An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith (ebook reader macos .TXT) 📕

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