per cent and the premium upon the ten lottery tickets was raised to 9 l. life-annuity.

It would be unnecessary to trace the various methods of contriving the premiums given in the succeeding years of this war. The principle upon which they were regulated was always to proportion them to the rate of interest at the time; and the motive was, I suppose, that by this method of borrowing, a part at least of the debt would become extinguished with the lives of the subscribers. There might perhaps be another, to wit, that by swelling the capital, for value not received, there was an appearance of borrowing at a lower rate of interest than what in reality was the case. Thus in 1747, when 6,300,000 l. were borrowed; instead of giving not quite 4 1/2 per cent. for this sum, they gave 4 per cent. upon 6,930,000 l. which capital, although money should return to 3 per cent was still to stand at its full value; whereas, had 6,300,000 l. been borrowed at 4 1/2 per cent. there would have been a saving of 600,000 l. upon the capital; and at the peace, the interest of 4 1/2 per cent would equally have come down to 3 per cent with the other funds.

During this first war of George the Second, the land tax was constantly at 4s. in the pound; and new branches of customs, excise, or other inland duties, were created in proportion to the swelling of the national debts, which, on the 31st of December 1748, amounted to 78,293,313 l. sterling, bearing 3,003,325 l. interest; and the sinking fund, or surplus of all permanent taxes then imposed, after paying the civil list, and the interest upon this capital, amounted to 1,060,948 l. sterling. During this war, the debts were increased above what they were at the end of 1738, by 31,631,346 l. sterling capital, and by 1,043,272 l. of interest or annuities.

The war was no sooner over, and the national expence diminished, than money began to regorge in the hands of the monied interest: an infallible consequence of such a violent revolution, when extraneous circumstances, such as occurred after the peace of 1763, do not prevent it.

To profit of this conjuncture, government, early in 1749, proposed that all the public creditors upon capitals bearing 4 per cent interest, redeemable by parliament, and amounting to upwards of 57 millions, who should accept of 3 per cent from December 1757, should have their debts made irredeemable until that time; and in the interval should continue to have 4 per cent till December 1750; and 3 1/2 per cent from thence, until the total reduction to 3 per cent in December 1757.

This bold undertaking had the desired effect. Many obstacles were thrown in the way; but the regorging capitals in the hands of many, made every one fear the reimbursement for himself; and the credit of France was then so low, that very few chose its funds as an outlet for their superfluous money.

But an outlet, unfortunately, was not wanting at the end of the last war in 1763, as we shall shew in its proper place.

Here then is a notable instance of the effects of regorging money. A small sum, when compared with a nation's debt, operates upon the whole capital; as a small balance upon trade affects the whole mass of reciprocal payments.

The reimbursement of 57 millions offered by government, in 1749, was, to the conviction of all the world, an impracticable scheme; but the stockholders seeing a large sum ready to be subscribed, at the interest offered, and feeling the effects which that regorging money must, in all events, have produced; willingly, and wisely perhaps, consented to the offer made them. Had they refused, and had the scheme proposed become abortive thereby, perhaps the nation, from the disappointment, might have been so far animated against the creditors, as to have consented to be at the expence of defraying the service of the following years, without encroaching upon the sinking fund. What effect this would have produced upon the rate of interest, in that conjuncture, no man can tell, nor will the real consequence of such a measure be ever known, until the happy trial be made. That it would have brought interest below 3 per cent in December 1757, is, I think, evident: for as matters stood, had the creditors of 57 millions been able to hold out, I must do them the justice to believe, they would not have accepted the proposal made to them; and an addition of all the sinking fund thrown among them annually, at a time they could not dispose of what they had, upon better terms than those offered to them, would undoubtedly then, as at all times, operate a very great national relief, in bringing down the interest of money.

During the tranquillity which continued from the peace of Aix-la-Chapelle, in 1748, to the commencement of hostilities in 1755, the money expended for extraordinary services amounted on an average to above four millions per annum. The expence of government was then increased, by supporting the colonies, and by several great and uncommon outgoings at home, for purposes mentioned in the supplies of those years.

A little before the breaking out of the last war, that is to say, on the 5th of January 1755, the national funded debt was reduced to 72,289,674 l. upon which was paid an annuity of 2,654,500 l. and the sinking fund amounted to 1,308,814 l. At the end of 1763, the year of the peace, the funded debt amounted to 130,586,789 l. 10 s. besides above 9 millions not provided for. So that at the end of last war the national debt exceeded 140 millions; besides the value of the annuities granted in 1757, 1761, and 1762. Hence it appears, that the war occasioned an augmentation of upwards of 58,297,116 l. upon the funded national debt; (3) besides the difference between the unfunded debts at the beginning and end of the war; and also the value of those annuities.

I shall, before I conclude this chapter, present a short scheme of the state of the nation at that time: but first let us take a view of the methods used to borrow so large a sum in the short period of eight years.

Until 1757, money was borrowed by government, at very little more than 3 per cent but then a loan of 5 millions being necessary, government consented to create annuities of 4 1/2 per cent irredeemable for 24 years. By this expedient the monied people eluded the operation of reducing the interest of this fund, upon the return of peace. How far this expedient was to be preferred to the former, of increasing the capital beyond the money paid; or whether it would not have been still better to have paid for the money wanted, according to the current rate of interest in the market at the time, waiting until a peace might afford a favourable opportunity of reducing it, I shall not take upon me to determine. (4)

I have observed how rash it is for any one to censure acts of administration, when the motives of a statesman's conduct are unknown. This, however, I have sometimes ventured to do, in speaking of things which happened many years ago; but we ought to be more cautious as we come nearer to our own times, because not having, as in the case before us, a course of experience to point out the errors, we must entirely rely upon our own sagacity, and reason from analogy only.

During the last war, as in that preceding it, taxes were increased in proportion to the interest of the money borrowed; and new impositions were now laid on the articles of great consumption, which produced abundantly. The new malt-duty of 3d. per bushel, and the new beer-duty of 3s. per barrel, bring in net into the exchequer near 820,000 l. per annum, and discharge the interest of above 27 millions sterling, at 3 per cent. Such a sum raised at the end of a war so very expensive, and at the very time when the credit of France was totally fallen, must have operated in the strongest manner, and did in fact operate more, perhaps, than any other consideration, to put an end to that war, the most glorious that Europe has beheld since the beginning of this century, or perhaps in any age whatever: advantageous to Great Britain, notwithstanding all the expence, provided that the consequences happen to correspond to what may be reasonably expected.

I shall now set before my reader a short state of the taxes, debts, and public funds of Great Britain, at this bright period of her history.

From the best authority I have been able to procure, the revenue of the state, considered under the three general branches of customs, excise, and other inland duties, which comprehend the whole permanent income of this kingdom, was then as follows:

Customs net into the exchequer, about £2,000,000

Excise in all its permanent branches net, about 4,600,000

Other in land duties net 1,000,000

Land tax at 4s. in the pound 2,000,000

Annual malt tax net 613,000

In all 10,213,000

Let us next state the annual charges and appropriations settled upon this fund.

First then the civil list, to the amount of 800,000

Secondly, The interest of about 131 millions of funded debts at different rates of interest, about 4,500,000

Thirdly, The interest of nine millions not then provided for, supposed to be at 4 per cent. 360,000 In all of regular and permanent annual charge 5,660,000

So there remains free, about 4,553,000

From which if we deduct the annual grants of land and malt-taxes, which extend together, as above, to 2,613,000

There will remain as the produce of the sinking

fund (5) 1,940,000

In this state, nearly, stood the affairs of Great Britain after the conclusion of the peace in 1763.

It now only remains to offer some conjectures why, after the conclusion of this peace, as after the peace of Aix-la-chapelle, money was not found to regorge, so as to furnish an opportunity of reducing the rate of interest upon all redeemable debts, and by that to raise the amount of the sinking fund, and more firmly to establish the national credit.

After the fall of the credit of France toward the end of 1759, Great Britain had the command of all the money to be lent in Europe; and accordingly amazing sums were borrowed in 1760, 1761, and 1762. Of the sums borrowed, a great part, no doubt, was the property of strangers; but they, not being so well acquainted with the affairs of this nation as the English themselves, instead of subscribing to the loans, lent the money to our own country people, who, in hopes of a great rise upon the return of peace, filled the subscriptions with this borrowed money.

The consequence was, that no sooner did the funds begin to rise after the peace, than many creditors demanded their money of those who had invested it in the public funds. This obliged the latter to bring their stock to market, and this again had naturally the effect of keeping the funds very low. Some, more prudent than the rest, had borrowed upon a long term of repayment: which had the effect of putting off still longer the settlement of the funds in the hands of the real proprietors, and of taking them out of those who only held them nominally.

Besides this accidental cause of the low price of the funds, other circumstances, no doubt, greatly contributed to produce the same effect.

How great soever the balance of trade, that is, of exportations above importations, may have been of late in favour of England, still the mighty sums drawn out by the foreign creditors have certainly, upon the whole, prevented much money from coming home on the general or grand balance of payments. While this continues to be the case, it is impossible that much money should regorge at home in the hands of the natives, and until this shall happen, there can be no hope of seeing the 3 per cents rise above par. But then the rise, small as it is, since the peace, may encourage us to hope that this favourable change is not far off: for had the profits of our trade been quite unable to balance the loss upon our foreign debts, the funds would undoubtedly still continue to fall, which is demonstrably not the case from the circumstances of the loan in April 1766, obtained by government, with the assistance of a lottery indeed, at 3 per cent. (6)

Here then was an outlet provided for more money than all that could regorge at home, viz. the payment of those foreign creditors, to whom the stockholders were indebted. besides this, the sale by government, of such tracts of land in the new acquired islands in the West Indies, provided another; money was even placed in the funds of France soon after the peace, until the adventurers were checked by the operations of the King's council, in reducing both capitals and interest upon them, contrary to the original stipulations with the creditors. A lucky circumstance for Great Britain, as it forces, in a manner, all the money of the continent into the English funds, which equally remain a debt upon the nation, whether high or low in the market.

Chapter VIII: Contingent Consequences of the Extension of Credit, and Increase of Debts

I now proceed to inquire what be the consequences of this might change produced upon the policy of industrious and trading states from the establishment of credit, debts, and taxes.

I have, from the very beginning of this inquiry, occasionally taken notice of the influence which such a change must make upon the spirit and manners of a people. The lower classes, who are slow in forming combinations, do not soon comprehend the necessary consequences of such revolutions. Even ministers have been often at a loss to judge of the consequences which might follow upon some steps of their own conduct relative thereto, although taken upon mature deliberation.

When public credit is employed for raising money upon a plan of refunding the capital, either by uniform annual payments exceeding the interest, or by funds established for sinking the capital, no contingent consequences can happen, provided the plan be executed: the debts contracted will be paid, and matters will return to their former state.

When public credit is employed for raising money upon payment of a perpetual interest; or if, whatever be the plan laid down, capitals should not happen to be discharged, but the debts should swell continually; in this case, the contingent consequences are many and various, far exceeding any man's sagacity to investigate.

If we judge of them from what past experience has taught us, we may conclude, that, in one way or other, all debts contracted will in time disappear, either by being paid, or by being abolished: because it is not to be expected that posterity will groan under such a load any longer than it is convenient; and because in fact we see no very old public debts as yet outstanding, where interest has been regularly paid out of a fund which has remained in the possession of the state.

This is a very rational conclusion from past experience; but it is relative only to the circumstances of past times. While the debtors are the masters, there is no difficulty of getting clear of debts: but if the consequence of this new system should be to make the creditors the masters, I suppose the case may be different. Farther,

In former times public debts were contracted between the state and its own subjects; but at present we see that in such loans, foreigners, even enemies, are invited to concur: and the better to engage them to it, a total immunity is promised from all taxes upon the interest to be paid by the borrowers.

This circumstance has already drawn the attention of Princes, in the discussion of their reciprocal concerns. We saw how, in the treaty of Dresden, which took place after the King of Prussia's invasion of Saxony in 1745, it was provided by the 6th article, that all debts due by the bank of the Steuer to that Prince's subjects, were to be paid, on presentation of their contracts.

We have not indeed as yet seen wars carried on for the payment of debts; but the case may happen, and kingdom may be carried off upon such pretensions, as well as private property. What a chain of contingent consequences arises from this single combination, were this a proper place to introduce them!

But without going to the supposition of Princes or nations becoming reciprocally engaged in debts, and thereby involving such mighty interests in the support of public faith, we may easily conceive, that a monied interest, of a long standing, may have influence enough to produce a change upon the spirit and manners of a people.

Let me here take the example of Great Britain. Do we not see how the spirit of that nation is totally bent upon the support of public credit? And do we not see how absolutely their commercial interest depends upon it? Can it be supposed, that every one has combined all the consequences which may flow from the constant swelling of their debts? Or, indeed is it possible to determine what will be the consequences of them? This however we may suppose at least, because we see the progress of it already, that the interest of the creditors will daily gather strength, both in parliament and without doors: and if from small beginnings it have arrived at the pitch we now see, it is very natural to conclude, that, in time, it may become stronger, and that at last, the creditors of the nation may become the masters of it.

When any one interest becomes too predominant, the prosperity of the state stands upon a precarious footing. Every interest should be encouraged, protected, and kept within due bounds. The following speculations are intended for the application of principles to new and unexperienced combinations; where natural causes may work their direct and immediate effects, and thereby prove prejudicial to the general welfare, unless they be foreseen in some degree, and proper remedies be prepared against them.

Europe was possessed by our ancestors free from taxes; our fathers saw them imposed, and we now see how fast they become mortgaged for our debts. We can as little judge of the extent of our credit, as they could of the possibility of contributing so large a fund for the support of it.

As the plan of imposing taxes has been extended, we see the public coffers every day receiving a vast flux of money, and like the heart in the human body, throwing it out again into circulation. Happy state, could it be lasting, and were this flux and reflux preserved in a due proportion to all the uses for which it is intended! But states have their vices, as well as private people. Public opulence should be proportioned to public exigencies: but how often do we see ambition putting on the face of public spirit, and animating the resentment of a nation, under colour of providing for her security? Hence wars, from wars expence: recourse is had to credit, money is borrowed, debts are contracted, taxes are augmented; all this increases circulation, which demands a supply of currency: this is procured by melting down the solid property. These operations performed, the public money is either sent abroad, or remains at home. If sent abroad, more property must be melted down, in order to fill up the void. If it remain at home, it will animate every branch of circulation; and when the exigence, which required this additional quantity of money, is over, what circulation finds superfluous, will stagnate in the hands of the monied interest, and will either form a fund for the filling of new loans to government, or it will be laid out in the purchase of the property formerly melted down, which produced it; and thereby will be consolidated a-new.

Every interest in a state must influence the government of it, in proportion to its consequence and weight; and every government must influence the spirit of the people who live under it.

Now, as we have seen how industry creates wealth; how wealth and confidence create credit; how credit creates debts and taxes; how these again occasion an augmentation of money, by the melting down of property; and how this property becomes transferred to a new set of men, once the monied interest, who afterwards acquire the lands, and consolidate this quantity of money which is become superfluous to circulation; does not this chain of consequences represent a kind of circle, returning into itself? And is it not plain, that without the intervention of this engine, namely the money created in proportion to the demand for it, the chain would be cut off, before it could reach the link from which it first set out? Will not this conversion of the former monied interest into a new landed interest, insensibly inspire the bulk of the landlords with sentiments analogous to a monied interest? Is not this evidently more and more the case every day in England? And from this may we not prognosticate the solidity of public credit in that nation?

If on the other hand we find, as in France, industry in times of peace drawing wealth from other nations, and thereby increasing the coin, upon which alone credit is circulated through the kingdom; and then foreign expence sending it away in times of war; must not circulation keep pace with the coin, that is to say, be circumscribed within the proportion of it?

If the solidity and extent of the King's free revenue should afford credit to borrow this coin; and if, without providing a proportional supply of currency to fill up the void, the coin borrowed be sent out of France; how can the ordinary circulation be carried on?

Let us here recall to mind what was said in the 22d chapter, upon banks, where we distinguished voluntary circulation, which is buying, from involuntary circulation, which is paying: we there observed how paying must always take place of buying; consequently, we may here determine that taxes must be paid before buying, that is consumption, can go on. The deficiency therefore of coin for circulation, will, first, proportionally affect the trade, manufactures, and consumption of France, and afterwards the revenue which arises from them. Is not this the constant complaint in France, when war carries off their coin? The remonstrances of all their parliaments are filled with it.

In times of peace, the amount of what comes from the people is greater than in time of war: but then there is coin sufficient for all the payments; and when they are made to the royal treasury, they immediately return into circulation, and no hurt is felt.

I insist the more upon this principle, and I introduce it in so many different ways, and under such a variety of views, because I take it to be one of the most important considerations in the whole doctrine of credit, and one which I have never seen suggested by any French or English writer upon this subject. Many are the complaints for want of money; but no method have I ever seen proposed for obtaining it from solid property; the easiest and safest of all operations, when conducted with honesty, and according to principles.

As money therefore is the means of closing the chain of consequences already mentioned, and forming it into a circle, as has been said, we plainly see how, when it is wanting, the same effects cannot be produced; and consequently the country of France, where money is confined to the coin, will be very long of adopting the sentiments of a monied interest; whether for its profit or its loss, in the end, is not here the question.

We have now traced the contingent consequences of public credit as far as to shew how it may tend to influence the spirit of a people, and make them adopt the sentiments of a monied interest.

The allurement of acquiring land-property is very great, no doubt, especially to monied men. The ease and affluence of those, on the other hand, who have their capitals in their pocket-books, is very attracting to the eyes of many landlords, especially at a time when they are paying the heavy taxes laid upon their possessions.

The firm establishment of public credit tends greatly to introduce these reciprocal sentiments of good-will among the two great classes of a people, and thereby to preserve a balance between them. The monied interest wish to promote the prosperity of the landlords; the landlords, the solidity of credit; and the well-being of both depends upon the success of trade and industry.

Let us now suppose what is actually the case in Great Britain, that from the swelling of public debts an enormous fund of personal property is created. This is formed out of the income of the whole nation; and as it has been purchased by those who have lent money to the state, in common language it is included in what we call the monied interest: it is however very distinct from it, as will be understood from what is to follow.

The capital of the public debts is the price which has been paid for the annuities due to the creditors, and is now no more money to them than land is money to the landlord. It may be turned into money, no doubt; but so may land.

The monied interest, comprehends, those only who have money, not realized upon any fund, and who either employ it in the way of trade, in the way of industry, in jobbing in land, in stock, or in any way they please, so as to draw from it an annual income. While it is fixed, that is, given for any permanent value, it ceases to be money; when it is called in, it becomes money again. Let stock, therefore, suffer ever so many alienations from hand to hand, it still continues stock: it never can become land, it never can become money, until it be paid off by government. I hope this idea is so clear, as to be well understood. Stock, therefore, I here consider as one great branch of solid personal property; as far as the security of government is solid and good; and as such, may be melted down into money by banks, as well as any other thing.

Now I have said that this fund is formed out of the income of the whole nation; consequently by fund, here, I do not understand the capital, which exists no more, but the interest which is drawn for it: it is this interest, I say, which is paid from the land, the money, the trade, the industry, &c. which forms one great branch of the monied interest of England. From the land, out of the amount of the taxes charged upon it; from the money, trade, industry, &c. out of the amount of proportional taxes, such as excises, customs, salt-tax, stamp-duties, and the like.

The more the national debts increase, by the monied interest realizing into this branch of solid property the funds, the more the taxes must augment; and consequently, the more the proprietors of the funds themselves must be affected by such taxes, as well as the landlords.

From this exposition of the matter, it may be concluded, that as proportional taxes affect every man's income, according to his consumption; the landlord, caeteris paribus, who pays a land tax, as well as his proportion upon his consumption, is more hardly dealt with than the proprietor of the other branch of solid property, the funds, who pays his proportion only of the last.

But the condition of the stockholder is not equally favourable to that of the landlord, for two very plain reasons. The first is, that the income of his stock cannot increase; that of the land may. The second is, that the swelling of this great capital of stock has the effect of sinking the interest upon it, and consequently of diminishing the income of the stockholder: and in proportion to this diminution, the value of land must augment. Now I readily allow that the augmentation upon the value of lands is no inducement to a landlord to turn them into money; because he would then lose upon his money, what he gains upon the additional price received. But it is a great advantage in another respect, namely, that he thereby diminishes the interest he pays upon his debts, if he have any; and if he have none, it enables him to borrow at a lower rate for the future; and by improving his lands with the money borrowed, he may augment his income much beyond the proportion of the interest paid.

It is therefore necessary, in imposing land taxes, rightly to combine every circumstance; that the load of all impositions may be equally distributed upon every class of a people who enjoys superfluity, and upon no other. If, after a fair deduction of principles, this shall appear a thing possible to be done, we may expect to see statesmen engaged to depart from the old maxim of grasping at what is readiest and nearest at hand, to wit, the landed property, with a view to spare a class of people, which, in a well regulated state, never can be made to feel the burden of any proportional tax whatsoever; I mean the industrious poor.

I now proceed in my inquiry into the nature and consequences of the swelling of this great branch of property, the public funds.

As to the nature of it, we have said already, that it is formed by realizing money into stock. When government borrows, the lenders must be people who have money. If the loan be made at home, the money is no sooner paid in, than it is spent; and as we may suppose that it would not have been lent, had either the lenders found it necessary for their current expence, or had they found a more profitable way of realizing it than by lending it to government, we consider it as having been in a state of stagnation; but being lent to government, it is thrown into a new channel of circulation.

Farther, this money stagnating in the hands of the lender, either proceeded from his income, which exceeded his expence, or from the profits of his industry. In either case, the country is neither poorer or richer, when considered in a cumulative view, than if the same sum had been lent to private people at home.

Let us next suppose the money to have been borrowed for the exigence of a foreign war. In this case, if it be borrowed at home and sent abroad, it must first be converted into the money of the world, gold and silver, and then sent off, to the diminution of this kind of property; or it must go abroad in the money of the country, credit, to the diminution of the annual income upon which the credit is established. As this last operation may not be so clear, an example will explain it.

Government borrows one million; it is paid in paper, and must be sent to Holland. If at that time a balance be due by Holland of one million, bills will readily be found for it. In this case, the balance of trade is borrowed as it were by government, and becomes converted into a capital of a million in the public funds, the interest of which will remain at home, and continue to be the property of the nation. But as the value of this balance is sent to Holland and spent abroad, it is, upon the whole, to the nation, as if no balance had been due to them. This I call a lucrum cessans to the country.

But suppose no balance to be due by Holland at the time the million comes to be sent off, I say the consequence will be, to alienate in favour of foreigners a part of the annual income, proportional to the whole interest paid for the loan, whether it has been subscribed for by foreigners, or by natives.

If the subscription be filled by foreigners, the consequence is evident: it is equally so in the other case, upon a little reflection.

Suppose then the million subscribed for, and paid in London. Bills are sought for; none are found, I mean in the way of reciprocal compensation, does not this sum immediately become a balance against London? And as a country loses all such balances, and the country to which they are due gains them, this million is lost to England, and forms what I call a damnum emergens; that is to say, her former property or income is so far diminished, or comes to be transferred to strangers.

From this we may conclude, that in all matters of public borrowing, it is of no consequence whether the subscription be filed by natives, or by foreigners, when the value of it is to be sent abroad.

Let us next examine the state of the question when the loan is made in order to be spent at home, as is the case after a war, when the unfunded debts come to be paid off.

We have said that loans are filled by money stagnating, which the owner desires to realize: if he cannot do better, he lends it to government; if he can do better, he will not lend it.

While the uses of domestic circulation absorb all the money in the country, that is to say, when there are private persons ready to borrow all the money to be lent, at this time government cannot borrow at home; and if they did, by offering a high interest for it, the borrowing would do harm to circulation; because it would raise interest at home, or disappoint those who would gladly borrow it, for little more than the interest offered by government.

Let us next suppose that after a war, when the unfunded debts are either bearing a high interest, or selling at discount, government shall find an advantage in opening a subscription, which may be filled from abroad, at a lower rate than the then actual value of money. Suppose, I say, the Dutch should be willing to lend at 3 per cent while money in England stood at 4 per cent. I ask if, in this case, government ought to borrow from Holland, at the expence of sending the interest out of the country, rather than suffer such debts to sell at discount; or continue paying a higher interest at home for what they owe?

It is my opinion that still they ought to borrow abroad, for the following reasons. That if the high interest at home proceed from want of money, that is to say, from circulation not being full enough, it is their interest to borrow, were it for nothing else than to supply circulation; because unless this be full, all industry must languish. But suppose it should be said that circulation is full enough, that industry suffers no check from that quarter, but that there being no superfluity of money, interest stands 1 per cent higher than it would do were there considerable stagnations. In this case also, I think it is their interest to borrow, were it for no other reason than to produce such stagnations.

It is a general rule every where, that there is no having enough without having a superfluity; at least there is no certainty of one's having enough without finding a superfluity. Borrowing abroad, therefore, in small sums, at such a time, will produce stagnations at home, from which succeeding loans may be filled, after circulation is sufficiently provided: and even in case more should be borrowed from strangers than may be found necessary; and that in consequence of this, too much money should come to stagnate at home, after the demand of government is over; the monied interest would then lend, in their turn, to other states, where interest is higher; and the annual returns from that quarter would more than compensate what must be sent away, in consequence of the former borrowing.

From these combinations, let us draw some conclusions.

First, That the effect of public borrowing, or national debt, is to augment the permanent income of the country, out of stagnating money, and balances of trade.

Secondly, That this income so created, may be either the property of natives, or of strangers.

Thirdly, That when money is found to regorge, in a country where circulation is not diminishing, it may be supposed to proceed from the coming in of a right balance of trade.

Fourthly, If stagnations in one part be found to interrupt circulation in another, public borrowing, for domestic purposes, has the good effect of giving vent to the stagnation, and throwing the money into a new channel of circulation.

Fifthly, That the sum of interest paid by any nation to strangers, shews the general balance due by the nation, after deducting all the profits of their past trade from all the expence of their foreign wars.

But here it must be observed, that as on one hand we are comprehending all that is paid to foreign creditors, on account of the funds they have in England, for example, so on the other hand, must be deducted from this, all the payments made to Englishmen by other nations.

Sixthly, From this last circumstance we discover that the lending to other nations by private hands, produces the same effect to a nation as if the state were actually paying off the debts due to strangers. Consequently, when Moses permitted the Jews to lend to strangers at interest, and forbade such loans among themselves, his view was to establish a foreign tribute, as it were, in favour of his own nation, instead of promoting luxury at home.

Seventhly, As the balance due to a nation upon her trade, is found to compensate, pro tanto, the money she spends abroad, we may from the same principle, conclude that so soon as she ceases to expend money abroad, the balance of trade in her favour, if not realized at home in some new improvement, will diminish, pro tanto, the interest, or capitals due to strangers. This is evident from the nature of balances, of which we have treated already.

Eighthly, The consequence, for example, of England's owing large sums to strangers, will, from the same principle, constantly prevent exchange from rising very high in her favour, when the balance of her trade comes to be paid to her: because on every such occasion, her foreign creditors will be glad to disappoint exchangers, by furnishing bills for their interest, or capitals, to those who owe the balance; the consequence of which is plainly to diminish the foreign debts.

This circumstance implies no loss to the nation which is creditor in the balance of trade, and debtor upon the capitals; because we have proved that the price of exchange never affects a nation, but certain individuals only, who pay it to others of the same nation.

This is sufficient, I think, to point out in some degree the nature of a national debt. I come next to examine the consequences of its constant augmentation; when proper measures are not taken, either to pay it off, or to circumscribe it within certain bounds.

In what is to follow, I shall throw all consideration of capitals totally out of the question; and as to the amount of taxes, it is quite indifferent whether the money proceeding from them be in consequence of an improvement made upon those already established, or from new impositions: such combinations will come in more properly afterwards.

If the interest paid upon the national debt of England, for example, be found constantly to increase upon every new war, the consequence will be, that more money must be raised on the subject for the payment of it. The question then comes to be. First, How far may debts extend? Secondly, How far may taxes be carried? And Thirdly, What will be the consequence, supposing the one and the other carried to the greatest height possible?

I answer to the first, that abstracting from circumstances which may disturb the gradual progress of this operation, before it can arrive at the ne plus ultra, debts may be increased to the full proportion of all that can be raised for the payment of the interest. As to the second, How far taxes may be carried, I shall not here anticipate the subject of the following book, any farther than is necessary to resolve the question before us.

Taxes, we have said, either affect income, or consumption. The land-tax of England is now at 4 shillings in the pound, upon a supposed value of the property affected by it, which is all real and personal estates, the stock upon lands, and some few other particulars excepted.

This tax may be carried to the full value of all the real estates in England. As for personal estates it never can affect them proportionally; and this part of the statute of land-tax which passes every year, and imposes 4 shillings in the pound on personal estates, carries in it a mark of our former ignorance in matters of taxation.

The notion of actually imposing 20 shillings in the pound upon the real value of all the land-rents of England, appears to us perfectly ridiculous. I admit it to be so; and could I have discovered any argument by which I could have limited the rising of the land-tax to any precise number of shillings under twenty, I should have stated this as the maximum rather than the other.

The second branch of taxes comprehends those upon consumptions, excises, and the like. The maximum as to this branch must depend upon the interests of foreign trade; because this is affected in a certain degree by the prices of domestic industry. Other taxes have not this effect, as we shall shew in its proper place.

But as foreign trade on the other hand is not essential to the support of the domestic industry, consumption, circulation, &c. of any nation, as has been proved in the second book, but merely to its increasing in wealth proportionally to other nations; were foreign communications cut off entirely, I perceive no limit to which I can confine the extent of proportional taxes. Let me therefore suppose a term beyond which impositions of all kinds must come to a stop, and then ask, in the third place, what the consequence will be? I answer, that the state will then be in possession of all that can be raised on the land, on the consumption, industry and trade of the country; in short, of all that can be called income, which it will administer for the public creditors.

When this comes to be the case, debts become extinguished of course; because they come to be consolidated with the property: a case which commonly happens when a creditor takes possession of an estate for the payment of debts equal to its value.

Government then may continue to administer for the creditors, and either retain in its hand what is necessary for the public expence of the year; or if it inclines to shew the same indulgence for this new class of proprietors as for the former, it may limit the retention to a sum equal only to the interest of the money wanted; and in this way set out upon a new system of borrowing, until the amount of taxes once more extending to the amount of the public revenue be transferred to a new set of creditors. This is the endless path referred to in the ninth chapter of the second book, which, after a multitude of windings, returns into itself.

A state, I imagine, which would preserve its public faith inviolable, until a period such as I have been supposing, would run little risk of not finding credit for a new borrowing. The prospect of a second revolution of the same kind with the first would be very distant; and in matters of credit, which are constantly exposed to risk, such events being out of the reach of calculation, are never taken into any man's account who has money to lend.

The whole of this hypothesis is, I readily agree, destitute of all probability; because of the infinite variety of circumstances which may frustrate such a scheme. I introduced it merely to shew where the constant mortgaging of a public revenue may end; and to disprove the vulgar notion, that by contracting debts beyond a certain sum, a trading nation which has a great balance in its favour, must be involved in an unavoidable bankruptcy. To say that a nation must become bankrupt to itself, is a proposition which I think implies a contradiction.

Chapter IX: Of Bankruptcies

In the last chapter we have been running through a chain of consequences relative to the increase of public debts, which appear as extravagant to us at present, as it would have appeared to Davenant, to have supposed the debts of this nation to grow up to their present height, without the risk of involving the nation in a general bankruptcy.

But these consequences are merely contingent. The present debts may either be paid off, or the nation may be involved in a general bankruptcy. In either case, the vast property in the funds, this great article of permanent income, belonging to natives and to foreigners, must wither and decay, and at last disappear altogether.

We may therefore conclude, that one of three events must happen, viz. either First, Debts will swell to such a pitch as at last to pay themselves: or, Secondly, The nation will be involved in a bankruptcy.. or, Thirdly, They will be fairly paid off, or at least circumscribed within reasonable bounds.

The first supposition we have examined; the second we are now to consider; the last will be the subject of the following chapter, with which I shall conclude this book.

I shall advance no argument to prove that the scheme of a public bankruptcy is either lawful, honourable, or expedient, if voluntarily gone into by a state; because I think it is diametrically opposite to every principle of good government. It is a maxim uncontroverted, that a contract ought to be binding between the parties contracting, and that it ought to be fulfilled in every article. If the public good be alleged as an overruling principle, to which every other must give way, I readily admit the justness of the exception. There is another of equal force, the impossibility of performance. When such arguments are used to engage a nation to commit a deliberate act of bankruptcy, two things must be examined: the first, is the interest which the public has in adopting the scheme: the second, the consequences of it. What reasons a state may have for breaking faith with her creditors, I shall consider afterwards; but let us first enquire what might be the consequences of a general and total bankruptcy in England; from which we may gather what difference it would make, were it partial only; and by this inquiry, we may be led to discover the proper method of breaking faith, in case it should become unavoidable. This is what in another place I called bringing credit decently to her grave; when, after being overstretched, it can no longer be supported.

A bankruptcy may take place in two ways: either as a consequence of circumstances which cannot be prevented; or by a deliberate act of government.

Were the trade and industry of England to decay, the amount of all the permanent taxes might so far diminish, as to prove insufficient to pay the interest of the national debt, and defray the expence of civil government. Were the people to be blown up into a spirit of revolt against taxes, the same event would probably happen. In either case, the natural and immediate consequences of the bankruptcy would probably follow one another in this manner:

First, Every creditor of the state would become poorer in proportion to the diminution of his income.

Secondly, Consumption and the demand for work would diminish in proportion to the part of that income withheld, which the creditors annually expend for these purposes.

Thirdly, Trade would directly suffer, in proportion to that part of the said revenue yearly thrown into it by the public creditors at present; and it would consequently suffer, in proportion to the hurt resulting to private credit, from the consequences of the bankruptcy.

The creditors would then lose all, the trade of England would be undone, and the multitudes who live in consequence of the demand for their industry from the one and the other, would be reduced to misery. These immediate effects would first manifest themselves in the capital. The consequences would soon be felt all over England: a diminution upon the consumption of the fruits of the earth; a stagnation of that commerce which is carried on between London and the country (which we have seen to be equal to the amount of all the taxes, and to all the land-rents spent in London) would soon throw every thing into confusion. But taxes would be abolished: of that there is no doubt. Let a deliberate bankruptcy take place without any abolition of them by law, they would soon sink to nothing, from the utter impossibility there would be found to pay them.

A total bankruptcy, therefore, coming upon England, either from a decay of her trade, or a disturbance in collecting the public revenue would have the effect of plunging the nation into utter ruin at home: what might be the consequences from abroad, I leave to the reader's sagacity to determine.

Let me now suppose a bankruptcy to take place from a deliberate act of power, with a view of expediency.

The difference between the two consists in this; that in the first, all the consequences we have mentioned would follow one upon another, without a possibility of preventing them: in the other, a plan to prevent them might be concerted.

Let me then suppose, that government shall find it expedient, at any time, to use a spunge for the public debts; that they shall fear to external bad consequences, either from the resentment of those states who may be hurt by it, or from the ambition of others who may profit by it; that they shall coolly resolve to sacrifice the interest of all the creditors in favour of the whole body; and that they shall deliberate upon the plan to be followed, in order to bring about so great a revolution, without essentially hurting any interest in the state, that of the creditors alone excepted.

In this case, I imagine, they would begin by ordering the amount of all that is paid to the creditors, to be set apart as a fund for the execution of the plan.

They would purchase all over England, every article of produce and manufacture which might remain upon hand for want of a market: they would feed all those who would be forced to be idle for want of employment: they would instantly put proper employments into their hands; one week's delay in the execution of this part of the plan would throw the manufacturing interest into such confusion, as to be past all remedy: they would furnish credit to all the merchants subsisting, in proportion to what they had lost by the extinction of the funds: they would establish offices every where, to supply the wants of those who would be totally ruined, until by degrees they could re-establish confidence, the parent of trade, the mother of industry. By such precautions, properly taken, and properly executed, none would suffer but the unhappy creditors and their families, who, from great opulence, would be reduced to poverty.

As far as human prudence is insufficient for going through so great a detail all at once; so far would the effects of a general bankruptcy add hurtful consequences to those which in every case are unavoidable.

Were a statesman endowed with the supernatural gift of turning the minds of a nation at his will, and of foreseeing every consequence before it happened, such a plan might be executed. Another who, with the greatest capacity ever man was endowed with, would, for expediency, not from necessity, deliberately undertake a general bankruptcy, I should consider as a madman.

I should rather prefer to submit to the natural consequences which might result from an accidental bankruptcy, than endeavour to avoid them by a plan too complicated for human wisdom to execute.

Let us next suppose the scheme to be fairly executed from a view of expediency, no matter how, and all inconveniences prevented during the execution, what would be gained by it?

If by the supposition all taxes be kept alive, for at least a certain time, in order to prevent a total confusion, certainly no body could gain during this period; even the state itself would lose, because every branch of consumption would infallibly diminish. But that time elapsed, and taxes reduced to the lowest, who would be the gainers? We shall see when we come to the doctrine of taxation, that a sudden abolition of taxes, in consequence of a bankruptcy, would be advantageous to no body, but to creditors upon mortgage, and to the idle: not to landlords; because their incomes would diminish more than in the proportion of the present land-tax, at least their improvements would be interrupted, and their rents ill paid: not to the manufacturing classes; because at present they pay no taxes, but in proportion to their idleness or extravagance, as shall be proved: the monied interest, not secured on land, would I suppose be extinguished; trade and credit at an end. The gains then would be confined to those who have money secured upon land, where the capital is demandable. In such a situation, the interest of money would rise beyond all bounds; and a debt which might have been considered as a trifle before, might then carry off an estate. The idle also who live peaceably upon a very moderate income would find a great advantage from the fall of prices for want of consumption, and from the distress of the industrious; but the indigent poor, who are supported from voluntary charity, would suffer: all the great establishments for labour and industry, in public workhouses and hospitals, would fall to the ground: the numbers of poor who are there maintained at present would come upon a society, which is beginning to lose those tender feelings of compassion, which in countries of idleness, are more or less prevalent in proportion as misery is more or less familiarly before them.

To say all in one word, a total bankruptcy, and abolition of taxes, would bring this nation back to the situation it was in before taxes and debts were known.

Does any body imagine that our present situation is not analogous to our present policy, and that it is possible that independently of the same circumstances we should long continue to enjoy the advantages we feel? No: were we in the same situation as formerly, we should feel as our fathers felt. They had as good understandings to improve their circumstances as we have; but they had to do with an idle. we with an industrious common people. Trade and credit have been long at work to effect this great revolution: the operation is not as yet completed, and a total bankruptcy now, would destroy every good effect of it for a long time.

Were taxes made to cease, the large sums which proceed from them would disappear entirely. Money would not, as some imagine, become equally distributed among those who now pay the taxes, and so proportionally increase every man's income. The reason is plain: the money paid for taxes, circulates; because it is demanded by the public, and is spent by it. Were taxes suppressed, people having less occasion for money than formerly, would circulate less in proportion. It is the necessity of paying taxes, which creates this money for the payment of them; and when this method of creating is not contrived, the taxes cannot be paid, as has been often said. Now it is this great flux of money from taxes which animates the trade of England: take them out of the circle, what becomes of the whole?

To suppose, therefore, so great a revolution in the circulation of a country, as that produced by the cessation of taxes; and to suppose no interruption from it upon the state of industry, and the employment of the people of this nation, is a proposition I must reject, as being contrary to all principles; and to this among the rest, that it would be a most sudden, and a most violent revolution; which throughout the whole course of this inquiry, we have found to involve inconveniences beyond the power of any theory to point out or to remedy.

Upon the whole we may conclude, that the fatal consequences of a bankruptcy would be many; and that the good resulting from a total abolition of taxes would be confined to two objects. First, A relief to those who pay them upon their possessions, or persons. Secondly, A diminution of prices in favour of the idle at home, and of trade abroad: great objects, no doubt, could they be obtained at less expence than the consequences of a total failure of public credit and domestic industry. Perhaps when we come to examine the Principles of taxation, we shall find that taxes do not raise prices so much as is generally believed; and those principles which influence the application of public money, will point out better expedients than a bankruptcy for compassing the great national objects which we have just now mentioned.

But let us suppose a case, which may possibly happen, as matters seem to go on. Suppose, I say, that by continuing to carry on long and expensive wars, the sum of interest paid to strangers should exceed all that the nation can gain by her trade. In this case, there must be a general balance of payments against her every year, which very soon would manifest itself by the most fatal consequences.

The bank of England would be the first to feel them, by the departure of all the coin and precious metals. Trade would feel them next, and then indeed they would become universal.

In such a situation, I fairly acknowledge, that I cannot discover any expedient to avoid a bankruptcy. Engaging the foreign creditors to become citizens, by the allurements of the greatest privileges, and bills of naturalization, are vain speculations. Unless some resource, hidden from me, should, upon such an occasion, open itself, in the deep recesses of future events, I believe the nation would soon be driven upon the fatal rock of bankruptcy. The idea of a nation's becoming bankrupt to itself, I have always looked upon as a contradiction; but that it may become bankrupt to the rest of the world, is quite consistent with reason and common sense.

I shall not take upon me to suggest what mode of bankruptcy would in such a case be the best; a total, or a partial one. The partial, I am afraid, would, in England, work effects almost as hurtful as the other. But if ever the case should happen, the only way will be, to watch over every symptom of the approaching catastrophe, and to improve circumstances to the best advantage.

I cannot omit inserting in this place the opinion of a most sagacious and most intelligent foreign merchant, most consolatory to Great Britain, with respect to the debts she owes to foreigners.

The late Mr Megens, who lived many years in England, composed a treatise in German, which Mr Horsley translated in 1752, under the title of the Universal Merchant. In the 31st Section of this work is the following passage:

'And although it cannot be denied, that for as much as foreigners are become great creditors in the public debts of England, a great sum of interest must be annually made good to them. Yet if it appear that the private people abroad, are more indebted to the private people here, than such interest amounts to; the nation has no prejudicial draught upon it, on account of such debt; and that the general balance of trade is highly in favor of England.'

Few people, I am persuaded, have any such idea as this laid down by Mr Megens. Happy, for Great Britain, could it be verified!

Of what infinite consequence is it then for a British statesman to inquire into the amount of debts owing to strangers, and into the state of the balance of trade? In speaking of exchange, I threw out many things concerning the idea of putting that branch of business into the hands of the bank, in conjunction with the exchequer. Were the state brought into the dilemma of either submitting to this gradual decline of trade, from a cause which could not be removed; or of being pushed to the necessity of leaping into the terrible gulph of a deliberate bankruptcy; in such a dilemma, I say, what infinite advantages might not be drawn from the management of exchange?

I have heard it said, that the debt owing to strangers was a great advantage to England; because it drew people to that market where their funds are settled. I allow all the force any one can give to this proposition: But alas! what would it avail, whenever England becomes incapable to furnish goods equivalent to all her imports from abroad, added to all she owes to her foreign creditors?

I am very far from supposing the present situation of England to forebode the approach of any such disaster; but it is good to represent to one's self some determinate object, by which we may judge of our situation in times to come.

Debts have increased far beyond the imagination of every mortal. Great men have uttered prophecies, which have proved false, concerning the consequences of a debt of one hundred millions. From this most people conclude, that they will go on until some unforeseen accident shall dash the fabric to pieces. I have been pretending to shew how they may go on in a perpetual chain. But alas! one fatal circumstance was there omitted; and now that it has been taken in, I think it serves as a datum, to resolve the most important problem of this science, viz. How to determine the exact extent of public credit. The solution of which is, That it is not necessary that public credit should ever fail, from any augmentation of debts whatever, due to natives; and that it must fail, so soon as the nation becomes totally unable either to export commodities equal to all their imports and foreign debts, or to pay off a proportional part of their capital, sufficient to turn the balance to the right side.

From this proposition two corollaries may be drawn.

First, That the most important object in paying off debts, is to get quit of those due to strangers.

Secondly, That whatever circumstance has a tendency towards diminishing the burden of foreign debts, should be encouraged.

If it be said, that whenever our foreign debts exceed the balance of our trade, the best way would be to break faith with strangers, and keep it with the subjects of the state: I answer, that were the thing possible, which I apprehend it is not, the consequence might prove equally hurtful.

The greatest of all the inconveniences proceeding from a bankruptcy, is the ruin of industry, and the stop put to circulation. Can it then be supposed, that a country might execute so glaring a scheme of treachery to all her neighbours, and still continue her correspondence with them in the open way of trade? Certainly not. Were all foreign trade to be stopt at once, what a revolution would it occasion! The circulation of foreign trade, in the city of London only, exceeds perhaps the amount of all the taxes. A stop put to this would occasion such a stagnation, as would ruin the nation as much as if the bankruptcy were to become universal. I do not here pretend minutely to trace consequences, which are finite: all that can be done, is to suggest hints, which every one may pursue, in proportion to the extent of his combinations.

The intention of touching upon this subject at all, is to shew, that the expedient of a spunge, which is frequently talked of as a remedy against the consequence of debts, is, perhaps, more dangerous than any thing which can be apprehended from them. The reason is, that the spunge implies a more sudden bankruptcy than any one brought on in a gradual way, by natural causes.

Were natural and irresistible causes totally to cut off all profit upon the trade of Britain, one cannot say how far the other nations of Europe might not find it their interest to assist us, provided we did our utmost to preserve our good faith to them. And as I think I have made it sufficiently evident that nothing can be gained by openly violating public faith, the best resolution a nation can take, is to adhere to it to the last extremity, and to banish from their thoughts every idea which may be repugnant to it.

Chapter 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 Mississippi? 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 indemnify 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.


1. After the long and particular account I have given of the Mississippi, I shall not enter into a like detail concerning a scheme which proceeded upon the very same principles; to wit, the artificially raising the value of a stock, by promising dividends, out of funds which were nowise proportioned to them.

I shall therefore, in a very few words, first compare some of the operations of the South Sea scheme with those of the Mississippi; and in doing it, point out the principal differences between them.

The great profits upon the Mississippi were expected from the interest paid by government for the great loan, from the farms of the revenue, and from the profits upon their trade.

Those of the South Sea were, at setting out, first, The profits upon their trade: secondly, The allowance made them by government for the expence of management: thirdly, The difference of receiving 5 per cent for the money they laid out in purchasing the public debts, when money was at 4 per cent as it was when the scheme was set on foot: and fourthly, The surplus money subscribed into the stock above par, in consequence of the artifices used to enhance the value of it.

The seven millions they were to pay to the state, seemingly for no value received were a sort of compensation for receiving the 5 per cent for 7 years, at a time when money was worth no more than 4 per cent.

These advantages raised, at first, the value of the original stock of eleven millions. The consequence was, that the proprietors of the 16 millions of the redeemable debts, which were to be bought in, when they came to subscribe their capitals into the new stock, transacted them at a proportional discount; which discount, being good against the government in favour of the company, served to discharge proportionally the seven millions the company was to pay. This gave an additional value to the stock; and so it rose, greatly indeed above this proportion. Then the company promised a dividend of 10 per cent for one half year, upon their capital, at midsummer 1720; this dividend was to be paid in stock, which was constantly rising in its value; but no information was ever given to the public concerning the funds which were to produce this dividend; so every one concluded that there were hidden treasures in the hands of the company which enabled it to promise such large dividends. Accordingly, stock rose from 300 per cent to 375; then to 400, and at last to 1000 per cent; and in proportion as it rose, the wealth of the former subscribers augmented from the surplus above par, paid by the latter, and those who subscribed last, bore all the loss upon the blowing up of the scheme.

But one great difference between the South Sea and Mississippi, was this: That in France there was abundance of money in the hands of the public, for purchasing the actions, at the exorbitant price to which they rose; but in England there was not: consequently, in France, the rate of interest fell to 2 per cent and in England, the great demand for money to borrow, raised it beyond all bounds.

Those who subscribed in money, paid down no more than 10 per cent at subscribing; but became bound to pay up the remainder. But when the stock tumbled, people were better pleased to lose the 10 per cent they had paid, than to pay up the remaining 90 per cent according to the terms at subscribing. Those indeed who subscribed their former capitals at a vast discount, did not labour under the same inconvenience for want of money; but this discount became as real a loss to them, as the cash subscribed became a loss to the money subscribers, the moment that those who were in the secret, and who, by the most infamous chain of artifices, had blown up the public frenzy, began to realize and sell out, and that the whole was discovered to be a cheat. So that upon the whole, the English scheme had intrinsically a much worse foundation than the French. The first blew up from an absolute necessity, and for want of any bottom at all; the last from misconduct, and rather from folly than knavery. I return to an account of the scheme.

The original capital of the South Sea company, was 11,750,000 l. The redeemable debts which the proprietors of this capital afterwards proposed to purchase, amounted to 16,750,000 l.; and the value of the irredeemable, or what were called the absolute terms, was computed at 15,058,000 l. together 31,808,000 l. sterling.

The proprietors of this original capital of 11,750,000 l. consulted their own advantage only, in purchasing in this large sum of debts, which were to be converted into additional stock; and therefore sounded very high the great advantages of such a transformation of them; first, From the profits of the trade, which they were to enjoy exclusively. And, secondly, From the great addition to their wealth, from the constant rising in the price of their stock. They carried their views to nothing less than obtaining a majority in the house of commons, by the weight of their wealth, and of becoming the absolute rulers of the nation.

The public being from the beginning intoxicated with such ideas, subscriptions for stock were opened at 200 per cent above par; and some of the proprietors of the 31,808,000 l. subscribed at first their capitals at a proportional discount; that is, they made over a debt of 100 l. for 33 1/3 in South Sea stock; and successively the subscription rose to 1000 per cent. These immense profits being incorporated into the gains of the general stock, were proportionally shared by the subscribers themselves, who became proprietors; and the higher the stock rose, the more these gains augmented. This influenced the infatuation; and the dividends augmenting in proportion to the price of subscription, there appeared no end of the rising of the stock.

The first dividend offered, as has been said, was 10 per cent half-yearly in stock; this was afterwards converted into no less than 30 per cent in money, for that half-year: and when stock rose to 1000, a dividend of no less than 50 per cent per annum, in money, was promised for twelve years to come.

Had stock risen to 2000 per cent the dividend could have as easily been carried to 100 per cent per annum, as it had been to 50 per cent when at 1000.

But whence was this dividend to be paid? The company and the directors took good care never to give to the public any light as to this particular.

To prevent, therefore, such abuses in the rising of the South Sea, it ought to have been provided by parliament, that in taking in subscriptions, and offering dividends, the directors should, on the one hand, have informed the public, first, Of the money owing to them by government, secondly, Of the money gained by the subscriptions above par. And thirdly, Of the profits upon their trade. And, on the other hand, of the debts due by them; and of the nett balance upon their books, in their favour.

This would have been fair dealing. But to pretend the necessity of secrecy, in a point where a nation is interested, was in itself a mere pretext; and had it been otherwise, it might have been answered, that a company which is obliged to have recourse to such secrets, ought to be prevented from dealing with those who were to remain ignorant of them, however deeply interested.

2. This may seem a high valuation, and is, in fact, far beyond what any of those annuities sold for: but as the interest of money cannot be estimated, for a constancy, at more than 3 per cent and that probably the best lives were chosen, the value to government of such annuities may well be estimated at 20 years purchase. By De Moivre's tables, annuities for the most favourable ages, interest being at 3 per cent are valued at 19.87 years purchase; and his valuations are generally allowed not to be too high.

3. The annuities of 1757, are estimated, by the author of the Consideration on Trade and Finances, at 472,500 l. or at 14 years' purchase; and the annuities of 1761, 1762, at 6,826,875 l. or at 27 1/2 years' purchase. But this valuation seems too low.

4. This question has been determined in the affirmative, in a pamphlet ascribed to Mr G. Grenville, entitled, The Present State of the Nation, an. 1768: page 12 in the note.

5. I find that the sinking fund is now estimated at 2,100,000 l. by the author of the Considerations on Trade, etc. above cited. I am also informed that the net produce of the customs exceeds 2,200,000 l. considerably: but 4,600,000 l. is rather the gross than the net produce of the permanent duties of excise; that is, of all the excise duties, excepting the annual malt-duty. It must also be observed, that the annuities payable to the national creditors amounted, the 5th January 1764, to more than 4,720,000 l. But on the other hand, the interest of the unfunded 9 millions is rated too high, as appears from the author above quoted. I cannot pretend to give exact details. The general sketch here stated is sufficient for my purpose.

6. The loan of 1766, was 1,500,000 l. at 3 per cent. Every subscriber for 100 l. had an annuity of 3 per cent on 60 l. and 4 lottery tickets, valued to them by government at 10 l. each, in all 100 l. The prizes and blanks in the lottery amount to 600,000 l. and bear 3 per cent paid by government. The annuities amount to 900,000 l. and bear also 3 per cent. The number of tickets are 60,000. Hence at 10 l. each, they amount to 600,000 l.

The advantage government reaps by this way of borrowing, is, that the desire of gaming, raises the lottery tickets above their value, when thrown into the hands of the public; and this advanced value being a profit to those who receive them in part of their subscription, this profit they share with government. Example. In April 1766, when government borrowed 1,500,000 l. at 3 per cent, the 3 per cents were at 89: consequently, the difference between 89 and 100, which is 11 l. must have been supposed to be the sum which the subscribers, from the propensity of people to game, had a reasonable, or rather a certain expectation of gaining upon the sale of 4 lottery tickets, that is, 2 l. 15s. upon every one.

To know therefore the real par of a lottery ticket, you must proceed thus: it costs the subscribers 10 l. for which they receive from government 3 per cent. This 10 l. as 3 per cents stood at 89, is worth at that rate no more than 8 l. 18s. Add to this sum what the public must pay for the liberty to play, which we have stated above at 2 l. 15s. and you have the exact par of a lottery ticket at 11 l. 13s.

Whatever they sell at above 11 l. 13s. is profit to the subscribers, whatever they sell below 11 l. 13s. is a loss to them.

This profit though small in appearance, is greatly increased from another circumstance, viz.

That the subscribers may sell their subscriptions at a time when they have really advanced but a small part of it. The first payment is commonly of 15 per cent on their subscription: when they sell, they make this profit upon the whole capital. Suppose then 15 per cent paid in: if the profit upon selling be no more than 1 per cent upon the capital, that 1 per cent turns out no less than 6 2/3 per cent upon the money they have advanced. Thus a person who is possessed of 1500 l. only, may subscribe for 10,000 l. in this loan: he pays in his 1500 l. and receives his subscription; when he sells, he sells 10,000 l. subscription, upon which he gains 1 per cent, 1 per cent. of 10,000 l. is 100 l. so (in one month suppose) he gains by this means 100 l. for the use of 1500 l. But as a counterbalance for this profit, he runs the risk of the falling of the subscription, which involves him in a proportional loss if he sells out; or in the inconvenience of advancing more money than he had to employ in that way, in case he should prefer keeping his subscription for a longer time, in hopes of a rise in the public funds. By this mode of borrowing, government profits by the disposition of the people to game. But this propensity has its bounds, and at present it is found by experience not to exceed 60,000 lottery tickets, or 60,000 l. Were, therefore, a subscription of 3 millions taken in upon the same plan with the present of 1,500,000 l. the regorging number of tickets would so glut the market, that the whole would fall below the par of their supposed value. 7. We must always carefully avoid confounding the grand balance of payments with the balance between importation and exportation, which I consider as the balance of trade. 8. Experience shews, that when the debts of a nation have come to a height, the public creditors become people of great consequence, upon account of the ease and affluence of their circumstances. They are not exposed to the many hidden expences incident to land proprietors. They are a class in the state but lately known; the capital of their wealth is hidden; and opinions concerning their rank, and the figure they ought to make, are as yet unformed. Whereas the family of a land proprietor is known; his expence may surpass that of his predecessors without much observation; but if it should fall below it, he commonly sinks in the estimation of his neighbours, who seldom put circumstances together which can only be guessed at. An heir to a landed estate, is bred up from his infancy with the notion of living like his father: the son of a monied man has commonly very different sentiments; and even when any of this class takes a turn to expence, the lustre of it is all displayed round his own body; that is, in his own house, and in his own family: no country seats, hounds, horses, servants in every quarter, family interest to keep up, little economy in spending. In a word, every one feels better than I can describe that landed men commonly exceed, and monied men commonly live within their income.

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