An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith [e book reader pdf TXT] 📗
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they chuse to do so, a very large sum of money to government.
Hence the ability in the subjects of a commercial state to lend.
Commerce and manufactures can seldom flourish long in any state
which does not enjoy a regular administration of justice; in
which the people do not feel themselves secure in the possession
of their property ; in which the faith of contracts is not
supported by law ; and in which the authority of the state is not
supposed to be regularly employed in enforcing the payment of
debts from all those who are able to pay. Commerce and
manufactures, in short, can seldom flourish in any state, in
which there is not a certain degree of confidence in the justice
of government. The same confidence which disposes great merchants
and manufacturers upon ordinary occasions, to trust their
property to the protection of a particular government, disposes
them, upon extraordinary occasions, to trust that government with
the use of their property. By lending money to government, they
do not even for a moment diminish their ability to carry on their
trade and manufactures; on the contrary, they commonly augment
it. The necessities of the state render government, upon most
occasions willing to borrow upon terms extremely advantageous to
the lender. The security which it grants to the original
creditor, is made transferable to any other creditor ; and from
the universal confidence in the justice of the state, generally
sells in the market for more than was originally paid for it. The
merchant or monied man makes money by lending money to
government, and instead of diminishing. increases his trading
capital. He generally considers it as a favour, therefore, when
the administration admits him to a share in the first
subscription for a new loan. Hence the inclination or willingness
in the subjects of a commercial state to lend.
The government of such a state is very apt to repose itself upon
this ability and willingness of its subjects to lend it their
money on extraordinary occasions. It foresees the facility of
borrowing, and therefore dispenses itself from the duty of
saving.
In a rude state of society, there are no great mercantile or
manufacturing capitals. The individuals, who hoard whatever money
they can save, and who conceal their hoard, do so from a distrust
of the justice of government ; from a fear, that if it was known
that they had a hoard, and where that hoard was to be found, they
would quickly be plundered. In such a state of things, few people
would be able, and nobody would be willing to lend their money to
government on extraordinary exigencies. The sovereign feels that
he must provide for such exigencies by saving, because he
foresees the absolute impossibility of borrowing. This foresight
increases still further his natural disposition to save.
The progress of the enormous debts which at present oppress, and
will in the long-run probably ruin, all the great nations of
Europe, has been pretty uniform. Nations, like private men, have
generally begun to borrow upon what may be called personal
credit, without assigning or mortgaging any particular fund for
the payment of the debt; and when this resource has failed them,
they have gone on to borrow upon assignments or mortgages of
particular funds.
What is called the unfunded debt of Great Britain, is contracted
in the former of those two ways. It consists partly in a debt
which bears, or is supposed to bear, no interest, and which
resembles the debts that a private man contracts upon account;
and partly in a debt which bears interest, and which resembles
what a private man contracts upon his bill or promissory-note.
The debts which are due, either for extraordinary services, or
for services either not provided for, or not paid at the time
when they are performed; part of the extraordinaries of the army,
navy, and ordnance, the arrears of subsidies to foreign princes,
those of seamen’s wages, etc. usually constitute a debt of the
first kind. Navy and exchequer bills, which are issued sometimes
in payment of a part of such debts, and sometimes for other
purposes, constitute a debt of the second kind; exchequer bills
bearing interest from the day on which they are issued, and navy
bills six months after they are issued. The bank of England,
either by voluntarily discounting those bills at their current
value, or by agreeing with government for certain considerations
to circulate exchequer bills, that is, to receive them at par,
paying the interest which happens to be due upon them, keeps up
their value, and facilitates their circulation, and thereby
frequently enables government to contract a very large debt of
this kind. In France, where there is no bank, the state bills
(billets d’etat { See Examen des Reflections Politiques sur les
Finances.}) have sometimes sold at sixty and seventy per cent.
discount. During the great recoinage in king William’s time, when
the bank of England thought proper to put a stop to its usual
transactions, exchequer bills and tallies are said to have sold
from twentyfive to sixty per cent. discount; owing partly, no
doubt, to the supposed instability of the new government
established by the Revolution, but partly, too, to the want of
the support of the bank of England.
When this resource is exhausted, and it becomes necessary, in
order to raise money, to assign or mortgage some particular
branch of the public revenue for the payment of the debt,
government has, upon different occasions, done this in two
different ways. Sometimes it has made this assignment or mortgage
for a short period of time only, a year, or a few years, for
example; and sometimes for perpetuity. In the one case, the fund
was supposed sufficient to pay, within the limited time, both
principal and interest of the money borrowed. In the other, it
was supposed sufticient to pay the interest only, or a perpetual
annuity equivalent to the interest, government being at liberty
to redeem, at any time, this annuity, upon paying back the
principal sum borrowed. When money was raised in the one way. it
was said to be raised by anticipation ; when in the other, by
perpetual funding, or, more shortly, by funding.
In Great Britain, the annual land and malt taxes are regularly
anticipated every year, by virtue of a borrowing clause
constantly inserted into the acts which impose them. The bank of
England generally advances at an interest, which, since the
Revolution, has varied from eight to three per cent., the sums of
which those taxes are granted, and receives payment as their
produce gradually comes in. If there is a deficiency, which there
always is, it is provided for in the supplies of the ensuing
year. The only considerable branch of the public revenue which
yet remains unmortgaged, is thus regularly spent before it comes
in. Like an improvident spendthrift, whose pressing occasions
will not allow him to wait for the regular payment of his
revenue, the state is in the constant practice of borrowing of
its own factors and agents, and of paying interest for the use of
its own money.
In the reign of king William, and during a great part of that of
queen Anne, before we had become so familiar as we are now with
the practice of perpetual funding, the greater part of the new
taxes were imposed but for a short period of time (for four,
five, six, or seven years only), and a great part of the grants
of every year consisted in loans upon anticipations of the
produce of those taxes. The produce being frequently insufficient
for paying, within the limited term, the principal and interest
of the money borrowed, deficiencies arose; to make good which, it
became necessary to prolong the term.
In 1697, by the 8th of William III., c. 20, the deficiencies of
several taxes were charged upon what was then called the first
general mortgage or fund, consisting of a prolongation to the
first of August 1706, of several different taxes, which would
have expired within a shorter term, and of which the produce was
accumulated into one general fund. The deficiencies charged upon
this prolonged term amounted to �5,160,459: 14: 9�.
In 1701, those duties, with some others, were still further
prolonged, for the like purposes, till the first of August 1710,
and were called the second general mortgage or fund. The
deficiencies charged upon it amounted to �2,055,999: 7: 11�.
In 1707, those duties were still further prolonged, as a fund for
new loans. to the first of August 1712, and were called the third
general mortgage or fund. The sum borrowed upon it was
�983,254:11:9�.
In 1708, those duties were all (except the old subsidy of tonnage
and poundage, of which one moiety only was made a part of this
fund, and a duty upon the importation of Scotch linen, which had
been taken off by the articles of union) still further continued,
as a fund for new loans, to the first of August 1714, and were
called the fourth general mortgage or fund. The sum borrowed upon
it was �925,176:9:2�.
In 1709, those duties were all ( except the old subsidy of
tonnage and poundage, which was now left out of this fund
altogether ) still further continued, for the same purpose, to
the first of August 1716, and were called the fifth general
mortgage or fund. The sum borrowed upon it was �922,029:6s.
In 1710, those duties were again prolonged to the first of August
1720, and were called the sixth general mortgage or fund. The sum
borrowed upon it was �1,296,552:9:11�.
In 1711, the same duties (which at this time were thus subject to
four different anticipations), together with several others, were
continued for ever, and made a fund for paying the interest of
the capital of the South-sea company, which had that year
advanced to government, for paying debts, and making good
deficiencies, the sum of �9,177,967:15:4d, the greatest loan
which at that time had ever been made.
Before this period, the principal, so far as I have been able to
observe, the only taxes, which, in order to pay the interest of a
debt, had been imposed for perpetuity, were those for paying the
interest of the money which had been advanced to government by
the bank and East-India company, and of what it was expected
would be advanced, but which was never advanced, by a projected
land bank. The bank fund at this time amounted to
�3,375,027:17:10�, for which was paid an annuity or interest of
�206,501:15:5d. The East-India fund amounted to �3,200,000, for
which was paid an annuity or interest of �160,000; the bank fund
being at six per cent., the East-India fund at five per cent.
interest.
In 1715, by the first of George I., c. 12, the different taxes
which had been mortgaged for paying the bank annuity, together
with several others, which, by this act, were likewise rendered
perpetual, were accumulated into one common fund, called the
aggregate fund, which was charged not only with the payment of
the bank annuity, but with several other annuities and burdens of
different kinds. This fund was afterwards augmented by the third
of George I., c.8., and by the fifth of George I., c. 3, and the
different duties which were then added to it were likewise
rendered perpetual.
In 1717, by the third of George I., c. 7, several other taxes
were rendered perpetual, and accumulated into another common
fund, called the general fund, for the payment of certain
annuities, amounting in the whole to �724,849:6:10�.
In consequence of those different acts, the greater part of the
taxes, which before had been anticipated only for a short term of
years were rendered perpetual, as a fund for paying, not
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